COUNCIL DIRECTIVE 93/6/EEC of 15 March 1993 on the capital adequacy of investments firms and credit institutions
THE COUNCIL OF THE EUROPEAN COMMUNITIES,
Having regard to the Treaty establishing the European Economic Community, and in particular the first and third sentences of Article 57 (2) thereof,
Having regard to the proposal from the Commission (1),
In cooperation with the European Parliament (2),
Having regard to the opinion of the Economic and Social Committee (3),
Whereas the main objective of Council Directive 93/22/EEC of 10 May 1993 on investment services in the securities field (4) is to allow investment firms authorized by the competent authorities of their home Member States and supervised by the same authorities to establish branches and provide services freely in other Member States; whereas that Directive accordingly provides for the coordination of the rules governing the authorization and pursuit of the business of investment firms;
Whereas that Directive does not, however, establish common standards for the own funds of investment firms nor indeed does it establish the amounts of the initial capital of such firms; whereas it does not establish a common framework for monitoring the risks incurred by the same firms; whereas it refers, in several of its provisions, to another Community initiative, the objective of which would be precisely to adopt coordinated measures in those fields;
Whereas the approach that has been adopted is to effect only the essential harmonization that is necessary and sufficient to secure the mutual recognition of authorization and of prudential supervision systems; whereas the adoption of measures to coordinate the definition of the own funds of investment firms, the establishment of the amounts of their initial capital and the establishment of a common framework for monitoring the risks incurred by investment firms are essential aspects of the harmonization necessary for the achievement of mutual recognition within the framework of the internal financial market;
Whereas it is appropriate to establish different amounts of initial capital depending on the range of activities that investment firms are authorized to undertake;
Whereas existing investment firms should be permitted, under certain conditions, to continue their business even if they do not comply with the minimum amount of initial capital fixed for new firms;
Whereas the Member States may also establish rules stricter than those provided for in this Directive;
Whereas this Directive forms part of the wider international effort to bring about approximation of the rules in force regarding the supervision of investment firms and credit institutions (hereinafter referred to collectively as 'institutions');
Whereas common basic standards for the own funds of institutions are a key feature in an internal market in the investment services sector, since own funds serve to ensure the continuity of institutions and to protect investors;
Whereas in a common financial market, institutions, whether they are investment firms or credit institutions, engage in direct competition with one another;
Whereas it is therefore desirable to achieve equality in the treatment of credit institutions and investment firms;
Whereas, as regards credit institutions, common standards are already established for the supervision and monitoring of credit risks in Council Directive 89/647/EEC of 18 December 1989 on a solvency ratio for credit institutions (5);
Whereas it is necessary to develop common standards for market risks incurred by credit institutions and provide a complementary framework for the supervision of the risks incurred by institutions, in particular market risks, and more especially position risks, counterparty/ settlement risks and foreign-exchange risks;
Whereas it is necessary to introduce the concept of a 'trading book' comprising positions in securities and other financial instruments which are held for trading purposes and are subject mainly to market risks and exposures relating to certain financial services provided to customers;
Whereas it is desirable that institutions with negligible trading-book business, in both absolute and relative terms, should be able to apply Directive 89/647/EEC, rather than the requirements imposed in Annexes I and II to this Directive;
Whereas it is important that monitoring of settlement/delivery risks should take account of the existence of systems offering adequate protection that reduces that risk;
Whereas, in any case, institutions must comply with this Directive as regards the coverage of the foreign-exchange risks on their overall business; whereas lower capital requirements should be imposed for positions in closely correlated currencies, whether statistically confirmed or arising out of binding intergovernmental agreements, with a view in particular to the creation of the European Monetary Union;
Whereas the existence, in all institutions, of internal systems for monitoring and controlling interest-rate risks on all of their business is a particularly important way of minimizing such risks; whereas, consequently, such systems must be subject to overview by the competent authorities;
Whereas Council Directive 92/121/EEC of 21 December 1992 on the monitoring and control of large exposures of credit institutions (6) is not aimed at establishing common rules for monitoring large exposures in activities which are principally subject to market risks; whereas that Directive makes reference to another Community initiative intended to adopt the requisite coordination of methods in that field;
Whereas it is necessary to adopt common rules for the monitoring and control of large exposures incurred by investment firms;
Whereas the own funds of credit institutions have already been defined in Council Directive 89/299/EEC of 17 April 1989 on the own funds of credit institutions (7);
Whereas the basis for the definition of the own funds of institutions should be that definition;
Whereas, however, there are reasons why for the purposes of this Directive the definition of the own funds of institutions may differ from that in the aforementioned Directive in order to take account of the particular characteristics of the activities carried on by those institutions which mainly involve market risks;
Whereas Council Directive 92/30/EEC of 6 April 1992 on the supervision of credit institutions on a consolidated basis (8) states the principle of consolidation; whereas it does not establish common rules for the consolidation of financial institutions which are involved in activities principally subject to market risks; whereas that Directive makes reference to another Community initiative intended to adopt coordinated measures in that field;
Whereas Directive 92/30/EEC does not apply to groups which include one or more investment firms but no credit institutions; whereas it was, however, felt desirable to provide a common framework for the introduction of the supervision of investment firms on a consolidated basis;
Whereas technical adaptations to the detailed rules laid down in this Directive may from time to time be necessary to take account of new developments in the investment services field; whereas the Commission will accordingly propose such adaptations as are necessary;
Whereas the Council should, at a later stage, adopt provision for the adaptation of this Directive to technical progress in accordance with Council Decision 87/373/EEC of 13 July 1987 laying down the procedures for the exercise of implementing powers conferred on the Commission (9); whereas meanwhile the Council itself, on a proposal from the Commission, should carry out such adaptations;
Whereas provision should be made for the review of this Directive within three years of the date of its application in the light of experience, developments on financial markets and work in international fora of regulatory authorities; whereas that review should also include the possible review of the list of areas that may be subject to technical adjustment;
Whereas this Directive and Directive 93/22/EEC on investment services in the securities field are so closely interrelated that their entry into force on different dates could lead to the distortion of competition,
HAS ADOPTED THIS DIRECTIVE:
Article 1
1. Member States shall apply the requirements of this Directive to investment firms and credit institutions as defined in Article 2.
2. A Member State may impose additional or more stringent requirements on the investment firms and credit institutions that it has authorized.
DEFINITIONS
Article 2
For the purposes of this Directive:
1. credit institutions shall mean all institutions that satisfy the definition in the first indent of Article 1 of the First Council Directive (77/780/EEC) of 12 December 1977 on the coordination of laws, regulations and administrative provisions relating to the taking up and pursuit of the business of credit institutions (10) which are subject to the requirements imposed by Directive 89/647/EEC;
2. investment firms shall mean all institutions that satisfy the definition in point 2 of Article 1 of Directive 93/22/EEC, which are subject to the requirements imposed by the same Directive, excluding:
- credit institutions,
- local firms as defined in 20, and
- firms which only receive and transmit orders from investors without holding money or securities belonging to their clients and which for that reason may not at any time place themselves in debit with their clients;
3. institutions shall mean credit institutions and investment firms;
4. recognized third-country investment firms shall mean firms which, if they were established within the Community, would be covered by the definition of investment firm in 2, which are authorized in a third country and which are subject to and comply with prudential rules considered by the competent authorities as at least as stringent as those laid down in this Directive;
5. financial instruments shall mean the instruments listed in Section B of the Annex to Directive 93/22/EEC;
6. the trading book of an institution shall consist of:
(a) its proprietary positions in financial instruments which are held for resale and/or which are taken on by the institution with the intention of benefiting in the short term from actual and/or expected differences between their buying and selling prices, or from other price or interest-rate variations, and positions in financial instruments arising from matched principal broking, or positions taken in order to hedge other elements of the trading book;
(b) the exposures due to the unsettled transactions, free deliveries and over-the-counter (OTC) derivative instruments referred to in paragraphs 1, 2, 3 and 5 of Annex II, the exposures due to repurchase agreements and securities lending which are based on securities included in the trading book as defined in (a) referred to in paragraph 4 of Annex II, those exposures due to reverse repurchase agreements and securities-borrowing transactions described in the same paragraph, provided the competent authorities so approve, which meet either the conditions (i), (ii), (iii) and (v) or conditions (iv) and (v) as follows:
(i) the exposures are marked to market daily following the procedures laid down in Annex II;
(ii) the collateral is adjusted in order to take account of material changes in the value of the securities involved in the agreement or transaction in question, according to a rule acceptable to the competent authorities;
(iii) the agreement or transaction provides for the claims of the institution to be automatically and immediately offset against the claims of its counter-party in the event of the latter's defaulting;
(iv) the agreement or transaction in question is an interprofessional one;
(v) such agreements and transactions are confined to their accepted and appropriate use and artificial transactions, especially those not of a short-term nature, are excluded; and
(c) those exposures in the form of fees, commission, interest, dividends and margin on exchange-traded derivatives which are directly related to the items included in the trading book referred to in paragraph 6 of Annex II.
Particular items shall be included in or excluded from the trading book in accordance with objective procedures including, where appropriate, accounting standards in the institution concerned, such procedures and their consistent implementation being subject to review by the competent authorities;
7. parent undertaking, subsidiary undertaking and financial institution shall be defined in accordance with Article 1 of Directive 92/30/EEC;
8. financial holding company shall mean a financial institution the subsidiary undertakings of which are either exclusively or mainly credit institutions, investment firms or other financial institutions, one of which at least is a credit institution or an investment firm;
9. risk weightings shall mean the degrees of credit risk applicable to the relevant counter-parties under Directive 89/647/EEC. However, assets constituting claims on and other exposures to investment firms or recognized third-country investment firms and exposures incurred to recognized clearing houses and exchanges shall be assigned the same weighting as that assigned where the relevant counterparty is a credit institution;
10. over-the-counter (OTC) derivative instruments shall mean the interest-rate and foreign-exchange contracts referred to in Annex II to Directive 89/647/EEC and off-balance-sheet contracts based on equities, provided that no such contracts are traded on recognized exchanges where they are subject to daily margin requirements and, in the case of foreign-exchange contracts, that every such contract has an original maturity of more than 14 calendar days;
11. regulated market shall mean a market that satisfies the definition given in Article 1 (13) of Directive 93/22/EEC;
12. qualifying items shall mean long and short positions in the assets referred to in Article 6 (1) (b) of Directive 89/647/EEC and in debt instruments issued by investment firms or by recognized third-country investment firms. It shall also mean long and short positions in debt instruments provided that such instruments meet the following conditions: such instruments must firstly be listed on at least one regulated market in a Member State or on a stock exchange in a third country provided that that exchange is recognized by the competent authorities of the relevant Member State; and secondly both be considered by the institution concerned to be sufficiently liquid and, because of the solvency of the issuer, be subject to a degree of default risk which is comparable to or lower than that of the assets referred to in Article 6 (1) (b) of Directive 89/647/EEC; the manner in which the instruments are assessed shall be subject to scrutiny by the competent authorities, which shall overturn the judgment of the institution if they consider that the instruments concerned are subject to too high a degree of default risk to be qualifying items.
Notwithstanding the foregoing and pending further coordination, the competent authorities shall have the discretion to recognize as qualifying items instruments which are sufficiently liquid and which, because of the solvency of the issuer, are subject to a degree of default risk which is comparable to or lower than that of the assets referred to in Article 6 (1) (b) of Directive 89/647/EEC. The default risk associated with such instruments must have been evaluated at such a level by at least two credit-rating agencies recognized by the competent authorities or by only one such credit-rating agency so long as they are not rated below such a level by any other credit-rating agency recognized by the competent authorities.
The competent authorities may, however, waive the condition imposed in the preceding sentence if they judge it inappropriate in the light of, for example, the characteristics of the market, the issuer, the issue, or some combination of those characteristics.
Furthermore, the competent authorities shall require the institutions to apply the maximum weighting shown in Table 1 in paragraph 14 of Annex I to instruments which show a particular risk because of the insufficient solvency of the issuer or liquidity.
The competent authorities of each Member State shall regularly provide the Council and the Commission with information concerning the methods used to evaluate the qualifying items, in particular the methods used to assess the degree of liquidity of the issue and the solvency of the issuer;
13. central government items shall mean long and short positions in the assets referred to in Article 6 (1) (a) of Directive 89/647/EEC and those assigned a weighting of 0 % in Article 7 of the same Directive;
14. convertible shall mean a security which, at the option of the holder, can be exchanged for another security, usually the equity of the issuer;
15. warrant shall mean an instrument which gives the holder the right to purchase a number of shares of common stock or bonds at a stipulated price until the warrant's expiry date. They may be settled by the delivery of the securities themselves or their equivalent in cash;
16. covered warrant shall mean an instrument issued by an entity other than the issuer of the underlying instrument which gives the holder the right to purchase a number of shares of common stock or bonds at a stipulated price or a right to secure a profit or avoid a loss by reference to fluctuations in an index relating to any of the financial instruments listed in Section B of the Annex to Directive 93/22/EEC until the warrant's expiry date;
17. repurchase agreement and reverse repurchase agreement shall mean any agreement in which an institution or its counter-party transfers securities or guaranteed rights relating to title to securities where that guarantee is issued by a recognized exchange which holds the rights to the securities and the agreement does not allow an institution to transfer or pledge a particular security to more than one counter-party at one time, subject to a commitment to repurchase them (or substituted securities of the same description) at a specified price on a future date specified, or to be specified, by the transferor, being a repurchase agreement for the institution selling the securities and a reverse repurchase agreement for the institution buying them.
A reverse repurchase agreement shall be considered an interprofessional transaction when the counter-party is subject to prudential coordination at Community level or is a Zone A credit institution as defined in Directive 89/647/EEC or is a recognized third-country investment firm or when the agreement is concluded with a recognized clearing house or exchange;
18. securities lending and securities borrowing shall mean any transaction in which an institution or its counter-party transfers securities against appropriate collateral subject to a commitment that the borrower will return equivalent securities at some future date or when requested to do so by the transferor, being securities lending for the institution transferring the securities and securities borrowing for the institution to which they are transferred.
Securities borrowing shall be considered an interprofessional transaction when the counterparty is subject to prudential coordination at Community level or is a Zone A credit institution as defined in Directive 89/647/EEC or is a recognized third-country investment firm or when the transaction is concluded with a recognized clearing house or exchange;
19. clearing member shall mean a member of the exchange or the clearing house which has a direct contractual relationship with the central counterparty (market guarantor); non-clearing members must have their trades routed through a clearing member;
20. local firm shall mean a firm dealing only for its own account on a financial-futures or options exchange or for the accounts of or making a price to other members of the same exchange and guaranteed by a clearing member of the same exchange. Responsibility for ensuring the performance of contracts entered into by such a firm must be assumed by a clearing member of the same exchange, and such contracts must be taken into account in the calculation of the clearing member's overall capital requirements so long as the local firm's positions are entirely separate from those of the clearing member;
21. delta shall mean the expected change in an option price as a proportion of a small change in the price of the instrument underlying the option;
22. for the purposes of paragraph 4 of Annex I, long position shall mean a position in which an institution has fixed the interest rate it will receive at some time in the future, and short position shall mean a position in which it has fixed the interest rate it will pay at some time in the future;
23. own funds shall mean own funds as defined in Directive 89/299/EEC. This definition may, however, be amended in the circumstances described in Annex V;
24. initial capital shall mean items 1 and 2 of Article 2 (1) of Directive 89/299/EEC;
25. original own funds shall mean the sum of items 1, 2 and 4, less the sum of items 9, 10 and 11 of Article 2 (1) of Directive 89/299/EEC;
26. capital shall mean own funds;
27. modified duration shall be calculated using the formula set out in paragraph 26 of Annex I.
INITIAL CAPITAL
Article 3
1. Investment firms which hold clients' money and/or securities and which offer one or more of the following services shall have initial capital of ECU 125 000:
- the reception and transmission of investors' orders for financial instruments,
- the execution of investors' orders for financial instruments,
- the management of individual portfolios of investments in financial instruments,
provided that they do not deal in any financial instruments for their own account or underwrite issues of financial instruments on a firm commitment basis.
The holding of non-trading-book positions in financial instruments in order to invest own funds shall not be considered as dealing for the purposes set out in the first paragraph or for the purposes of paragraph 2.
The competent authorities may, however, allow an investment firm which executes investors' orders for financial instruments to hold such instruments for its own account if:
- such positions arise only as a result of the firm's failure to match investors' orders precisely,
- the total market value of all such positions is subject to a ceiling of 15 % of the firm's initial capital,
- the firm meets the requirements imposed in Articles 4 and 5, and
- such positions are incidental and provisional in nature and strictly limited to the time required to carry out the transaction in question.
2. Member States may reduce the amount referred to in paragraph 1 to ECU 50 000 where a firm is not authorized to hold clients' money or securities, to deal for its own account, or to underwrite issues on a firm commitment basis.
3. All other investment firms shall have initial capital of ECU 730 000.
4. The firms referred to in the second and third indents of Article 2 (2) shall have initial capital of ECU 50 000 in so far as they benefit from freedom of establishment or provide services under Articles 14 or 15 of Directive 93/22/EEC.
5. Notwithstanding paragraphs 1 to 4, Member States may continue the authorization of investment firms and firms covered by paragraph 4 in existence before this Directive is applied the own funds of which are less than the initial capital levels specified for them in paragraphs 1 to 4. The own funds of such firms shall not fall below the highest reference level calculated after the date of notification of this Directive. That reference level shall be the average daily level of own funds calculated over a six-month period preceding the date of calculation. It shall be calculated every six months in respect of the corresponding preceding period.
6. If control of a firm covered by paragraph 5 is taken by a natural or legal person other than the person who controlled it previously, the own funds of that firm must attain at least the level specified for it in paragraphs 1 to 4, except in the following situations:
(i) in the case of the first transfer by inheritance after the application of this Directive, subject to the competent authorities' approval, for not more than 10 years after that transfer;
(ii) in the case of a change in the composition of a partnership, as long as at least one of the partners at the date of the application of this Directive remains in the partnership, for not more than 10 years after the date of the application of this Directive.
7. In certain specific circumstances and with the consent of the competent authorities, however, in the event of a merger of two or more investment firms and/or firms covered by paragraph 4, the own funds of the firm produced by the merger need not attain the level specified in paragraphs 1 to 4. Nevertheless, during any period when the levels specified in paragraphs 1 to 4 have not been attained, the own funds of the new firm may not fall below the merged firms' total own funds at the time of the merger.
8. The own funds of investment firms and firms covered by paragraph 4 may not fall below the level specified in paragraphs 1 to 5 and 7. If they do, however, the competent authorities may, where the circumstances justify it, allow such firms a limited period in which to rectify their situations or cease their activities.
PROVISIONS AGAINST RISKS
Article 4
1. The competent authorities shall require institutions to provide own funds which are always more than or equal to the sum of:
(i) the capital requirements, calculated in accordance with Annexes I, II and VI, for their trading-book business;
(ii) the capital requirements, calculated in accordance with Annex III, for all of their business activities;
(iii) the capital requirements imposed in Directive 89/647/EEC for all of their business activities, excluding both their trading-book business and their illiquid assets it they are deducted from own funds under paragraph 2 (d) of Annex V;
(iv) the capital requirements imposed in paragraph 2.
Irrespective of the amount of the capital requirement referred to in (i) to (iv) the own-funds requirement for investment firms shall never be less than the amount prescribed in Annex IV.
2. The competent authorities shall require institutions to cover the risks arising in connection with business that is outside the scope of both this Directive and Directive 89/647/EEC and considered to be similar to the risks covered by those Directives by adequate own funds.
3. If the own funds held by an institution fall below the amount of the own funds requirement imposed in paragraph 1, the competent authorities shall ensure that the institution in question takes appropriate measures to rectify its situation as quickly as possible.
4. The competent authorities shall require institutions to set up systems to monitor and control the interest-rate risk on all of their business, and those systems shall be subject to overview by the competent authorities.
5. Institutions shall be required to satisfy their competent authorities that they employ systems which can calculate their financial positions with reasonable accuracy at any time.
6. Notwithstanding paragraph 1, the competent authorities may allow institutions to calculate the capital requirements for their trading-book business in accordance with Directive 89/647/EEC rather than in accordance with Annexes I and II to this Directive provided that:
(i) the trading-book business of such institutions does not normally exceed 5 % of their total business;
(ii) their total trading-book positions do not normally exceed ECU 15 million; and
(iii) the trading-book business of such institutions never exceeds 6 % of their total business and their total trading-book positions never exceed ECU 20 million.
7. In order to calculate the proportion that trading-book business bears to total business as in paragraph 6 (i) and (iii), the competent authorities may refer either to the size of the combined on- and off-balance-sheet business, to the profit and loss account or to the own funds of the institutions in question, or to a combination of those measurements. When the size of on- and off-balance-sheet business is assessed, debt instruments shall be valued at their market prices or their principal values, equities at their market prices and derivatives according to the nominal or market values of the instruments underlying them. Long positions and short positions shall be summed regardless of their signs.
8. If an institution should happen for more than a short period to exceed either or both of the limits imposed in paragraph 6 (i) and (ii) or to exceed either or both of the limits imposed in paragraph 6 (iii), it shall be required to meet the requirements imposed in Article 4 (1) (i) rather than those of Directive 89/647/EEC in respect of its trading-book business and to notify the competent authority.
MONITORING AND CONTROL OF LARGE EXPOSURES
Article 5
1. Institutions shall monitor and control their large exposures in accordance with Directive 92/121/EEC.
2. Notwithstanding paragraph 1, those institutions which calculate the capital requirements for their trading-book business in accordance with Annexes I and II shall monitor and control their large exposures in accordance with Directive 92/121/EEC subject to the modifications laid down in Annex VI to this Directive.
VALUATION OF POSITIONS FOR REPORTING PURPOSES
Article 6
1. Institutions shall mark to market their trading books on a daily basis unless they are subject to Article 4 (6).
2. In the absence of readily available market prices, for example in the case of dealing in new issues on the primary markets, the competent authorities may waive the requirement imposed in paragraph 1 and require institutions to use alternative methods of valuation provided that those methods are sufficiently prudent and have been approved by competent authorities.
SUPERVISION ON A CONSOLIDATED BASIS
Article 7
General principles
1. The capital requirements imposed in Articles 4 and 5 for institutions which are neither parent undertakings nor subsidiaries of such undertakings shall be applied on a solo basis.
2. The requirements imposed in Articles 4 and 5 for:
- any institution which has a credit institution within the meaning of Directive 92/30/EEC, an investment firm or another financial institution as a subsidiary or which holds a participation in such an entity, and
- any institution the parent undertaking of which is a financial holding company
shall be applied on a consolidated basis in accordance with the methods laid down in the abovementioned Directive and in paragraphs 7 to 14 of this Article.
3. When a group covered by paragraph 2 does not include a credit institution, Directive 92/30/EEC shall apply, subject to the following adaptations:
- financial holding company shall mean a financial institution the subsidiary undertakings of which are either exclusively or mainly investment firms or other financial institutions one at least of which is an investment firm,
- mixed-activity holding company shall mean a parent undertaking, other than a financial holding company or an investment firm, the subsidiaries of which include at least one investment firm,
- competent authorities shall mean the national authorities which are empowered by law or regulation to supervise investment firms,
- every reference to credit institutions shall be replaced by a reference to investment firms,
- the second subparagraph of Article 3 (5) of Directive 92/30/EEC shall not apply,
- in Articles 4 (1) and (2) and 7 (5) of Directive 92/30/EEC each reference to Directive 77/780/EEC shall be replaced by a reference to Directive 93/22/EEC,
- for the purposes of Articles 3 (9) and 8 (3) of Directive 92/30/EEC the references to the Banking Advisory Committee shall be substituted by references to the Council and the Commission,
- the first sentence of Article 7 (4) of Directive 92/30/EEC shall be replaced by the following:
'Where an investment firm, a financial holding company or a mixed-activity holding company controls one or more subsidiaries which are insurance companies, the competent authorities and the authorities entrusted with the public task of supervising insurance undertakings shall cooperate closely'.
4. The competent authorities required or mandated to exercise supervision of groups covered by paragraph 3 on a consolidated basis may, pending further coordination on the supervision of such groups on a consolidated basis and where the circumstances justify it, waive that obligation provided that each investment firm in such a group:
(i) uses the definition of own funds given in paragraph 9 of Annex V;
(ii) meets the requirements imposed in Articles 4 and 5 on a solo basis;
(iii) sets up systems to monitor and control the sources of capital and funding of all other financial institutions within the group.
5. The competent authorities shall require investment firms in a group which has been granted the waiver provided for in paragraph 4 to notify them of those risks, including those associated with the composition and sources of their capital and funding, which could undermine their financial positions. If the competent authorities then consider that the financial positions of those investment firms is not adequately protected, they shall require them to take measures including, if necessary, limitations on the transfer of capital from such firms to group entities.
6. Where the competent authorities waive the obligation of supervision on a consolidated basis provided for in paragraph 4 they shall take other appropriate measures to monitor the risks, namely large exposures, of the whole group, including any undertakings not located in a Member State.
7. Member States may waive the application of the requirements imposed in Articles 4 and 5, on an individual or subconsolidated basis, to an institution which, as a parent undertaking, is subject to supervision on a consolidated basis, and to any subsidiary of such an institution which is subject to their authorization and supervision and is included in the supervision on a consolidated basis of the institution which is its parent company.
The same right of waiver shall be granted where the parent undertaking is a financial holding company which has its head office in the same Member State as the institution, provided that it is subject to the same supervision as that exercised over credit institutions or investment firms, and in particular the requirements imposed in Articles 4 and 5.
In both cases, if the right of waiver is exercised measures must be taken to ensure the satisfactory allocation of own funds within the group.
8. Where an institution the parent undertaking of which is an institution has been authorized and is situated in another Member State, the competent authorities which granted that authorization shall apply the rules laid down in Articles 4 and 5 to that institution on a individual or, where appropriate, a subconsolidated basis.
9. Notwithstanding paragraph 8, the competent authorities responsible for authorizing the subsidiary of a parent undertaking which is an institution may, by a bilateral agreement, delegate their responsibility for supervising the subsidiary's capital adequacy and large exposures to the competent authorities which authorized and supervise the parent undertaking. The Commission must be kept informed of the existence and content of such agreements. It shall forward such information to the competent authorities of the other Member States and to the Banking Advisory Committee and to the Council, except in the case of groups covered by paragraph 3.
Calculating the consolidated requirements
10. Where the rights of waiver provided for in paragraphs 7 and 9 are not exercised, the competent authorities may, for the purpose of calculating the capital requirements set out in Annex I and the exposures to clients set out in Annex VI on a consolidated basis, permit net positions in the trading book of one institution to offset positions in the trading book of another institution according to the rules set out in Annexes I and VI respectively.
In addition, they may allow foreign-exchange positions subject to Annex III in one institution to offset foreign-exchange positions subjet to Annex III in another institution in accordance with the rules set out in Annex III.
11. The competent authorities may also permit offsetting of the trading book and of the foreign-exchange positions of undertakings located in third countries, subject to the simultaneous fulfilment of the following conditions:
(i) those undertakings have been authorized in a third country and either satisfy the definition of credit institution given in the first indent of Article 1 of Directive 77/780/EEC or are recognized third-country investment firms;
(ii) such undertakings comply, on a solo basis, with capital adequacy rules equivalent to those laid down in this Directive;
(iii) no regulations exist in the countries in question which might significantly affect the transfer of funds within the group.
12. The competent authorities may also allow the offsetting provided for in paragraph 10 between institutions within a group that have been authorized in the Member State in question, provided that:
(i) there is a satisfactory allocation of capital within the group;
(ii) the regulatory, legal or contractual framework in which the institutions operate is such as to guarantee mutual financial support within the group.
13. Furthermore, the competent authorities may allow the offsetting provided for in paragraph 10 between institutions within a group that fulfil the conditions imposed in paragraph 12 and any institution included in the same group which has been authorized in another Member State provided that that institution is obliged to fulfil the capital requirements imposed in Articles 4 and 5 on a solo basis.
Definition of consolidated own funds
14. In the calculation of own funds on a consolidated basis Article 5 of Directive 89/299/EEC shall apply.
15. The competent authorities responsible for exercising supervision on a consolidated basis may recognize the validity of the specific own-funds definitions applicable to the institutions concerned under Annex V in the calculation of their consolidated own funds.
REPORTING REQUIREMENTS
Article 8
1. Member States shall require that investment firms and credit institutions provide the competent authorities of their home Member States with all the information necessary for the assessment of their compliance with the rules adopted in accordance with this Directive. Member States shall also ensure that institutions' internal control mechanisms and administrative and accounting procedures permit the verification of their compliance with such rules at all times.
2. Investment firms shall be obliged to report to the competent authorities in the manner specified by the latter at least once every month in the case of firms covered by Article 3 (3), at least once every three months in the case of firms covered by
Article 3
(1) and at least once every six months in the case of firms covered by Article 3 (2).
3. Notwithstanding paragraph 2, investment firms covered by Article 3 (1) and (3) shall be required to provide the information on a consolidated or subconsolidated basis only once every six months.
4. Credit institutions shall be obliged to report in the manner specified by the competent authorities as often as they are obliged to report under Directive 89/647/EEC.
5. The competent authorities shall oblige institutions to report to them immediately any case in which their counterparties in repurchase and reverse repurchase agreements or securities-lending and securities-borrowing transactions default on their obligations. The Commission shall report to the Council on such cases and their implications for the treatment of such agreements and transactions in this Directive not more than three years after the date referred to in Article 12. Such reports shall also describe the way that institutions meet those of conditions (i) to (v) in Article 2 (6) (b) that apply to them, in particular that referred to in condition (v). Furthermore it shall give details of any changes in the relative volume of institutions' traditional lending and their lending through reverse repurchase agreements and securities-borrowing transactions. If the Commission concludes on the basis of this report and other information that further safeguards are needed to prevent abuse it shall make appropriate proposals.
COMPETENT AUTHORITIES
Article 9
1. Member States shall designate the authorities which are to carry out the duties provided for in this Directive. They shall inform the Commission thereof, indicating any division of duties.
2. The authorities referred to in paragraph 1 must be public authorities or bodies officially recognized by national law or by public authorities as part of the supervisory system in operation in the Member State concerned.
3. The authorities concerned must be granted all the powers necessary for the performance of their tasks, and in particular that of overseeing the constitution of trading books.
4. The competent authorities of the various Member States shall collaborate closely in the performance of the duties provided for in this Directive, particularly when investment services are provided on a services basis or through the establishment of branches in one or more Member States. They shall on request supply one another with all information likely to facilitate the supervision of the capital adequacy of investment firms and credit institutions, in particular the verification of their compliance with the rules laid down in this Directive. Any exchange of information between competent authorities which is provided for in this Directive in respect of investment firms shall be subject to the obligation of professional secrecy imposed in
Article 25
of Directive 93/22/EEC and, as regards credit institutions, to the obligation imposed in Article 12 of Directive 77/780/EEC, as amended by Directive 89/646/EEC.
Article 10
Pending adoption of a further Directive laying down provisions for adapting this Directive to technical progress in the areas specified below, the Council shall, acting by qualified majority on a proposal from the Commission, in accordance with Decision 87/373/EEC, adopt those adaptations which may be necessary, as follows:
- clarification of the definitions in Article 2 in order to ensure uniform application of this Directive throughout the Community,
- clarification of the definitions in Article 2 to take account of developments on financial markets,
- alteration of the amounts of initial capital prescribed in Article 3 and the amount referred to in Article 4 (6) to take account of developments in the economic and monetary field,
- the alignment of terminology on and the framing of definitions in accordance with subsequent acts on institutions and related matters.
TRANSITIONAL PROVISIONS
Article 11
1. Member States may authorize investment firms subject to Article 30 (1) of Directive 93/22/EEC the own funds of which are on the day of the application of this Directive lower than the levels specified in Article 3 (1) to (3) of this Directive. Thereafter, however, the own funds of such investment firms must fulfil the conditions laid down in Article 3 (5) to (8) of this Directive.
2. Notwithstanding paragraph 14 of Annex I, Member States may set a specific-risk requirement for any bonds assigned a weighting of 10 % under Article 11 (2) of Directive 89/647/EEC equal to half the specific-risk requirement for a qualifying item with the same residual maturity as such a bond.
FINAL PROVISIONS
Article 12
1. Member States shall bring into force the laws, regulations and administrative provisions necessary for them to comply with this Directive by the date fixed in the second paragraph of Article 31 of Directive 93/22/EEC. They shall forthwith inform the Commission thereof.
When Member States adopt these provisions they shall include a reference to this Directive or add such a reference on the occasion of their official publication. The manner in which such references are to be made shall be laid down by the Member States.
2. Member States shall communicate to the Commission the main provisions of national law which they adopt in the field covered by this Directive.
Article 13
The Commission shall as soon as possible submit to the Council proposals for capital requirements in respect of commodities trading, commodity derivatives and units of collective-investment undertakings.
The Council shall decide on the Commission's proposals no later than six months before the date of application of this Directive.
REVIEW CLAUSE
Article 14
Within three years of the date referred to in Article 12, acting on a proposal from the Commission, the Council shall examine and, if necessary, revise this Directive in the light of the experience acquired in applying it, taking into account market innovation and, in particular, developments in international fora of regulatory authorities.
Article 15
This Directive is addressed to the Member States.
Done at Brussels, 15 March 1993.