A4-0380/97

Proposal for a European Parliament and Council Directive amending Council Directive 93/6/EEC on the capital adequacy of investment firms and credit institutions (COM(97)0071 - C4-0304/97 - 97/0124(COD))

The proposal was approved with the following amendments:

(Amendment 19)

Recital 8

>Original text>

Whereas some investment firms dealing primarily in commodities and commodity derivatives may not yet be able to use internal models or to comply with the capital requirements for commodity risk as laid down in this Directive; whereas it is expected that appropriate, cost- effective internal models for investment firms on the risk management of commodities and commodities derivatives, in particular for options, will be available shortly; whereas, in order to give those firms sufficient time to upgrade their risk-management systems, competent authorities, under certain conditions, should not be obliged to prescribe the capital charges for commodities referred to in Annex VII to Directive 93/6/EEC for investment firms before 1 January 2000;

>Text following EP vote>

Whereas some investment firms dealing primarily in commodities and commodity derivatives may not yet be able to use internal models or to comply with the capital requirements for commodity risk as laid down in this Directive; whereas it is expected that appropriate, cost- effective internal models for investment firms on the risk management of commodities and commodities derivatives, in particular for options, will be available shortly; whereas, in order to give those firms sufficient time to upgrade their risk-management systems, competent authorities, under certain conditions, should not be obliged to prescribe the capital charges for commodities referred to in Annex VII to Directive 93/6/EEC for investment firms until after 31 December 2006;

(Amendment 20)

ARTICLE 1(5a) (new)

Article 11a (new) (Directive 93/6/EEC)

>Text following EP vote>

5a. Article 11a is inserted:

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'Article 11a

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Up to 31 December 2006, Member States may authorize their institutions to use the minimum spread, carry and outright rates indicated in the following table rather than those indicated in Annex VII (13) and (16), provided that those institutions, in the opinion of the competent authorities:

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(i) carry out a significant volume of transactions in commodities;

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(ii) offer a diversified portfolio of commodities;

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(iii) are not yet in a position to employ internal models for the calculation of their risk-management system in relation to their commodities position on the lines set out in Annex VIII.

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Minimum spread, carry and outright rates

>TABLE>

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Member States applying this article shall provide the Commission with the necessary information.'

(Amendment 2)

ANNEX II

Annex VIII(3) (Directive 93/6/EEC)

>Original text>

3. The competent authorities shall also be satisfied that the institution's models continue to be reasonably accurate, as evidenced by a regular back- testing programme to be conducted by the institution.

>Text following EP vote>

3. The institution shall monitor the accuracy and performance of its model by conducting a backtesting programme. The backtesting has to provide for each business day a comparison of the one-day value- at-risk measure generated by the institution's model for the portfolio's end-of-day positions with the one-day change of the portfolio's value by the end of the subsequent business day. Competent authorities shall monitor the development by institutions of the capability to perform backtesting on both actual and, assuming unchanged end-of-day positions, hypothetical changes in the portfolio's value. Backtesting on hypothetical changes in the portfolio's value is based upon a comparison between the portfolio's end-of-day value and, assuming unchanged positions, its value at the end of the subsequent day.

(Amendment 3)

ANNEX II

Annex VIII(4a)(new) (Directive 93/6/EEC)

>Text following EP vote>

4a. For the purpose of calculating capital requirements for specific risk associated with traded debt and equity positions the competent authorities may recognise the use of an institution's internal model if in addition to compliance with the conditions in the remainder of this Annex the model:

>Text following EP vote>

- explains the historical price variation in the portfolio,

- captures concentration in terms of magnitude and changes of composition of the portfolio,

- is robust to an adverse environment, and

- is validated through backtesting aimed at assessing whether specific risk is being accurately captured. If competent authorities allow this backtesting to be performed on the basis of relevant sub-portfolios these must be chosen in a consistent manner.

(Amendment 16)

ANNEX II

Annex VIII(5) (Directive 93/6/EEC)

>Original text>

5. Notwithstanding paragraph 1, institutions using models shall be subject to a separate capital charge to cover the specific risk of traded debt instruments and equities as described in Annex I to the extent that the competent authorities consider that this risk is not incorporated sufficiently into their models. The competent authorities shall in any case set a minimum specific risk charge of 50% of the charge as calculated according to Annex I for institutions using models.

>Text following EP vote>

5. Institutions using internal models which are not in accordance with paragraph 4 shall be subject to a separate capital charge in respect of the specific risk calculated according to Annex I.

(Amendment 4)

ANNEX II

Annex VIII(7), second subparagraph (Directive 93/6/EEC)

>Original text>

The value-at-risk number calculated by means of the model shall be compared with the actual change in value of the portfolio. Backtesting shall be carried out daily on the basis of both effective and, assuming unchanged end-of-day positions, hypothetical changes in the portfolio value.

>Text following EP vote>

The value-at-risk number calculated by means of the model shall be compared with the actual change in value of the portfolio. Backtesting shall be carried out daily on the basis of effective or, assuming unchanged end-of-day positions, hypothetical changes in the portfolio value. The value-at-risk number subject to the backtesting must correspond to a holding period of one (1) day. Before using an internal model to determine its own funds, the institution shall also obtain the approval of the competent authorities, inter alia, for the type of changes (effective or hypothetical) to be used in its backtesting. The institution must also apply the method selected consistently.

>Text following EP vote>

At all events, the competent authorities shall monitor the institutions' development of the scope for backtesting on the basis of effective and, assuming unchanged end-of-day positions, hypothetical changes in the portfolio value.

(Amendment 5)

ANNEX II

Annex VIII(7), third subparagraph (Directive 93/6/EEC)

>Original text>

If the change in portfolio value exceeds the value-at-risk calculated using the model, the target has been overshot. The number of overshootings, as set out in Table 5, shall be based on a spot check of 250 values.

>Text following EP vote>

If the change in portfolio value exceeds the value-at-risk calculated using the model, the target has been overshot. The number of overshootings, as set out in Table 5, shall be based on a statistical sample of daily values covering the 250 most recent working days.

For the purpose of determining the 'plus' factor, the number of overshootings shall be determined at least quarterly.

(Amendment 6)

ANNEX II

Annex VIII (7) fourth, fifth and sixth subparagraphs (Directive 93/6/EEC)

>Original text>

The competent authorities can, in individual cases, waive the requirement to add a plus factor if, owing to an exceptional situation, an increase in the multiplication factor would be unjustified and the model is basically sound. In this context, the institution has to prove that an increase would be unjustified.

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The competent authorities can, in individual cases, waive the requirement to increase the multiplication factor by the plus factor in accordance with Table 5 if the institution has demonstrated to the satisfaction of the competent authorities that such an increase is unjustified and that the model is basically sound.

>Original text>

In the event of numerous overshootings, the competent authority shall revoke the model's recognition or impose appropriate measures to ensure that the model is improved promptly.

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If numerous overshootings indicate that the model is not sufficiently accurate the competent authorities shall revoke the model's recognition or impose appropriate measures to ensure that the model is improved promptly.

>Original text>

The institution is to record all overshootings ascertained by backtesting, together with the reasons for them, and to notify the competent authorities immediately of the extent of the overshootings and the reasons for them.

>Text following EP vote>

The institution is to record all overshootings ascertained by backtesting, together with the reasons for them, and to notify the competent authorities, without undue delay, and in any case no later than 5 working days after the day on which the error was noted.

(Amendment 7)

ANNEX II

Annex VIII (7a)(new) (Directive 93/6/EEC)

>Text following EP vote>

7a. If for the purpose of calculating capital requirements for specific risk the institution's model is recognised by the competent authorities in accordance with paragraph 4 the multiplication factor to be applied to the specific risk portion of the institution's value-at-risk measure shall be increased to 4. If the institution's backtesting indicates that the model does not sufficiently accurately capture specific risk the competent authorities shall revoke the model's recognition for the purpose of calculating capital requirements for specific risk or impose appropriate measures to ensure that the model is improved promptly.

(Amendment 8)

ANNEX II

Annex VIII (7b)(new) (Directive 93/6/EEC)

>Text following EP vote>

7b. The competent authorities may waive the requirement pursuant to paragraph 7a for an increase of the multiplication factor to 4 if the institution demonstrates that in line with agreed international standards its model adequately captures also the event and default risk for its traded debt and equity positions

Legislative resolution embodying Parliament's opinion on the proposal for a European Parliament and Council Directive amending Council Directive 93/6/EEC on the capital adequacy of investment firms and credit institutions (COM(97)0071 - C4- 0304/97 - 97/0124(COD))

(Codecision procedure: first reading)

The European Parliament,

- having regard to the Commission proposal to Parliament and the Council, COM(97)0071 - 97/0124(COD) ((OJ C 240, 6.8.1997, p. 24.)),

- having regard to Articles 189b(2) and 57(2) of the EC Treaty, pursuant to which the Commission submitted the proposal to Parliament (C4-0304/97),

- having regard to Rule 58 of its Rules of Procedure,

- having regard to the report of the Committee on Legal Affairs and Citizens' Rights and the opinion of the Committee on Economic and Monetary Affairs and Industrial Policy (A4-0380/97),

1. Approves the Commission proposal, subject to Parliament's amendments;

2. Calls on the Commission to alter its proposal accordingly, pursuant to Article 189a(2) of the EC Treaty;

3. Calls on the Council to incorporate Parliament's amendments in the common position that it adopts in accordance with Article 189b(2) of the EC Treaty;

4. Should the Council intend to depart from the text approved by Parliament, calls on the Council to notify Parliament and requests that the conciliation procedure be initiated;

5. Points out that the Commission is required to submit to Parliament any modification it may intend to make to its proposal as amended by Parliament;

6. Instructs its President to forward this opinion to the Council and Commission.