1993L0006 — EN — 11.02.2003 — 002.001 — 1
This document is meant purely as a documentation tool and the institutions do not assume any liability for its contents
►B COUNCILDIRECTIVE93/6/EEC
of15March1993
onthecapitaladequacyofinvestmentsfirmsandcreditinstitutions
(OJ L 141, 11.6.1993, p. 1)
Amended by:
Official Journal
No page date
►M1Directive 98/31/EC of the European Parliament and of the Council of 22
June 1998L 204 13 21.7.1998
►M2Directive 98/33/EC of the European Parliament and of the Council of 22
June 1998L 204 29 21.7.1998
►M3Directive 2002/87/EC of the European Parliament and of the Council of
16 December 2002L 35 1 11.2.2003
Corrected by:
►C1Corrigendum, OJ L 248, 8.9.1998, p. 20 (98/31/EC)
NB: This consolidated version contains references to the European unit of account and/or the ecu, which from 1 January 1999
should be understood as references to the euro — Council Regulation (EEC) No 3308/80 (OJ L 345, 20.12.1980, p. 1) andCouncil Regulation (EC) No 1103/97 (OJ L 162, 19.6.1997, p. 1).
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COUNCILDIRECTIVE93/6/EEC
of15March1993
onthecapitaladequacyofinvestmentsfirmsandcreditinstitutions
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 Article57 (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 invest-
ment firms authorized by the competent authorities of their homeMember States and supervised by the same authorities to establishbranches 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 investmentfirms;
Whereas that Directive does not, however, establish common standards
for the own funds of investment firms nor indeed does it establish theamounts of the initial capital of such firms; whereas it does not estab-lish a common framework for monitoring the risks incurred by thesame firms; whereas it refers, in several of its provisions, to anotherCommunity 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 essen-
tial 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 theown funds of investment firms, the establishment of the amounts oftheir initial capital and the establishment of a common framework formonitoring the risks incurred by investment firms are essential aspects
of the harmonization necessary for the achievement of mutual recogni-
tion 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 supervi-
sion 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 toprotect investors;1993L0006 — EN — 11.02.2003 — 002.001 — 2
(1) OJ No C 152, 21. 6. 1990, p. 6; and
OJ No C 50, 25. 2. 1992, p. 5.
(2) OJ No C 326, 16. 12. 1991, p. 89; and
OJ No C 337, 21. 12. 1992, p. 114.
(3) OJ No C 69, 18. 3. 1991, p. 1.
(4) See page 27 of this Official Journal.
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Whereas in a common financial market, institutions, whether they are
investment firms or credit institutions, engage in direct competitionwith 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 inCouncil Directive 89/647/EEC of 18 December 1989 on a solvencyratio for credit institutions(
1);
Whereas it is necessary to developcommon standards for market risks
incurred by credit institutions and provide a complementary frameworkfor the supervision of the risks incurred by institutions, in particular
market risks, and more especially position risks, counterparty/settle-
ment 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 risksand exposures relating to certain financial services provided to custo-mers;
Whereas it is desirable that institutions with negligible trading-book
business, in both absolute and relative terms, should be able to applyDirective 89/647/EEC, rather than the requirements imposed inAnnexes 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 adequateprotection 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 overallbusiness; whereas lower capital requirements should be imposed forpositions 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 MonetaryUnion;
Whereas the existence, in all institutions, of internal systems for moni-
toring and controlling interest-rate risks on all of their business is aparticularly important way of minimizing such risks; whereas, conse-quently, such systems must be subject to overview by the competentauthorities;
Whereas Council Directive 92/121/EEC of 21 December 1992 on the
monitoring and control of large exposures of credit institutions(
2)i s
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 toadopt 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(
3);
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 differfrom that in the aforementioned Directive in order to take account of1993L0006 — EN — 11.02.2003 — 002.001 — 3
(1) OJ No L 386, 30. 12. 1989, p. 14. Directive as amended by Directive 92/30/
EEC (OJ No L 110, 28. 4. 1992, p. 52).
(2) OJ No L 29, 5. 2. 1993, p. 1.
(3) OJ No L 124, 5. 5. 1989, p. 16. Directive as last amended by Directive 92/
30/EEC (OJ No L 110, 24. 9. 1992, p. 52).
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the particular characteristics of the activities carried on by those insti-
tutions which mainly involve market risks;
Whereas Council Directive 92/30/EEC of 6 April 1992 on the supervi-
sion of credit institutions on a consolidated basis(1) states the principle
of consolidation; whereas it does not establish common rules for theconsolidation of financial institutions which are involved in activities
principally subject to market risks; whereas that Directive makes refer-
ence to another Community initiative intended to adopt coordinatedmeasures 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 intro-duction 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 Commissionwill 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 proce-dures for the exercise of implementing powers conferred on theCommission(
2); 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 experi-ence, developments on financial markets and work in international foraof 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 require-
ments on the investment firms and credit institutions that it hasauthorized.
DEFINITIONS
Article 2
For the purposes of this Directive:
1.credit institutions shall mean all institutions that satisfy the defini-
tion 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(
3) which are
subject to the requirements imposed by Directive 89/647/EEC;
2.investment firms shall mean all institutions that satisfy the defini-
tion in point 2 of Article 1 of Directive 93/22/EEC, which are1993L0006 — EN — 11.02.2003 — 002.001 — 4
(1) OJ No L 110, 28. 4. 1992, p. 52.
(2) OJ No L 197, 18. 7. 1987, p. 33.
(3) OJ No L 322, 17. 12. 1977, p. 30. Directive as amended by Directive 89/
646/EEC (OJ No L 386, 30. 12. 1989, p. 1).
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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 clientsand which for that reason may not at any time place themselvesin 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 coveredby the definition of investment firm in 2, which are authorized in athird country and which are subject to and comply with prudentialrules considered by the competent authorities as at least as strin-
gent as those laid down in this Directive;
5.financialinstruments shall mean the instruments listed in Section B
of the Annex to Directive 93/22/EEC;
6. thetrading book of an institution shall consist of:
(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 ofbenefiting in the short term from actual and/or expected differ-ences between their buying and selling prices, or from otherprice or interest-rate variations, and positions in financial
instruments, commodities and commodity derivatives, arising
from matched principal broking, or positions taken in order tohedge 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 torepurchase agreements and securities and commodities lendingwhich are based on securities or commodities included in thetrading book as defined in (a) referred to in paragraph 4 of
Annex II, those exposures due to reverse repurchase agree-
ments and securities-borrowing and commodities-borrowingtransactions described in the same paragraph, provided thecompetent 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 mate-
rial changes in the value of the securities or commoditiesinvolved in the agreement or transaction in question,
according to a rule acceptable to the competent authori-
ties;
(iii) the agreement or transaction provides for the claims of the
institution to be automatically and immediately offsetagainst the claims of its counter-party in the event of the
latter's defaulting;
(iv) the agreement or transaction in question is an interprofes-
sional 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, divi-
dends and margin on exchange-traded derivatives which aredirectly related to the items included in the trading bookreferred 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, whereappropriate, accounting standards in the institution concerned,1993L0006 — EN — 11.02.2003 — 002.001 — 5
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such procedures and their consistent implementation being subject
to review by the competent authorities;
7.parentundertaking,subsidiaryundertaking andfinancialinstitution
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 mainlycredit 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 investmentfirms or recognized third-country investment firms and exposuresincurred to recognized clearing houses and exchanges shall beassigned the same weighting as that assigned where the relevant
counterparty is a credit institution;
10.over-the-counter (OTC) derivative instruments shall mean the off-
balance-sheet items to which according to the first subparagraphof Article 6(3) of Directive 89/647/EEC the methods set out inAnnex II to the said Directive shall be applied;
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 recognizedthird-country investment firms. It shall also mean long and shortpositions in debt instruments provided that such instruments meetthe 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 recog-nized by the competent authorities of the relevant Member State;and secondly both be considered by the institution concerned tobe 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 areassessed shall be subject to scrutiny by the competent authorities,which shall overturn the judgment of the institution if theyconsider 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 asqualifying items instruments which are sufficiently liquid andwhich, because of the solvency of the issuer, are subject to adegree 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 havebeen evaluated at such a level by at least two credit-rating agenciesrecognized by the competent authorities or by only one such credit-rating agency so long as they are not rated below such a level byany other credit-rating agency recognized by the competent autho-
rities.
The competent authorities may, however, waive the condition
imposed in the preceding sentence if they judge it inappropriate inthe light of, for example, the characteristics of the market, theissuer, 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 ofthe insufficient solvency of the issuer or liquidity.
The competent authorities of each Member State shall regularly
provide the Council and the Commission with informationconcerning the methods used to evaluate the qualifying items, in1993L0006 — EN — 11.02.2003 — 002.001 — 6
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particular the methods used to assess the degree of liquidity of the
issue and the solvency of the issuer;
13.centralgovernmentitems shall mean long and short positions in the
assets referred to in Article 6 (1) (a) of Directive 89/647/EEC andthose assigned a weighting of 0 % in Article 7 of the same Direc-
tive;
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 a security which gives the holder the right to
purchase an underlying at a stipulated price until or at the warrant'sexpiry date. It may be settled by the delivery of the underlying
itself or by cash settlement;
16. ‘stock financing’ shall means positions where physical stock has
been sold forward and the cost of funding has been locked in until
the date of the forward sale;
17. ‘repurchase agreement’ and ‘reverse repurchase agreement’ shall
mean any agreement in which an institution or its counter-partytransfers securities or commodities or guaranteed rights relating totitle to securities or commodities where that guarantee is issued bya 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 thanone counter-party at one time, subject to a commitment torepurchase them (or substituted securities or commodities of thesame 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.
A reverse repurchase agreement shall be considered an interprofes-
sional transaction when the counter-party is subject to prudential
coordination at Community level or is a Zone A credit institutionas defined in Directive 89/647/EEC or is a recognized third-country investment firm or when the agreement is concluded witha recognized clearing house or exchange;
18. ‘securities or commodities lending’ and ‘securities or commodities
borrowing’ shall mean any transaction in which an institution or itscounter-party transfers securities or commodities against appro-priate collateral subject to a commitment that the borrower willreturn equivalent securities or commodities at some future date orwhen 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 commoditiesborrowing for the institution to which they are transferred.
Securities or commodities borrowing shall be considered an inter-
professional transaction when the counter-party is subject toprudential coordination at Community level or is a Zone A creditinstitution 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;
19.clearing member shall mean a member of the exchange or the
clearing house which has a direct contractual relationshipwith thecentral 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 guar-anteed by a clearing member of the same exchange. Responsibilityfor ensuring the performance of contracts entered into by such afirm must be assumed by a clearing member of the same exchange,and such contracts must be taken into account in the calculation of1993L0006 — EN — 11.02.2003 — 002.001 — 7
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the clearing member's overall capital requirements so long as the
local firm's positions are entirely separate from those of theclearing member;
21.deltashall mean the expected change in an option price as a
proportion of a small change in the price of the instrument under-
lying 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 atsome 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 circum-stances described in Annex V;
24.initial capital shall mean items 1 and 2 of Article 2 (1) of Direc-
tive 89/299/EEC;
25.originalownfunds 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.capitalshall mean own funds;
27.modified duration shall be calculated using the formula set out in
paragraph 26 of Annex I.
INITIALCAPITAL
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 125000:
— 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 thepurposes 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 suchinstruments 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 50000 where a firm is not authorized to hold clients' money orsecurities, to deal for its own account, or to underwrite issues on a firmcommitment basis.
3. All other investment firms shall have initial capital of
ECU 730000.
4. The firms referred to in the second and third indents of Article 2
(2) shall have initial capital of ECU 50000 in so far as they benefit1993L0006 — EN — 11.02.2003 — 002.001 — 8
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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 4in existence before this Directive is applied the own funds of which areless than the initial capital levels specified for them in paragraphs 1 to4. The own funds of such firms shall not fall below the highest refer-ence 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 correspondingpreceding 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 inparagraphs 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, fornot 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 thisDirective 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 ormore investment firms and/or firms covered by paragraph 4, the ownfunds 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, theown funds of the new firm may not fall below the merged firms' totalown funds at the time of the merger.
8. The own funds of investment firms and firms covered by para-
graph 4 may not fall below the level specified in paragraphs 1 to 5
and 7. If they do, however, the competent authorities may, where thecircumstances justify it, allow such firms a limited period in which torectify their situations or cease their activities.
PROVISIONSAGAINSTRISKS
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 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 busi-ness activities;
(iii) the capital requirements imposed in Directive 89/647/EEC for all
of their business activities, excluding both their trading-book busi-
ness and their illiquid assets it they are deducted from own fundsunder 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 ofboth this Directive and Directive 89/647/EEC and considered to besimilar to the risks covered by those Directives by adequate own funds.1993L0006 — EN — 11.02.2003 — 002.001 — 9
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3. If the own funds held by an institution fall below the amount of
the own funds requirement imposed in paragraph 1, the competentauthorities 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 busi-ness, and those systems shall be subject to overview by the competentauthorities.
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 theirtrading-book business in accordance with Directive 89/647/EEC ratherthan in accordance with Annexes I and II to this Directive providedthat:
(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 neverexceed 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 ownfunds of the institutions in question, or to a combination of thosemeasurements. When the size of on- and off-balance-sheet business isassessed, 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 under-lying them. Long positions and short positions shall be summedregardless 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-bookbusiness and to notify the competent authority.
MONITORINGANDCONTROLOFLARGEEXPOSURES
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 accordancewith Annexes I and II, and as appropriate Annex VIII, shall monitorand control their large exposures in accordance with Directive 92/121/EEC subject to the modifications laid down in Annex VI to this Direc-
tive.
VALUATIONOFPOSITIONSFORREPORTINGPURPOSES
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 compe-1993L0006 — EN — 11.02.2003 — 002.001 — 10
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tent authorities may waive the requirement imposed in paragraph 1 and
require institutions to use alternative methods of valuation providedthat those methods are sufficiently prudent and have been approved
by competent authorities.
SUPERVISIONONACONSOLIDATEDBASIS
Article 7
General principles
1. The capital requirements imposed in Articles 4 and 5 for institu-
tions 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 insti-
tution 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 paragraphs7 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 followingadaptations:
— ‘financial holding company’ shall mean a financial institution, the
subsidiary undertakings of which are either exclusively or mainly
investment firms or other financial institutions, at least one ofwhich is an investment firm, and which is not a mixed financialholding company within the meaning of Directive 2002/87/EC ofthe European Parliament and of the Council of 16 December 2002on the supplementary supervision of credit institutions, insurance
undertakings and investment firms in a financial conglomerate(
1),
— ‘mixed-activity holding company’ shall mean a parent undertaking,
other than a financial holding company or an investment firm or amixed financial holding company within the meaning of Directive
2002/87/EC, the subsidiaries of which include at least one invest-
ment 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 refer-
ence toinvestment 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 referenceto 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 substi-
tuted 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 controlsone or more subsidiaries which are insurance companies, thecompetent authorities and the authorities entrusted with the publictask of supervising insurance undertakings shall cooperate closely’.1993L0006 — EN — 11.02.2003 — 002.001 — 11
(1) OJ L 35, 11.2.2003.▼M3
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4. The competent authorities required or mandated to exercise super-
vision 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 upsystems to monitor and control the sources of cap ital 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 4to 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 thenconsider that the financial positions of those investment firms is notadequately protected, they shall require them to take measuresincluding, if necessary, limitations on the transfer of capital from such
firms to groupentities.
6. Where the competent authorities waive the obligation of supervi-
sion on a consolidated basis provided for in paragraph 4 they shall takeother appropriate measures to monitor the risks, namely large expo-sures, of the whole group, including any undertakings not located in aMember 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 supervi-
sion on a consolidated basis, and to any subsidiary of such aninstitution which is subject to their authorization and supervision andis included in the supervision on a consolidated basis of the institutionwhich 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 samesupervision as that exercised over credit institutions or investmentfirms, 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 thegroup.
8. Where an institution the parent undertaking of which is an institu-
tion has been authorized and is situated in another Member State, the
competent authorities which granted that authorization shall apply therules laid down in Articles 4 and 5 to that institution on a individualor, where appropriate, a subconsolidated basis.
9. Notwithstanding paragraph 8, the competent authorities respon-
sible for authorizing the subsidiary of a parent undertaking which is
an institution may, by a bilateral agreement, delegate their responsi-
bility for supervising the subsidiary's capital adequacy and largeexposures to the competent authorities which authorized and supervisethe parent undertaking. The Commission must be kept informed of theexistence and content of such agreements. It shall forward such infor-mation 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.
Calculatingtheconsolidatedrequirements
10. Where the rights of waiver provided for in paragraphs 7 and 9
are not exercised, the competent authorities may, for the purpose ofcalculating the capital requirements set out in Annexes I and VIII andthe exposures to clients set out in Annex VI on a consolidated basis,permit positions in the trading book of one institution to offset posi-1993L0006 — EN — 11.02.2003 — 002.001 — 12
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tions 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 institu-
tion 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 offsetcommodities positions in another institution in accordance with therules 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 thesimultaneous 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 firstindent 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 thathave 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 institu-
tions operate is such as to guarantee mutual financial supportwithin 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 institutionincluded in the same groupwhich has been authorized in anotherMember State provided that that institution is obliged to fulfil thecapital requirements imposed in Articles 4 and 5 on a solo basis.
Definitionofconsolidatedownfunds
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 AnnexV in the calculation of their consolidated own funds.
REPORTINGREQUIREMENTS
Article 8
1. Member States shall require that investment firms and credit insti-
tutions provide the competent authorities of their home Member Stateswith all the information necessary for the assessment of their compli-ance 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 theverification 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 leastonce 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 consoli-dated or subconsolidated basis only once every six months.1993L0006 — EN — 11.02.2003 — 002.001 — 13
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4. Credit institutions shall be obliged to report in the manner speci-
fied by the competent authorities as often as they are obliged to reportunder Directive 89/647/EEC.
5. The competent authorities shall oblige institutions to report to
them immediately any case in which their counter-parties in repurchaseand reverse repurchase agreements or securities and commodities-lending and securities and commodities-borrowing transactions defaulton 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 thedate referred to in Article 12. Such report shall also describe the waythat institutions meet those of conditions (i) to (v) in Article 2(6)(b)that apply to them, in particular condition (v). Furthermore it shallgive details of any changes in the relative volume of institutions' tradi-
tional lending and their lending through reverse repurchase agreements
and securities-borrowing or commodities-borrowing transactions. If theCommission concludes on the basis of this report and other informationthat further safeguards are needed to prevent abuse, it shall makeappropriate proposals.
COMPETENTAUTHORITIES
Article 9
1. Member States shall designate the authorities which are to carry
out the duties provided for in this Directive. They shall inform theCommission thereof, indicating any division of duties.
2. The authorities referred to in paragraph 1 must be public authori-
ties or bodies officially recognized by national law or by publicauthorities as part of the supervisory system in operation in theMember State concerned.
3. The authorities concerned must be granted all the powers neces-
sary 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 inthis Directive, particularly when investment services are provided on aservices 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 adequacyof investment firms and credit institutions, in particular the verificationof their compliance with the rules laid down in this Directive. Anyexchange of information between competent authorities which isprovided 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 obli-gation imposed in Article 12 of Directive 77/780/EEC, as amended byDirective 89/646/EEC.
Article 10
Pending adoption of a further Directive laying down provisions for
adapting this Directive to technical progress in the areas specifiedbelow, 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 devel-
opments 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 devel-opments in the economic and monetary field,1993L0006 — EN — 11.02.2003 — 002.001 — 14
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— the alignment of terminology on and the framing of definitions in
accordance with subsequent acts on institutions and related matters.
TRANSITIONALPROVISIONS
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 ownfunds of such investment firms must fulfil the conditions laid down inArticle 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 residualmaturity as such a bond.
Article 11a
Until 31 December 2006, Member States may authorise their institu-
tions to use the minimum spread, carry and outright rates set out inthe following table instead of those indicated in paragraphs 13, 14, 17and 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 accor-
dance with Annex VIII.
Table
Precious
metals
(except gold)Base metalsAgricultural
products
(softs)Other,
including
energy
products
Spread rate (%) 1,0 1,2 1,5 1,5
Carry rate (%) 0,3 0,5 0,6 0,6
Outright rate (%) 8 10 12 15
Member States shall inform the Commission of the use they make of
this Article.
FINALPROVISIONS
Article 12
1. Member States shall bring into force the laws, regulations and
administrative provisions necessary for them to comply with this Direc-tive by the date fixed in the second paragraph of Article 31 ofDirective 93/22/EEC. They shall forthwith inform the Commission
thereof.
When Member States adopt these provisions they shall include a refer-
ence to this Directive or add such a reference on the occasion of theirofficial publication. The manner in which such references are to bemade 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 bythis Directive.1993L0006 — EN — 11.02.2003 — 002.001 — 15
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Article 13
The Commission shall as soon as possible submit to the Council propo-
sals 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.
REVIEWCLAUSE
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, ifnecessary, revise this Directive in the light of the experience acquiredin 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.1993L0006 — EN — 11.02.2003 — 002.001 — 16
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ANNEX I
POSITIONRISK
INTRODUCTION
Netting
1. The excess of an institution's long (short) positions over its short (long)
positions in the same equity, debt and convertible issues and identical finan-
cial futures, options, warrants and covered warrants shall be its net position
in each of those different instruments. In calculating the net position the
competent authorities shall allow positions in derivative instruments to be
treated, as laid down in paragraphs 4 to 7, as positions in the underlying
(or notional) security or securities. Institutions' holdings of their own debt
instruments shall be disregarded in calculating specific risk under paragraph
14.
2. No netting shall be allowed between a convertible and an offsetting position
in the instrument underlying it, unless the competent authorities adopt an
approach under which the likelihood of a particular convertible's being
converted is taken into account or have a capital requirement to cover any
loss which conversion might entail.
3. All net positions, irrespective of their signs, must be converted on a daily
basis into the institution's reporting currency at the prevailing spot exchange
rate before their aggregation.
Particular instruments
4. Interest-rate futures, forward-rate agreements (FRAs) and forward commit-
ments to buy or sell debt instruments shall be treated as combinations of
long and short positions. Thus a long interest-rate futures position shall be
treated as a combination of a borrowing maturing on the delivery date of
the futures contract and a holding of an asset with maturity date equal to
that of the instrument or notional position underlying the futures contract
in question. Similarly a sold FRA will be treated as a long position with a
maturity date equal to the settlement date plus the contract period, and a
short position with maturity equal to the settlement date. Both the
borrowing and the asset holding shall be included in the Central government
column of Table 1 in paragraph 14 in order to calculate the capital required
against specific risk for interest-rate futures and FRAs. A forward commit-
ment to buy a debt instrument shall be treated as a combination of a
borrowing maturing on the delivery date and a long (spot) position in the
debt instrument itself. The borrowing shall be included in the central
government column of Table 1 for purposes of specific risk, and the debt
instrument under whichever column is appropriate for it in the same table.
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The competent authorities may allow the capital requirement for an
exchange-traded future to be equal to the margin required by the exchange
if they are fully satisfied that it provides an accurate measure of the risk
associated with the future and that it is at least equal to the capital require-
ment for a future that would result from a calculation made using the
method set out in the remainder of this Annex or applying the internal
models method described in Annex VIII. Until 31 December 2006 the
competent authorities may also allow the capital requirement for an OTC
derivatives contract of the type referred to in this paragraph cleared by a
clearing house recognised by them to be equal to the margin required by
the clearing house if they are fully satisfied that it provides an accurate
measure of the risk associated with the derivatives contract and that it is at
least equal to the capital requirement for the contract in question that would
result from a calculation made using the method set out in the remainder of
this Annex or applying the internal models method described in Annex VIII.
5. Options on interest rates, debt instruments, equities, equity indices, financial
futures, swaps and foreign currencies shall be treated as if they were posi-
tions equal in value to the amount of the underlying instrument to which the
option refers, multiplied by its delta for the purposes of this Annex. The
latter positions may be netted off against any offsetting positions in theidentical underlying securities or derivatives. The delta used shall be that
of the exchange concerned, that calculated by the competent authorities or,
where that is not available or for OTC options, that calculated by the insti-
tution itself, subject to the competent authorities' being satisfied that the
model used by the institution is reasonable.1993L0006 — EN — 11.02.2003 — 002.001 — 17
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However, the competent authorities may also prescribe that institutions
calculate their deltas using a methodology specified by the competent
authorities.
The competent authorities shall require that the other risks, apart from the
delta risk, associated with options are safeguarded against. The competent
authorities may allow the requirement against a written exchange-traded
option to be equal to the margin required by the exchange if they are fully
satisfied that it provides an accurate measure of the risk associated with the
option and that it is at least equal to the capital requirement against an
option that would result from a calculation made using the method set out
in the remainder of this Annex or applying the internal models method
described in Annex VIII. Until 31 December 2006 the competent authorities
may also allow the capital requirement for an OTC option cleared by a
clearing house recognised by them to be equal to the margin required by
the clearing house if they are fully satisfied that it provides an accurate
measure of the risk associated with the option and that it is at least equal
to the capital requirement for an OTC option that would result from a calcu-
lation made using the method set out in the remainder of this Annex or
applying the internal models method described in Annex VIII. In addition
they may allow the requirement on a bought exchange-traded or OTC
option to be the same as that for the instrument underlying it, subject to
the constraint that the resulting requirement does not exceed the market
value of the option. The requirement against a written OTC option shall be
set in relation to the instrument underlying it.
6. Warrants relating to debt instruments and equities shall be treated in the
same way as options under paragraph 5.
7. Swaps shall be treated for interest-rate risk purposes on the same basis as
on-balance-sheet instruments. Thus an interest-rate swapunder which an
institution receives floating-rate interest and pays fixed-rate interest shall
be treated as equivalent to a long position in a floating-rate instrument of
maturity equivalent to the period until the next interest fixing and a short
position in a fixed-rate instrument with the same maturity as the swap itself.
8. However, institutions which mark to market and manage the interest-rate
risk on the derivative instruments covered in paragraphs 4 to 7 on a
discounted-cash-flow basis may use sensitivity models to calculate the posi-
tions referred to above and may use them for any bond which is amortized
over its residual life rather than via one final repayment of principal. Both
the model and its use by the institution must be approved by the competent
authorities. These models should generate positions which have the same
sensitivity to interest-rate changes as the underlying cash flows. This sensi-
tivity must be assessed with reference to independent movements in sample
rates across the yield curve, with at least one sensitivity point in each of the
maturity bands set out in Table 2 of paragraph 18. The positions shall be
included in the calculation of capital requirements according to the provi-
sions laid down in paragraphs 15 to 30.
9. Institutions which do not use models under paragraph 8 may instead, with
the approval of the competent authorities, treat as fully offsetting any posi-
tions in derivative instruments covered in paragraphs 4 to 7 which meet the
following conditions at least:
(i) the positions are of the same value and denominated in the same
currency;
(ii) the reference rate (for floating-rate positions) or coupon (for fixed-rate
positions) is closely matched;
(iii) the next interest-fixing date or, for fixed coupon positions, residual
maturity corresponds with the following limits:
— less than one month hence: same day,
— between one month and one year hence: within seven days,— over one year hence: within 30 days.
10. The transferor of securities or guaranteed rights relating to title to securities
in a repurchase agreement and the lender of securities in a securities lending
shall include these securities in the calculation of its capital requirement
under this Annex provided that such securities meet the criteria laid down
in Article 2 (6) (a).
11. Positions in units of collective-investment undertakings shall be subject to
the capital requirements of Directive 89/647/EEC rather than to position-
risk requirements under this Annex.1993L0006 — EN — 11.02.2003 — 002.001 — 18
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Specific andgeneralrisks
12. The position risk on a traded debt instrument or equity (or debt or equity
derivative) shall be divided into two components in order to calculate the
capital required against it. The first shall be its specific-risk component —
this is the risk of a price change in the instrument concerned due to factors
related to its issuer or, in the case of a derivative, the issuer of the under-
lying instrument. The second component shall cover its general risk — this
is the risk of a price change in the instrument due (in the case of a traded
debt instrument or debt derivative) to a change in the level of interest rates
or (in the case of an equity or equity derivative) to a broad equity-market
movement unrelated to any specific attributes of individual securities.
TRADED DEBT INSTRUMENTS
13. The institution shall classify its net positions according to the currency in
which they are denominated and shall calculate the capital requirement for
general and specific risk in each individual currency separately.
Specific risk
14. The institution shall assign its net positions, as calculated in accordance
with paragraph 1, to the appropriate categories in Table 1 on the basis of
their residual maturities and then multiply them by the weightings shown.
It shall sum its weighted positions (regardless of whether they are long or
short) in order to calculate its capital requirement against specific risk.
Table1
Central
government
itemsQualifying items Other items
Upto 6
monthsOver 6 and up
to 24 monthsOver 24
months
0,00 % 0,25 % 1,00 % 1,60 % 8,00 %
General risk
(a)Maturity-based
15. The procedure for calculating capital requirements against general risk
involves two basic steps. First, all positions shall be weighted according to
maturity (as explained in paragraph 16), in order to compute the amount of
capital required against them. Second, allowance shall be made for this
requirement to be reduced when a weighted position is held alongside an
opposite weighted position within the same maturity band. A reduction in
the requirement shall also be allowed when the opposite weighted positions
fall into different maturity bands, with the size of this reduction depending
both on whether the two positions fall into the same zone, or not, and on the
particular zones they fall into. There are three zones (groups of maturity
bands) altogether.
16. The institution shall assign its net positions to the appropriate maturity
bands in column 2 or 3, as appropriate, in Table 2 appearing in paragraph
18. It shall do so on the basis of residual maturity in the case of fixed-rate
instruments and on the basis of the period until the interest rate is next set
in the case of instruments on which the interest rate is variable before final
maturity. It shall also distinguish between debt instruments with a coupon of
3 % or more and those with a coupon of less than 3 % and thus allocate
them to column 2 or column 3 in Table 2. It shall then multiply each of
them by the weighing for the maturity band in question in column 4 in
Table 2.
17. It shall then work out the sum of the weighted long positions and the sum
of the weighted short positions in each maturity band. The amount of the
former which are matched by the latter in a given maturity band shall be
the matched weighted position in that band, while the residual long or short
position shall be the unmatched weighted position for the same band. The
total of the matched weighted positions in all bands then be calculated.
18. The institution shall compute the totals of the unmatched weighted long
positions for the bands included in each of the zones in Table 2 in order
to derive the unmatched weighted long position for each zone. Similarly
the sum of the unmatched weighted short positions for each band in a parti-
cular zone shall be summed to compute the unmatched weighted short1993L0006 — EN — 11.02.2003 — 002.001 — 19
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position for that zone. That part of the unmatched weighted long position
for a given zone that is matched by the unmatched weighted short position
for the same zone shall be the matched weighted position for that zone.
That part of the unmatched weighted long or unmatched weighted short
position for a zone that cannot be thus matched shall be the unmatched
weighted position for that zone.
Table2
ZoneMaturity bandWeighting (in
%)Assumed
interest rate
change (in %) Coupon of 3 % or more Coupon of less than 3 %
(1) (2) (3) (4) (5)
One0≤1 month 0 ≤1 month 0,00 —
>1≤3 months > 1 ≤3 months 0,20 1,00
>3≤6 months > 3 ≤6 months 0,40 1,00
>6≤12 months > 6 ≤12 months 0,70 1,00
Two>1≤2 years > 1,0 ≤1,9 years 1,25 0,90
>2≤3 years > 1,9 ≤2,8 years 1,75 0,80
>3≤4 years > 2,8 ≤3,6 years 2,25 0,75
Three>4≤5 years > 3,6 ≤4,3 years 2,75 0,75
>5≤7 years > 4,3 ≤5,7 years 3,25 0,70
>7≤10 years > 5,7 ≤7,3 years 3,75 0,65
>1 0≤15 years > 7,3 ≤9,3 years 4,50 0,60
>1 5≤20 years > 9,3 ≤10,6 years 5,25 0,60
> 20 years > 10,6 ≤12,0 years 6,00 0,60
> 12,0≤20,0 years 8,00 0,60
> 20 years 12,50 0,60
19. The amount of the unmatched weithted long (short) position in zone one
which is matched by the unmatched weighted short (long) position in zone
two shall then be computed. This shall be referred to in paragraph 23 as the
matched weighted position between zones one and two. The same calcula-
tion shall then be undertaken with regard to that part of the unmatched
weighted position in zone two which is left over and the unmatched
weighted position in zone three in order to calculate the matched weighted
position between zones two and three.
20. The institution may, if it wishes, reverse the order in paragraph 19 so as to
calculate the matched weighted position between zones two and three
before working out that between zones one and two.
21. The remainder of the unmatched weighted position in zone one shall then
be matched with what remains of that for zone three after the latter's
matching with zone two in order to derive the matched weighted position
between zones one and three.
22. Residual positions, following the three separate matching calculations in
paragraphs 19, 20 and 21, shall be summed.
23. The institution's capital requirement shall be calculated as the sum of:
(a) 10 % of the sum of the matched weighted positions in all maturity
bands;
(b) 40 % of the matched weighted position in zone one;
(c) 30 % of the matched weighted position in zone two;
(d) 30 % of the matched weighted position in zone three;
(e) 40 % of the matched weighted position between zones one and two and
between zones two and three (see paragraph 19);
(f) 150 % of the matched weighted position between zones one and three;
(g) 100 % of the residual unmatched weighted positions.
(b)Duration-based
24. The competent authorities in a Member State may allow institutions in
general or on an individual basis to use a system for calculating the capital
requirement for the general risk on traded debt instruments which reflects1993L0006 — EN — 11.02.2003 — 002.001 — 20
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duration instead of the system set out in paragraphs 15 to 23, provided that
the institution does so on a consistent basis.
25. Under such a system the institution shall take the market value of each
fixed-rate debt instrument and thence calculate its yield to maturity, which
is implied discount rate for that instrument. In the case of floating-rate
instruments, the institution shall take the market value of each instrument
and thence calculate its yield on the assumption that the principal is due
when the interest rate can next be changed.
26. The institution shall then calculate the modified duration of each debt
instrument on the basis of the following formula:
modified duration ¼duration D ðÞ
1þrðÞ;
where:
D=Xm
t¼1tCt
1þrðÞt
Xm
t¼1Ct
1þrðÞt
where:
r = yield to maturity (see paragraph 25),
Ct= cash payment in time t,
m = total maturity (see paragraph 25).
27. The institution shall then allocate each debt instrument to the appropriate
zone in Table 3. It shall do so on the basis of the modified duration of
each instrument.
Table3
ZoneModified duration
(in years)Assumed interest
(change in %)
(1) (2) (3)
One > 0 ≤1,0 1,0
Two > 1,0 ≤3,6 0,85
Three > 3,6 0,7
28. The institution shall then calculate the duration-weighted position for each
instrument by multiplying its market price by its modified duration and by
the assumed interest-rate change for an instrument with that particular
modified duration (see column 3 in Table 3).
29. The institution shall work out its duration-weighted long and its duration-
weighted short positions within each zone. The amount of the former which
are matched by the latter within each zone shall be the matched duration-
weighted position for that zone.
The institution shall then calculate the unmatched duration-weighted posi-
tions for each zone. It shall then follow the procedures laid down for
unmatched weighted positions in paragraphs 19 to 22.
30. The institution's capital requirement shall then be calculated as the sum of:
(a) 2 % of the matched duration-weighted position for each zone;
(b) 40 % of the matched duration-weighted positions between zones one
and two and between zones two and three;
(c) 150 % of the matched duration-weighted position between zones one
and three;
(d) 100 % of the residual unmatched duration-weighted positions.
EQUITIES
31. The institution shall sum all its net long positions and all its net short posi-
tions in accordance with paragraph 1. The sum of the two figures shall be
its overall gross position. The difference between them shall be its overall
net position.1993L0006 — EN — 11.02.2003 — 002.001 — 21
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Specific risk
32. It shall multiply its overall gross position by 4 % in order to calculate its
capital requirement against specific risk.
33. Notwithstanding paragraph 32, the competent authorities may allow the
capital requirement against specific risk to be 2 % rather than 4 % for those
portfolios of equities that an institution holds which meet the following
conditions:
(i) the equities shall not be those of issuers which have issued only traded
debt instruments that currently attract an 8 % requirement in Table 1
appearing in paragraph 14 or that attract a lower requirement only
because they are guaranteed or secured;
(ii) the equities must be adjudged highly liquid by the competent authori-
ties according to objective criteria;
(iii) no individual position shall comprise more than 5 % of the value of the
institution's whole equity portfolio. However, the competent authorities
may authorize individual positions of up to 10 % provided that the
total of such positions does not exceed 50 % of the portfolio.
General risk
34. Its capital requirement against general risk shall be its overall net position
multiplied by 8 %.
Stock-indexfutures
35. Stock-index futures, the delta-weighted equivalents of options in stock-
index futures and stock indices collectively referred to hereafter as ‘stock-
index futures’, may be broken down into positions in each of their consti-
tuent equities. These positions may be treated as underlying positions in the
equities in question; therefore, subject to the approval of the competent
authorities, they may be netted against opposite positions in the underlying
equities themselves.
36. The competent authorities shall ensure that any institution which has netted
off its positions in one or more of the equities constituting a stock-index
future against one or more positions in the stock-index future itself has
adequate capital to cover the risk of loss caused by the future's values not
moving fully in line with that of its constituent equities; they shall also do
this when an institution holds opposite positions in stock-index futures
which are not identical in respect of either their maturity or their composi-
tion or both.
37. Notwithstanding paragraphs 35 and 36, stock-index futures which are
exchange traded and — in the opinion of the competent authorities —
represent broadly diversified indices shall attract a capital requirement
against general risk of 8 %, but no capital requirement against specific
risk. Such stock-index futures shall be included in the calculation of the
overall net position in paragraph 31, but disregarded in the calculation of
the overall gross position in the same paragraph.
38. If a stock-index future is not broken down into its underlying positions, it
shall be treated as if it were an individual equity. However, the specific
risk on this individual equity can be ignored if the stock-index future in
question is exchange traded and, in the opinion of the competent authorities,
represents a broadly diversified index.
UNDERWRITING
39. In the case of the underwriting of debt and equity instruments, the compe-
tent authorities may allow an institution to use the following procedure in
calculating its capital requirements. Firstly, it shall calculate the net posi-
tions by deducting the underwriting positions which are subscribed orsub-
underwritten by third parties on the basis of formal agreements; secondly,
it shall reduce the net positions by the following reduction factors:
— working day 0: 100 %
— working day 1: 90 %
— working days 2 to 3: 75 %— working day 4: 50 %
— working day 5: 25 %1993L0006 — EN — 11.02.2003 — 002.001 — 22
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— after working day 5: 0 %.
Working day zero shall be the working day on which the institution
becomes unconditionally committed to accepting a known quantity of secu-
rities at an agreed price.
Thirdly, it shall calculate its capital requirements using the reduced under-
writing positions. The competent authorities shall ensure that the institution
holds sufficient capital against the risk of loss which exists between the
time of the initial commitment and working day 1.1993L0006 — EN — 11.02.2003 — 002.001 — 23
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ANNEX II
SETTLEMENTANDCOUNTER-PARTYRISK
SETTLEMENT/DELIVERY RISK
1. In the case of transactions in which debt instruments, equities and
commodities (excluding repurchase and reverse repurchase agreements and
securities or commodities lending and securities or commodities borrowing)
are unsettled after their due delivery dates, an institution must calculate the
price difference to which it is exposed. This is the difference between the
agreed settlement price for the debt instrument, equity or commodity in
question and its current market value, where the difference could involve
a loss for the institution. It must multiply this difference by the appropriate
factor in column A of the table appearing in paragraph 2 in order to calcu-
late its capital requirement.
2. Notwithstanding paragraph 1, an institution may, at the discretion of its
competent authorities, calculate its capital requirements by multiplying the
agreed settelement price of every transaction which is unsettled between 5
and 45 working days after its due date by the appropriate factor in column
B of the table below. As from 46 working days after the due date it shall
take the requirement to be 100 % of the price difference to which it is
exposed as in column A.
Number of working days
after due settlement dateColumn A
(%)Column B
(%)
5 — 15 8 0,5
16 — 30 50 4,0
31 — 45 75 9,0
46 or more 100 see paragraph 2
COUNTER-PARTY RISK
Free deliveries
3.1. An institution shall be required to hold capital against counterparty risk if:
(i) it has paid for securities or commodities before receiving them or it has
delivered securities or commodities before receiving payment for them;
and
(ii) in the case of cross-border transactions, one day or more has elapsed
since it made that payment or delivery.
3.2. The capital requirement shall be 8 % of the value of the securities or
commodities or cash owed to the institution multiplied by the risk
weighting applicable to the relevant counterparty.
Repurchase and reverse repurchase agreements, securities or commodities
lendingandborrowing
4.1. In the case of repurchase agreements and securities or commodities lending
based on securities or commodities included in the trading book the institu-
tion shall calculate the difference between the market value of the
securities or commodities and the amount borrowed by the institution or
the market value of the collateral, where that difference is positive. In the
case of reverse repurchase agreements and securities or commodities
borrowing, the institution shall calculate the difference between the amount
the institution has lent or the market value of the collateral and the market
value of the securities or commodities it has received, where that difference
is positive.
The competent authorities shall take measures to ensure that the excess
collateral given is acceptable.
Furthermore, the competent authorities may allow institutions not to
include the amount of excess collateral in the calculations described in the1993L0006 — EN — 11.02.2003 — 002.001 — 24
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first two sentences of this paragraph if the amount of excess collateral is
guaranteed in such a way that the transferor is always assured that the
excess collateral will be returned to it in the event of defaults of its
counter-party.
Accrued interest shall be included in calculating the market value of
amounts lent or borrowed and collateral.
4.2. The capital requirement shall be 8 % of the figure produced in accordance
with paragraph 4.1, multiplied by the risk weighting applicable to the rele-
vant counter-party.
OTCderivative instruments
5. In order to calculate the capital requirement on their OTC derivative instru-
ments, institutions shall apply Article II to Directive 89/647/EEC. The risk
weightings to be applied to the relevant counterparties shall be determined
in accordance with Article 2(9) of this Directive.
Until 31 December 2006, the competent authorities of Member States may
exempt from the application of the methods set out in Annex II OTC
contracts cleared by a clearing house where the latter acts as the legal
counterparty and all participants fully collateralise on a daily basis the
exposure they present to the clearing house, thereby providing a protection
covering both the current exposure and the potential future exposure. The
competent authorities must be satisfied that the posted collateral gives the
same level of protection as collateral which complies with Article
6(1)(a)(7) of Directive 89/647/EEC and that the risk of a build-upof the
clearing house's exposures beyond the market value of posted collateral is
eliminated. Member States shall inform the Commission of the use they
make of this option.
OTHER
6. The capital requirements of Directive 89/647/EEC shall apply to those
exposures in the form of fees, commission, interest, dividends and margin
in exchange-traded futures or options contracts which are neither covered
in this Annex or Annex I nor deducted from own funds under paragraph 2
(d) of Annex V and which are directly related to the items included in the
trading book
The risk weightings to be applied to the relevant counter-parties shall be
determined in accordance with Article 2 (9) of this Directive.1993L0006 — EN — 11.02.2003 — 002.001 — 25
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ANNEX III
FOREIGN-EXCHANGERISK
1. If the sum of an institution's overall net foreign-exchange position and its
net gold position, calculated in accordance with the procedure set out
below, exceeds 2 % of its total own funds, it shall multiply the sum of its
net foreign-exchange position and its net gold position by 8 % in order to
calculate its own-funds requirement against foreign-exchange risk.
Until 31 December 2004, the competent authorities may allow institutions
to calculate their own-funds requirement by multiplying by 8 % the amount
by which the sum of the overall net foreign-exchange position and the net
gold position exceeds 2 % of the total own funds.
2. A two-stage calculation shall be used.
3.1. Firstly, the institution's net open position in each currency (including the
reporting currency) and in gold shall be calculated. This position shall
consist of the sum of the following elements (positive or negative):
— the net spot position (i. e. all asset items less all liability items,
including accrued interest, in the currency in question or, for gold, the
net spot position in gold),
— the net forward position (i. e. all amounts to be received less all
amounts to be paid under forward exchange and gold transactions,
including currency and gold futures and the principal on currency swaps
not included in the spot position),
— irrevocable guarantees (and similar instruments) that are certain to be
called and likely to be irrecoverable,
— net future income/expenses not yet accrued but already fully hedged (at
the discretion of the reporting institution and with the prior consent of
the competent authorities, net future income/expenses not yet entered in
accounting records but already fully hedged by forward foreign-
exchange transactions may be included here). Such discretion must be
exercised on a consistent basis,
— the net delta (or delta-based) equivalent of the total book of foreign-
currency and gold options,
— the market value of other (i. e. non-foreign-currency and non-gold)
options,
— any positions which an institution has deliberately taken in order to
hedge against the adverse effect of the exchange rate on its capital ratio
may be excluded from the calculation of net open currency positions.
Such positions should be of a non-trading or structural nature and their
exclusion, and any variation of the terms of their exclusion, shall
require the consent of the competent authorities. The same treatment
subject to the same conditions as above may be applied to positions
which an institution has which relate to items that are already deducted
in the calculation of own funds.
3.2. The competent authorities shall have the discretion to allow institutions to
use the net present value when calculating the net open position in each
currency and in gold.
►M14. Secondly, net short and long positions in each currency other than the
reporting currency and the net long or short position in gold shall be
converted at spot rates into the reporting currency. ◄They shall then be
summed separately to form the total of the net short positions and the total
of the net long positions respectively. The higher of these two totals shall
be the institution's overall net foreign-exchange position.
5. Notwithstanding paragraphs 1 to 4 and pending further coordination, the
competent authorities may prescribe or allow institutions to use alternative
procedures for the purposes of this Annex.
6. Firstly, the competent authorities may allow institutions to provide lower
capital requirements against positions in closely correlated currencies than
those which would result from applying paragraphs 1 to 4 to them. The
competent authorities may deem a pair of currencies to be closely corre-
lated only if the likelihood of a loss — calculated on the basis of daily
exchange-rate data for the preceding three or five years — occurring on
equal and opposite positions in such currencies over the following 10
working days, which is 4 % or less of the value of the matched position
in question (valued in terms of the reporting currency) has a probability of1993L0006 — EN — 11.02.2003 — 002.001 — 26
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at least 99 %, when an observation period of three years is used, or 95 %,
when an observation period of five years is used. The own-funds require-
ment on the matched position in two closely correlated currencies shall be
4 % multiplied by the value of the matched position. The capital require-
ment on unmatched positions in closely correlated currencies,and all
positions in other currencies, shall be 8 %, multiplied by the higher of the
sum of the net short or the net long positions in those currencies after the
removal of matched positions in closely correlated currencies.
7. Secondly, until 31 December 2004, the competent authorities may allow
institutions to apply an alternative method to those outlined in paragraphs
1 to 6 for the purposes of this Annex. The capital requirement produced by
this method must be sufficient to exceed 2 % of the net open position as
measured in paragraph 4 and, on the basis of an analysis of exchange-rate
movements during all the rolling 10-working-day periods over the
preceding three years, to exceed the likely loss 99 % or more of the time.
The alternative method described in the first subparagraph may only be
used under the following conditions:
(i) the calculation formula and the correlation coefficients are set by the
competent authorities, based on their analysis of exchange-rate move-
ments;
(ii) the competent authorities review the correlation coefficients regularly
in the light of developments in foreign-exchange markets.
8. Thirdly, the competent authorities may allow institutions to remove posi-
tions in any currency which is subject to a legally binding
intergovernmental agreement to limit its variation relative to other curren-
cies covered by the same agreement from whichever of the methods
described in paragraphs 1 to 7 that they apply. Institutions shall calculate
their matched positions in such currencies and subject them to a capital
requirement no lower than half of the maximum permissible variation laid
down in the intergovernmental agreement in question in respect of the
currencies concerned. Unmatched positions in those currencies shall be
treated in the same way as other currencies.
Notwithstanding the first paragraph, the competent authorities may allow
the capital requirement on the matched positions in currencies of Member
States participating in the second stage of the European monetary union to
be 1,6 %, multiplied by the value of such matched positions.
9. The competent authorities shall notify the Council and Commission of the
methods, if any, that they are prescribing or allowing in respect of para-
graphs 6 to 8.
10. The Commission shall report to the Council on the methods referred to in
paragraph 9 and, where necessary and with due regard to international
developments, shall propose a more harmonized treatment of foreign-
exchange risk.
11. Net positions in composite currencies may be broken down into the compo-
nent currencies according to the quotas in force.1993L0006 — EN — 11.02.2003 — 002.001 — 27
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ANNEX IV
OTHERRISKS
Investment firms shall be required to hold own funds equivalent to one quarter
of their preceding year's fixed overheads. The competent authorities may adjust
that requirement in the event of a material change in a firm's business since the
preceding year. Where a firm has not completed a year's business, including the
day it starts up, the requirement shall be a quarter of the fixed overheads figure
projected in its business plan unless an adjustment to that plan is required by theauthorities.1993L0006 — EN — 11.02.2003 — 002.001 — 28
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ANNEX V
OWNFUNDS
1. The own funds of investment firms and credit institutions shall be defined in
accordance with Directive 89/299/EEC.
For the purposes of this Directive, however, investment firms which do not
have one of the legal forms referred to in Article 1 (1) of the Fourth Council
Directive 78/660/EEC of 25 July 1978 based on Article 54 (3) (g) of the
Treaty on the annual accounts of certain types of companies(1) shall never-
theless be deemed to fall within the scope of Council Directive 86/635/EEC
of 8 December 1986 on the annual accounts and consolidated accounts of
banks and other financial institutions(2).
2.►M1Notwithstanding paragraph 1, the competent authorities may permit
those institutions which are obliged to meet the own-funds requirements laid
down in Annexes I, II, III, IV, VI, VII and VIII to use an alternative defini-
tion when meeting those requirements only. ◄No part of the own funds
thus provided may be used simultaneously to meet other own-funds require-
ments. This alternative definition shall include the following items (a), (b)
and (c) less item (d), the deduction of that item being left to the discretion
of the competent authorities:
(a) own funds as defined in Directive 89/299/EEC excluding only items (12)
and (13) of Article 2 (1) of the same Directive for those investment firms
which are required to deduct item (d) of this paragraph from the total of
items (a), (b) and (c) of this paragraph;
(b) an institution's net trading-book profits net of any foreseeable charges or
dividends, less net losses on its other business provided that none of
those amounts has already been included in item (a) of this paragraph
under item 2 or 11 of Article 2 (1) of Directive 89/299/EEC;
(c) subordinated loan capital and/or the items referred to in paragraphs 5,
subject to the conditions set out in paragraphs 3 to 7;
(d) illiquid assets as defined in paragraph 8.
3. The subordinated loan capital referred to in paragraph 2 (c) shall have an
initial maturity of at least two years. It shall be fully paid up and the loan
agreement shall not include any clause providing that in specified circum-
stances other than the winding upof the institution the debt will become
repayable before the agreed repayment date, unless the competent authorities
approve the repayment. Neither the principal nor the interest on such subor-
dinated loan capital may be repaid if such repayment would mean that the
own funds of the institution in question would then amount to less than
100 % of the institution's overall requirements.
In addition, an institution shall notify the competent authorities of all repay-
ments on such subordinated loan capital as soon as its own funds fall below
120 % of its overall requirements.
4. The subordinated loan capital referred to in paragraph 2(c) may not exceed a
maximum of 150 % of the original own funds left to meet the requirements
laid down in Annexes I, II, III, IV, VI, VII, and VIII and may approach that
maximum only in particular circumstances acceptable to the relevant authori-
ties.
5. The competent authorities may permit institutions to replace the subordinated
loan capital referred to in paragraphs 3 and 4 with items 3 and 5 to 8 of
Article 2 (1) of Directive 89/299/EEC.
6. The competent authorities may permit investment firms to exceed the ceiling
for subordinated loan capital prescribed in paragraph 4 if they judge it
prudentially adequate and provided that the total of such subordinated loan
capital and the items referred to in paragraph 5 does not exceed 200 % of
the original own funds left to meet the requirements imposed in Annexes I,
II, III, IV, VI, VII and VIII or 250 % of the same amount where investment
firms deduct item 2(d) referred to in paragraph 2 when calculating own
funds.1993L0006 — EN — 11.02.2003 — 002.001 — 29
(1) OJ No L 222, 14. 8. 1978, p. 11. Directive as last amended by Directive 90/605/EEC
(OJ No L 317, 16. 11. 1990, p. 60).
(2) OJ No L 372, 31. 12. 1986, p. 1.▼M1
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7. The competent authorities may permit the ceiling for subordinated loan
capital prescribed in paragraph 4 to be exceeded by a credit institution if
they judge it prudentially adequate and provided that the total of such subor-
dinated loan capital and the items referred to in paragraph 5 does not exceed
250 % of the original own funds left to meet the requirements imposed in
Annexes I, II, III, VI, VII and VIII.
8. Illiquid assets include:
— tangible fixed assets (except to the extent that land and buildings may be
allowed to count against the loans which they are securing),
— holdings in, including subordinated claims on, credit or financial institu-
tions which may be included in the own funds of such institutions, unless
they have been deducted under items 12 and 13 of Article 2 (1) of Direc-
tive 89/299/EEC or under paragraph 9 (iv) of this Annex.
Where shares in a credit or financial institution are held temporarily for
the purpose of a financial assistance operation designed to reorganize and
save that institution, the competent authorities may waive this provision.
They may also waive it in respect of those shares which are included in
the investment firm's trading book,
— holdings and other investments, in undertakings other than credit institu-
tions and other financial institutions, which are not readily marketable,
— deficiencies in subsidiaries,— deposits made, other than those which are available for repayment within
90 days, and also excluding payments in connection with margined
futures or options contracts,
— loans and other amounts due, other than those due to be repaid within 90
days,
— physical stocks, unless they are subject to the capital requirements
imposed in Article 4 (2) and provided that such requirements are not
less stringent than those imposed in Article 4 (1) (iii).
9. Those investment firms included in a groupsubject to the waiver described
in Article 7 (4) shall calculate their own funds in accordance with paragraphs
1 to 8 subject to the following modifications:
(i) the illiquid assets referred to in paragraph 2 (d) shall be deducted;
(ii) the exclusion referred to in paragraph 2 (a) shall not cover those compo-
nents of items 12 and 13 of Article 2 (1) of Directive 89/299/EEC which
an investment firm holds in respect of undertakings included in the
scope of consolidation as defined in Article 7 (2) of this Directive;
(iii) the limits referred to in Article 6 (1) (a) and (b) of Directive 89/299/
EEC shall be calculated with reference to the original own funds less
those components of items 12 and 13 of Article 2 (1) of Directive 89/
299/EEC described in (ii) which are elements of the original own funds
of the undertakings in question;
(iv) those components of items 12 and 13 of Article 2 (1) of Directive 89/
299/EEC referred to in (iii) shall be deducted from the original own
funds rather than from the total of all items as prescribed in Article 6
(1) (c) of the same Directive for the purposes, in particular, of para-
graphs 4 to 7 of this Annex.1993L0006 — EN — 11.02.2003 — 002.001 — 30
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ANNEX VI
LARGEEXPOSURES
1. Institutions referred to in Article 5 (2) shall monitor and control their expo-
sures to individual clients and groups of connected clients as defined in
Directive 92/121/EEC, subject to the following modifications.
2. The exposures to individual clients which arise on the trading book shall be
calculated by summing the following items (i), (ii) and (iii):
(i) the excess — where positive — of an institution's long positions over
its short positions in all the financial instruments issued by the client in
question (the net position in each of the different instruments being
calculated according to the methods laid down in Annex I);
(ii) in the case of the underwriting of a debt or an equity instrument, the
institution's exposure shall be its net exposure (which is calculated by
deducting those underwriting positions which are subscribed or sub-
underwritten by third parties on the basis of a formal agreement)
reduced by the factors set out in paragraph 39 of Annex I.
Pending further coordination, the competent authorities shall require
institutions to set upsystems to monitor and control their underwriting
exposures between the time of the initial commitment and working day
one in the light of the nature of the risks incurred in the markets in
question;
(iii) the exposures due to the transactions, agreements and contracts referred
to in Annex II with the client in question, such exposures being calcu-
lated in the manner laid down in that Annex, without application of the
weightings for counter-party risk.
3. Thereafter, the exposures to groups of connected clients on the trading book
shall be calculated by summing the exposures to individual clients in a
group, as calculated in paragraph 2.
4. The overall exposures to individual clients or groups of connected clients
shall be calculated by summing the exposures which arise on the trading
book and the exposures which arise on the non-trading book, taking into
account Article 4 (6) to (12) of Directive 92/121/EEC. In order to calculate
the exposure on the non-trading book, institutions shall take the exposure
arising from assets which are deducted from their own funds by virtue of
paragraph 2 (d) of Annex V to be zero.
5. Institutions' overall exposures to individual clients and groups of connected
clients calculated in accordance with paragraph 4 shall be reported in accor-
dance with Article 3 of Directive 92/121/EEC.
6. That sum of the exposures to an individual client or group of connected
clients shall be limited in accordance with Article 4 of Directive 92/121/
EEC subject to the transitional provisions of Article 6 of the same Direc-
tive.
7. Notwithstanding paragraph 6 the competent authorities may allow assets
constituting claims and other exposures on investment firms, on recognized
third-country investment firms and recognized clearing houses and
exchanges in financial instruments to be subject to the same treatment
accorded to those on credit institutions in Article 4 (7) (i), (9) and (10) of
Directive 92/121/EEC.
8. The competent authorities may authorize the limits laid down in Article 4 of
Directive 92/121/EEC to be exceeded subject to the following conditions
being met simultaneously:
1. the exposure on the non-trading book to the client or group of clients in
question does not exceed the limits laid down in Directive 92/121/EEC,
calculated with reference to own funds as defined in Directive 89/299/
EEC, so that the excess arises entirely on the trading book;
2. the firm meets an additional capital requirement on the excess in respect
of the limits laid down in Article 4 (1) and (2) of Directive 92/121/EEC.
This shall be calculated by selecting those components of the total
trading exposure to the client or group of clients in question which
attract the highest specific-risk requirements in Annex I and/or require-
ments in Annex II, the sum of which equals the amount of the excess
referred to in 1; where the excess has not persisted for more than 10
days, the additional capital requirement shall be 200 % of the require-
ments referred to in the previous sentence, on these components.
As from 10 days after the excess has occurred, the components of the
excess, selected in accordance with the above criteria, shall be allocated
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of specific-risk requirements in Annex I and/or requirements in Annex II.
The institution shall then meet an additional capital requirement equal to
the sum of the specific-risk requirements in Annex I and/or the Annex II
requirements on these components multiplied by the corresponding factor
in column 2;
Table
Excess over the limits
(on the basis of a percentage of own funds)Factors
(1) (2)
Upto 40 % 200 %
From 40 % to 60 % 300 %From 60 % to 80 % 400 %
From 80 % to 100 % 500 %
From 100 % to 250 % 600 %
Over 250 % 900 %
3. where 10 days or less has elapsed since the excess occurred, the trading-
book exposure to the client or group of connected clients in question
must not exceed 500 % of the institution's own funds;
4. any excesses which have persisted for more than 10 days must not, in
aggregate, exceed 600 % of the institution's own funds;
5. institutions must report to the competent authorities every three months
all cases where the limits laid down in Article 4 (1) and (2) of Directive92/121/EEC have been exceeded during the preceding three months. In
each case in which the limits have been exceeded the amount of the
excess and the name of the client concerned must be reported.
9. The competent authorities shall establish procedures, of which they shall
notify the Council and the Commission, to prevent institutions from deliber-
ately avoiding the additional capital requirements that they would otherwise
incur on exposures exceeding the limits laid down in Article 4 (1) and (2)
of Directive 92/121/EEC once those exposures have been maintained for
more than 10 days, by means of temporarily transferring the exposures in
question to another company, whether within the same group or not, and/
or by undertaking artificial transactions to close out the exposure during
the 10-day period and create a new exposure. Institutions shall maintain
systems which ensure that any transfer which has this effect is immediately
reported to the competent authorities.
10. The competent authorities may permit those institutions which are allowed
to use the alternative definition of own funds under paragraph 2 of Annex V
to use that definition for the purposes of paragraphs 5, 6 and 8 of this
Annex provided that the institutions concerned are required, in addition, to
meet all of the obligations set out in Articles 3 and 4 of Directive 92/121/
EEC, in respect of the exposures which arise outside their trading books by
using own funds as defined in Directive 89/299/EEC.1993L0006 — EN — 11.02.2003 — 002.001 — 32
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ANNEX VII
COMMODITIESRISK
1. Each position in commodities or commodity derivatives shall be expressed
in terms of the standard unit of measurement. The spot price in each
commodity shall be expressed in the reporting currency.
2. Positions in gold or gold derivatives shall be considered as being subject to
foreign-exchange risk and treated according to Annex III or Annex VIII, as
appropriate, for the purpose of calculating market risk.
3. For the purposes of this Annex, positions which are purely stock financing
may be excluded from the commodities risk calculation only.
4. The interest-rate and foreign-exchange risks not covered by other provisions
of this Annex shall be included in the calculation of general risk for traded
debt instruments and in the calculation of foreign-exchange risk.
5. When the short position falls due before the long position, institutions shall
also guard against the risk of a shortage of liquidity which may exist in
some markets.
6. For the purpose of paragraph 19, the excess of an institution's long (short)
positions over its short (long) positions in the same commodity and iden-
tical commodity futures, options and warrants shall be its net position in
each commodity. The competent authorities shall allow positions in deriva-
tive instruments to be treated, as laid down in paragraphs 8, 9 and 10, as
positions in the underlying commodity.
7. The competent authorities may regard the following positions as positions in
the same commodity:
— positions in different sub-categories of commodities in cases where the
sub-categories are deliverable against each other,
and
— positions in similar commodities if they are close substitutes and if a
minimum correlation of 0,9 between price movements can be clearly
established over a minimum period of one year.
Particular instruments
8. Commodity futures and forward commitments to buy or sell individual
commodities shall be incorporated in the measurement system as notional
amounts in terms of the standard unit of measurement and assigned a
maturity with reference to expiry date. The competent authorities may allow
the capital requirement for an exchange-traded future to be equal to the
margin required by the exchange if they are fully satisfied that it provides
an accurate measure of the risk associated with the future and that it is at
least equal to the capital requirement for a future that would result from a
calculation made using the method set out in the remainder of this Annex or
applying the internal models method described in Annex VIII. Until 31
December 2006 the competent authorities may also allow the capital
requirement for an OTC commodity derivatives contract of the type referred
to in this paragraph cleared by a clearing house recognised by them to be
equal to the margin required by the clearing house if they are fully satisfied
that it provides an accurate measure of the risk associated with the deriva-
tives contract and that it is at least equal to the capital requirement for the
contract in question that would result from a calculation made using the
method set out in the remainder of this Annex or applying the internal
models method described in Annex VIII.
9. Commodity swaps where one side of the transaction is a fixed price and the
other the current market price shall be incorporated into the maturity ladder
approach as a series of positions equal to the notional amount of the
contract, with one position corresponding with each payment on the swap
and slotted into the maturity ladder set out in the table appearing in para-
graph 13. The positions would be long positions if the institution is paying
a fixed price and receiving a floating price and short positions if the institu-
tion is receiving a fixed price and paying a floating price.
Commodity swaps where the sides of the transaction are in different
commodities are to be reported in the relevant reporting ladder for the
maturity ladder approach.
10. Options on commodities or on commodity derivatives shall be treated as if
they were positions equal in value to the amount of the underlying to which
the option refers, multiplied by its delta for the purposes of this Annex. The
latter positions may be netted off against any offsetting positions in the1993L0006 — EN — 11.02.2003 — 002.001 — 33
▼M1
identical underlying commodity or commodity derivative. The delta used
shall be that of the exchange concerned, that calculated by the competent
authorities or, where none of those is available or for OTC options, that
calculated by the institution itself, subject to the competent authorities being
satisfied that the model used by the institution is reasonable.
However, the competent authorities may also prescribe that institutions
calculate their deltas using a methodology specified by the competent
authorities.
The competent authorities shall require that the other risks, apart from the
delta risk, associated with commodity options are safeguarded against. The
competent authorities may allow the requirement for a written exchange-
traded commodity option to be equal to the margin required by the
exchange if they are fully satisfied that it provides an accurate measure of
the risk associated with the option and that it is at least equal to the capital
requirement against an option that would result from a calculation made
using the method set out in the remainder of this Annex or applying the
internal models method described in Annex VIII. Until 31 December 2006
the competent authorities may also allow the capital requirement for an
OTC commodity option cleared by a clearing house recognised by them to
be equal to the margin required by the clearing house if they are fully satis-
fied that it provides an accurate measure of the risk associated with the
option and that it is at least equal to the capital requirement for an OTC
option that would result from a calculation made using the method set out
in the remainder of this Annex or applying the internal models method
described in Annex VIII. In addition they may allow the requirement on a
bought exchange-traded or OTC commodity option to be the same as that
for the commodity underlying it, subject to the constraint that the resulting
requirement does not exceed the market value of the option. The require-
ment for a written OTC option shall be set in relation to the commodity
underlying it.
11. Warrants relating to commodities shall be treated in the same way as
commodity options under paragraph 10.
12. The transferor of commodities or guaranteed rights relating to title to
commodities in a repurchase agreement and the lender of commodities in a
commodities lending agreement shall include such commodities in the
calculation of its capital requirement under this Annex.
(a)Maturity ladder approach
13. The institution shall use a separate maturity ladder in line with the
following table for each commodity. All positions in that commodity and
all positions which are regarded as positions in the same commodity
pursuant to paragraph 7 shall be assigned to the appropriate maturity bands.
Physical stocks shall be assigned to the first maturity band.
Maurity band
(1)Spread rate
(in %)
(2)
0≤1 month 1,50
>1≤3 months 1,50
>3≤6 months 1,50
>6≤12 months 1,50
>1≤2 years 1,50
>2≤3 years 1,50
> 3 years 1,50
14. Competent authorities may allow positions which are, or are regarded
pursuant to paragraph 7 as, positions in the same commodity to be offset
and assigned to the appropriate maturity bands on a net basis for:
— positions in contracts maturing on the same date,
and
— positions in contracts maturing within 10 days of each other if the
contracts are traded on markets which have daily delivery dates.
15. The institution shall then work out the sum of the long positions and the
sum of the short positions in each maturity band. The amount of the former1993L0006 — EN — 11.02.2003 — 002.001 — 34
▼M1
(latter) which are matched by the latter (former) in a given maturity band
shall be the matched positions in that band, while the residual long or short
position shall be the unmatched position for the same band.
16. That part of the unmatched long (short) position for a given maturity band
that is matched by the unmatched short (long) position for a maturity band
further out shall be the matched position between two maturity bands. That
part of the unmatched long or unmatched short position that cannot be thus
matched shall be the unmatched position.
17. The institution's capital requirement for each commodity shall be calculated
on the basis of the relevant maturity ladder as the sum of the following:
(i) the sum of the matched long and short positions, multiplied by the
appropriate spread rate as indicated in the second column of the table
appearing in paragraph 13 for each maturity band and by the spot price
for the commodity;
(ii) the matched position between two maturity bands for each maturity
band into which an unmatched position is carried forward, multiplied
by 0,6 % (carry rate) and by the spot price for the commodity;
(iii) the residual unmatched positions, multiplied by 15 % (outright rate)
and by the spot price for the commodity.
18. The institution's overall capital requirement for commodities risk shall be
calculated as the sum of the capital requirements calculated for each
commodity according to paragraph 17.
(b)Simplified approach
19. The institution's capital requirement for each commodity shall be calculated
as the sum of:
(i) 15 % of the net position, long or short, multiplied by the spot price for
the commodity;
(ii) 3 % of the gross position, long plus short, multiplied by the spot price
for the commodity.
20. The institution's overall capital requirement for commodities risk shall be
calculated as the sum of the capital requirements calculated for each
commodity according to paragraph 19.1993L0006 — EN — 11.02.2003 — 002.001 — 35
▼M1
ANNEX VIII
INTERNALMODELS
1. The competent authorities may, subject to the conditions laid down in this
Annex, allow institutions to calculate their capital requirements for position
risk, foreign-exchange risk and/or commodities risk using their own internal
risk-management models instead of or in combination with the methods
described in Annexes I, III and VII. Explicit recognition by the competent
authorities of the use of models for supervisory capital purposes shall berequired in each case.
2. Recognition shall only be given if the competent authority is satisfied that
the institution's risk-management system is conceptually sound and imple-
mented with integrity and that, in particular, the following qualitative
standards are met:
(i) the internal risk-measurement model is closely integrated into the
daily risk-management process of the institution and serves as the
basis for reporting risk exposures to senior management of the institu-
tion;
(ii) the institution has a risk control unit that is independent from business
trading units and reports directly to senior management. The unit
must be responsible for designing and implementing the institution's
risk-management system. It shall produce and analyse daily reports
on the output of the risk-measurement model and on the appropriate
measures to be taken in terms of trading limits;
(iii) the institution's board of directors and senior management are actively
involved in the risk-control process and the daily reports produced by
the risk-control unit are reviewed by a level of management with
sufficient authority to enforce both reductions of positions taken by
individual traders as well as in the institution's overall risk exposure;
(iv) the institution has sufficient numbers of staff skilled in the use of
sophisticated models in the trading, risk-control, audit and back-office
areas;
(v) the institution has established procedures for monitoring and ensuring
compliance with a documented set of internal policies and controls
concerning the overall operation of the risk-measurement system;
(vi) the institution's models have a proven track record of reasonable accu-
racy in measuring risks;
(vii) the institution frequently conduct a rigorous programme of stress
testing and the results of these tests are reviewed by senior manage-
ment and reflected in the policies and limits it sets;
(viii) the institution must conduct, as part of its regular internal auditing
process, an independent review of its risk-measurement system. This
review must include both the activities of the business trading units
and of the independent risk-control unit. At least once a year, the
institution must conduct a review of its overall risk-management
process. The review must consider:
— the adequacy of the documentation of the risk-management
system and process and the organisation of the risk-control unit,
— the integration of market risk measures into daily risk manage-
ment and the integrity of the management information system,
— the process the institution employs for approving risk-pricing
models and valuation systems that are used by front and back-
office personnel,
— the scope of market risks captured by the risk-measurement model
and the validation of any significant changes in the risk-measure-
ment process,
— the accuracy and completeness of position data, the accuracy and
appropriateness of volatility and correlation assumptions, and the
accuracy of valuation and risk sensitivity calculations,
— the verification process the institution employs to evaluate the
consistency, timeliness and reliability of data sources used to run
internal models, including the independence of such data sources,
and
— the verification process the institution uses to evaluate back-
testing that is conducted to assess the model's accuracy.
3. The institution shall monitor the accuracy and performance of its model by
conducting a back-testing programme. The back-testing has to provide for
each business day a comparison of the one-day value-at-risk measure gener-
ated►
C1by the institution's model for the portfolio's end-of-day positions
to the one-day change of the portfolio's value ◄by the end of the subse-1993L0006 — EN — 11.02.2003 — 002.001 — 36
▼M1
quent business day. Competent authorities shall examine the institution's
capability to perform back-testing on both actual and hypothetical changes
in the portfolio's value. Back-testing on hypothetical changes in the portfo-
lio's value is based on a comparison between the portfolio's end-of-day
value and, assuming unchanged positions, its value at the end of the subse-
quent day. Competent authorities shall require institutions to take
appropriate measures to improve their back-testing programme if deemed
deficient.
4. For the purpose of calculating capital requirements for specific risk asso-
ciated with traded debt and equity positions, the competent authorities may
recognise the use of an institution's internal model if in addition to compli-
ance with the conditions in the remainder of this Annex the model:
— explains the historical price variation in the portfolio,
— captures concentration in terms of magnitude and changes of composi-
tion of the portfolio,
— is robust to an adverse environment,— is validated through back-testing aimed at assessing whether specific
risk is being accurately captured. If competent authorities allow this
back-testing to be performed on the basis of relevant sub-portfolios,
these must be chosen in a consistent manner.
5. Institutions using internal models which are not recognised in accordance
with paragraph 4 shall be subject to a separate capital charge for specific
risk as calculated according to Annex I.
6. For the purpose of paragraph 10(ii) the results of the institution's own calcu-
lation shall be scaled upby a multip lication factor of at least 3.
7. The multiplication factor shall be increased by a plus-factor of between 0
and 1 in accordance with the following table, depending on the number of
overshootings for the most recent 250 business days as evidenced by the
institution's back-testing. Competent authorities shall require the institutions
to calculate overshootings consistently on the basis of back-testing either on
actual or on hypothetical changes in the portfolio's value. An overshooting
is a one-day change in the portfolio's value that exceeds the related one-day
value-at-risk measure generated by the institution's model. For the purpose
of determining the plus-factor the number of overshootings shall be assessed
at least quarterly.
Number of overshootings Plus-factor
Fewer than 5 0,00
5 0,40
6 0,50
7 0,65
8 0,75
9 0,85
10 or more 1,00
The competent authorities can, in individual cases and owing to an excep-
tional situation, waive the requirement to increase the multiplication factor
by the plus-factor according to the above table, if the institution has demon-
strated to the satisfaction of the competent authorities that such an increase
is unjustified and that the model is basically sound.
If numerous overshootings indicate that the model is not sufficiently accu-
rate, the competent authorities shall revoke the model's recognition or
impose appropriate measures to ensure that the model is improved
promptly.
In order to allow competent authorities to monitor the appropriateness of the
plus-factor on an ongoing basis, institutions shall notify promptly, and in
any case no later than within five working days, the competent authorities
of overshootings that result form their back-testing programme and that
would according to the above table imply an increase of a plus-factor.
8. If the institution's model is recognised by the competent authorities in
accordance with paragraph 4 for the purpose of calculating capital require-
ments for specific risk, the institution shall increase its capital requirement1993L0006 — EN — 11.02.2003 — 002.001 — 37
▼M1
calculated pursuant to paragraphs 6, 7 and 10 by a surcharge in the amount
of either:
(i) the specific risk portion of the value-at-risk measure which should be
isolated according to supervisory guidelines; or, at the institution's
option,
(ii) the value-at-risk measures of sub-portfolios of debt and equity positions
that contain specific risk.
Institutions using option (ii) are required to identify their sub-portfolio
structure beforehand and should not change it without the consent of the
competent authorities.
9. The competent authorities may waive the requirement pursuant to paragraph
8 for a surcharge if the institution demonstrates that in line with agreed
international standards its model accurately captures also the event risk
and default risk for its traded debt and equity positions.
10. Each institution must meet a capital requirement expressed as the higher of:
(i) its previous day's value-at-risk number measured according to the para-
meters specified in this Annex;
(ii) an average of the daily value-at-risk measures on each of the preceding
60 business days, multiplied by the factor mentioned in paragraph 6,
adjusted by the factor mentioned in paragraph 7.
11. The calculation of value-at-risk shall be subject to the following minimum
standards:
(i) at least daily calculation of value-at-risk;
(ii) a 99th percentile, one-tailed confidence interval;
(iii) a 10-day equivalent holding period;
(iv) an effective historical observation period of at least one year except
where a shorter observation period is justified by a significant upsurge
in price volatility;
(v) three-monthly data set updates.
12. The competent authorities shall require that the model captures accurately
all the material price risks of options or option-like positions and that any
other risks not captured by the model are covered adequately by own funds.
13. The competent authorities shall require that the risk-measurement model
captures a sufficient number of risk factors, depending on the level of
activity of the institution in the respective markets. As a minimum, the
following provisions shall be respected:
(i) for interest rate risk, the risk-measurement system shall incorporate a
set of risk factors corresponding to the interest rates in each currency
in which the institution has interest rate sensitive on- or off-balance
sheet positions. The institution shall model the yield curves using one
of the generally accepted approaches. For material exposures to
interest-rate risk in the major currencies and markets, the yield curve
shall be divided into a minimum of six maturity segments, to capture
the variations of volatility of rates along the yield curve. The risk-
measurement system must also capture the risk of less than perfectly
correlated movements between different yield curves;
(ii) for foreign-exchange risk, the risk-measurement system shall incorpo-
rate risk factors corresponding to gold and to the individual foreign
currencies in which the institution's positions are denominated;
(iii) for equity risk, the risk-measurement system shall use a separate risk
factor at least for each of the equity markets in which the institution
holds significant positions;
(iv) for commodity risk, the risk-measurement system shall use a separate
risk factor at least for each commodity in which the institution holds
significant positions. The risk-measurement system must also capture
the risk of less than perfectly correlated movements between similar,
but not identical, commodities and the exposure to changes in forward
prices arising from maturity mismatches. It shall also take account of
market characteristics, notably delivery dates and the scope provided
to traders to close out positions.
14. The competent authorities may allow institutions to use empirical correla-
tions within risk categories and across risk categories if they are satisfied
that the institution's system for measuring correlations is sound and imple-
mented with integrity.1993L0006 — EN — 11.02.2003 — 002.001 — 38