DIRECTIVE 98/31/EC OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 22 June 1998 amending Council Directive 93/6/EEC on the capital adequacy of investment firms and credit institutions
THE EUROPEAN PARLIAMENT AND THE COUNCIL OF THE EUROPEAN UNION,
Having regard to the Treaty establishing the European Community, and in particular the first and third sentences of Article 57(2) thereof,
Having regard to the proposal from the Commission (1),
Having regard to the opinion of the Economic and Social Committee (2),
Having regard to the opinion of the European Monetary Institute (3),
Acting in accordance with the procedure laid down in Article 189b of the Treaty (4),
(1) Whereas the risks associated with commodities trading and commodity derivatives are currently subject to Council Directive 89/647/EEC of 18 December 1989 on a solvency ratio for credit institutions (5); whereas, however, the market risks associated with those positions are not captured accurately by Directive 89/647/EEC; whereas it is necessary to extend the concept of the 'trading book` to positions in commodities or commodity derivatives which are held for trading purposes and are subject mainly to market risks; whereas institutions must comply with this Directive as regards the coverage of commodity risks on their overall business; whereas the perpetration of serious fraud by certain commodity futures traders is of growing concern to the Community and a threat to the image and integrity of the futures trading business; whereas it is desirable that the Commission should consider defining an appropriate prudential framework in order to prevent these fraudulent practices in the future;
(2) Whereas Council Directive 93/6/EEC of 15 March 1993 on the capital adequacy of investment firms and credit institutions (6) lays down a standardised method for the calculation of capital requirements for market risks incurred by investment firms and credit institutions; whereas institutions have developed their own risk-management systems (internal models), designed to measure more accurately than the standardised method the market risks incurred by investment firms and credit institutions; whereas the use of more accurate methods of measuring risks should be encouraged;
(3) Whereas the use of such internal models for the purpose of calculating capital requirements requires strict internal control mechanisms and should be subject to recognition and supervision by the competent authorities; whereas the continued reliability of the results of the internal model calculation should be verified by a back-testing procedure;
(4) Whereas it is appropriate that competent authorities may allow margin requirements for exchange-traded futures and options, and on a transitional basis for cleared over-the-counter derivatives of the same nature, to be used as substitutes for the capital requirement calculated for such instruments in accordance with this Directive, provided that this does not lead to a capital requirement which is lower than the capital requirement calculated according to the other methods prescribed in this Directive; whereas the application of this principle does not require that the equivalence between such margin requirements and the capital requirements calculated according to the other methods prescribed in this Directive must be continually verified by the institutions applying this principle;
(5) Whereas the rules adopted at the wider international level may, in order to encourage more sophisticated risk-management methods based on internal models, lower capital requirements for credit institutions from third countries; whereas those credit institutions compete with investment firms and credit institutions incorporated in the Member States; whereas for investment firms and credit institutions incorporated in the Member States, only an amendment of Directive 93/6/EEC can provide similar incentives for the development and use of internal models;
(6) Whereas for the purpose of calculating market-risk-capital requirements, positions in gold and gold derivatives should be treated in a similar fashion to foreign-exchange positions;
(7) Whereas the issue of subordinated debt should not automatically exclude an issuer's equity from being included in a portfolio qualifying for a 2 % specific-risk weighting according to point 33 of Annex I to Directive 93/6/EEC;
(8) Whereas this Directive is in accordance with the work of an international forum of banking supervisors on the supervisory treatment of market risk and of positions in commodities and commodity derivatives;
(9) Whereas it is necessary to have a transitional capital regime on an optional basis for investment firms and credit institutions undertaking significant commodities business, having a diversified commodity portfolio and being not yet able to use models for the purpose of calculating the commodities risk capital requirement, in order to ensure a harmonious application of this Directive;
(10) Whereas this Directive is the most appropriate means of attaining the objectives sought and does not go beyond what is necessary to achieve those objectives,
HAVE ADOPTED THIS DIRECTIVE:
Article 1
Directive 93/6/EEC is hereby amended as follows:
1. Article 2 is amended as follows:
(a) point 6(a) and the introductory phrase and subpoints (i) and (ii) of point 6(b) shall be replaced by the following:
'(a) its proprietary positions in financial instruments, commodities and commodity derivatives 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, commodities and commodity derivatives, 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 and commodities lending which are based on securities or commodities 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 and commodities-borrowing transactions described in the same paragraph, provided the competent authorities so approve, which meet either 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 or commodities involved in the agreement or transaction in question, according to a rule acceptable to the competent authorities`;
(b) points 15 and 16 shall be replaced by the following:
'15. "warrant" shall mean a security which gives the holder the right to purchase an underlying at a stipulated price until or at the warrant's expiry date. It may be settled by the delivery of the underlying itself or by cash settlement.
16. "stock financing" shall mean positions where physical stock has been sold forward and the cost of funding has been locked in until the date of the forward sale`;
(c) point 17, first paragraph, shall be replaced by the following:
'17. "repurchase agreement" and "reverse repurchase agreement" shall mean any agreement in which an institution or its counter-party transfers securities or commodities or guaranteed rights relating to title to securities or commodities where that guarantee is issued by a recognised exchange which holds the rights to the securities or commodities and the agreement does not allow an institution to transfer or pledge a particular security or commodity to more than one counter-party at one time, subject to a commitment to repurchase them (or substituted securities or commodities 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 or commodities and a reverse repurchase agreement for the institution buying them`;
(d) point 18 shall be replaced by the following:
'18. "securities or commodities lending" and "securities or commodities borrowing" shall mean any transaction in which an institution or its counter-party transfers securities or commodities against appropriate collateral subject to a commitment that the borrower will return equivalent securities or commodities at some future date or when requested to do so by the transferor, that transaction being securities or commodities lending for the institution transferring the securities or commodities and being securities or commodities borrowing for the institution to which they are transferred.
Securities or commodities borrowing 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 recognised third-country investment firm or when the transaction is concluded with a recognised clearing house or exchange`;
2. in Article 4(1), first subparagraph, points (i) and (ii) shall be replaced by the following:
'(i) the capital requirements, calculated in accordance with Annexes I, II and VI and, as appropriate, Annex VIII, for their trading-book business;
(ii) the capital requirements, calculated in accordance with Annexes III and VII and, as appropriate, Annex VIII, for all of their business activities`.
3. Article 5(2) shall be replaced by the following:
'2. Notwithstanding paragraph 1, those institutions which calculate the capital requirements for their trading-book business in accordance with Annexes I and II, and as appropriate Annex VIII, 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`;
4. Article 7(10) and the introductory part of Article 7(11), shall be replaced by the following:
'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 Annexes I and VIII and the exposures to clients set out in Annex VI on a consolidated basis, permit 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, VI and VIII.
In addition, they may allow foreign-exchange positions in one institution to offset foreign-exchange positions in another institution in accordance with the rules set out in Annex III and/or Annex VIII. They may also allow commodities positions in one institution to offset commodities positions in another institution in accordance with the rules set out in Annex VII and/or Annex VIII.
11. The competent authorities may also permit offsetting of the trading book and of the foreign-exchange and commodities positions, respectively, of undertakings located in third countries, subject to the simultaneous fulfilment of the following conditions:`.
5. Article 8(5) shall be replaced by the following:
'5. The competent authorities shall oblige institutions to report to them immediately any case in which their counter-parties in repurchase and reverse repurchase agreements or securities and commodities-lending and securities and commodities-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 report 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 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 or commodities-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`.
6. The following Article shall be inserted:
'Article 11a
Until 31 December 2006, Member States may authorise their institutions to use the minimum spread, carry and outright rates set out in the following table instead of those indicated in paragraphs 13, 14, 17 and 18 of Annex VII provided that the institutions, in the opinion of their competent authorities:
(i) undertake significant commodities business,
(ii) have a diversified commodities portfolio, and
(iii) are not yet in a position to use internal models for the purpose of calculating the capital requirement on commodities risk in accordance with Annex VIII.
>TABLE>
Member States shall inform the Commission of the use they make of this Article`.
7. Annexes I, II, III and V shall be amended, and Annexes VII and VIII added in accordance with the Annex to this Directive.
Article 2
1. Member States shall bring into force the laws, regulations and administrative provisions necessary to comply with this Directive not later than 24 months after the date of its entry into force. They shall forthwith inform the Commission thereof.
When Member States adopt these measures, they shall contain a reference to this Directive or shall be accompanied by such reference on the occasion of their official publication. The methods of making such reference shall be laid down by Member States.
2. Member States shall communicate to the Commission the text of the main provisions of domestic law which they adopt in the field governed by this Directive.
Article 3
This Directive shall enter into force on the day of its publication in the Official Journal of the European Communities.
Article 4
This Directive is addressed to the Member States.
Done at Luxembourg, 22 June 1998.