COMMISSION OF THE EUROPEAN COMMUNITIES 
Brussels, 10.05.1995 
COM(95) 170 final 
94/0099 (COD) 
AMENDED PROPOSAL FOR A EUROPEAN PARLIAMENT AND COUNCIL 
DIRECTIVE 
AMENDING COUNCIL DIRECTIVES 89/647/EEC AND 93/6/EEC WITH 
RESPECT TO THE SUPERVISORY RECOGNITION OF CONTRACTS FOR 
NOVATION AND NETTING AGREEMENTS 
("CONTRACTUAL NETTING") 
(presented by the Commission pursuant to Article 189 a (2) 
of the EC-Treaty) 
-1-
EXPLANATORY MEMORANDUM 
I. GENERAL CONSIDERATIONS 
1. On 27 April 1994 the Commission adopted a proposal for a Directive1 amending 
Directive 89/647/EEC. The proposal was sent to Parliament and Council by letter on 
28 April 1994. 
2. At its plenary session in Brussels on 14/15 September 1994, the Economic and 
Social Committee adopted an opinion on the proposal for a Directive2, approving 
the proposal and suggesting certain amendments. 
3. Parliament adopted a legislative resolution embodying its opinion on the 
Commission proposal for a Directive at its sitting on 15 February 19953. 
Parliament's opinion includes 9 amendments which are considered below. 
4. The amended proposal has been drafted to take account of the results of the 
consultations with both institutions. 
II. COMMENTS ON PARLIAMENT'S PROPOSED AMENDMENTS 
Amendments 1 and 2: Parliament suggests introducing a new recital (3a) stating that 
the rules envisaged will reduce the level of bank's compulsory capital cover. The 
reduction of the capital cover reflects the risk reducing effects of contractual netting. 
Parliament's amendment thus clarifies the mechanism of the rules envisaged. This is 
expressed in the new recitals. 
Amendment 3 suggests an additional recital (5a) encouraging Member States to 
introduce legislation that would ensure the legal validity of netting. This is a key 
element of the proposal and such a recital will be a useful occasion for drawing 
attention to the fact that legal validity of contractual netting depends on the national 
legislation and can only be ensured in that context. 
^OJC 142, 25.5.1994, p. 8 
2) Not yet published in the OJ 
3) PE 187.046 - Minutes of the sitting of 15 February 1995. 
Amendments 4 and 6 aim at a clarification of the authorities involved in the 
supervisory recognition of contractual netting. Such a clarification is useful. 
However, for investment firms that clarification has to be made in the context of the 
Capital Adequacy Directive (93/6/EEC). The amended proposal takes this 
amendment into account in substance. 
Amendment 5 suggests introducing a definition of "counterparty". This definition 
clarifies in the first place that bilateral netting may be concluded not only with credit 
institutions but also with all other "entities" which are legally empowered to engage 
in such contracts. Such a clarification is helpful and is therefore taken over in the 
amended proposal in substance. 
Amendment 7 concerns the availability of written and reasoned legal opinions on 
the legal enforceability of netting contracts. Parliament's text gives institutions more 
flexibility. They would not need to furnish to the supervisory authority these 
opinions. Instead, they would have to make such opinions available to the 
authorities. Such a flexibility contributes to a simplification of administrative 
checks. It is therefore reflected in the amended proposal. The same holds true for 
amendment 8 which explicitly allows for legal opinions covering groups or types of 
novation contracts and other netting agreements. 
Amendment 9 clarifies that the competent authorities must not create distortions of 
competition when striving for a uniform assessment of agreements for contractual 
netting. This clarification is also taken over in the amended proposal. 
3 
AMENDED PROPOSAL FOR A EUROPEAN PARLIAMENT AND COUNCIL 
DIRECTIVE 
AMENDING COUNCIL DIRECTIVES 89/647/EEC AND 93/6/EEC WITH 
RESPECT TO THE SUPERVISORY RECOGNITION OF CONTRACTS FOR 
NOVATION AND NETTING AGREEMENTS 
("CONTRACTUAL NETTING") 
INITIAL PROPOSAL AMENDED PROPOSAL 
Title: Title: 
Proposal for a European Parliament and 
Council Directive amending Council 
Directive 89/647/EEC with respect to the 
supervisory recognition of contracts for 
novation and netting agreements 
("contractual netting") 
Recital 4 
Whereas for credit institutions 
incorporated in the Member States, only 
an amendment of Directive 89/647/EEC 
can open a similar possibility for the 
supervisory recognition of bilateral 
netting and thereby provide them with 
equal conditions of competition; whereas 
the rules are both well balanced and suited 
to further reinforce the application of 
prudential supervisory measures to the 
sector of credit institutions; Proposal for a European Parliament and 
Council Directive amending Council 
Directives 89/647/EEC and 93/6/EEC 
with respect to the supervisory recognition 
of contracts for novation and netting 
agreements ("contractual netting") 
Recital 3a (new) 
Whereas the effect of the rules envisaged 
for the recognition of netting will be to 
reduce the level of credit institutions' 
compulsory cover through their own 
funds; 
Recital 4 
Whereas, however, for credit institutions 
incorporated in the Member States, only 
an amendment of Directive 89/647/EEC 
can open a similar possibility for the 
supervisory recognition of bilateral 
netting and thereby provide them with 
equal conditions of competition; whereas 
the rules are both well balanced and suited 
to further reinforce the application of 
prudential supervisory measures to the 
sector of credit institutions; 
7 
Article 1 Recital 5a (new) 
Whereas Member States in which the 
validity of 'contractual netting' is not yet 
legally recognized should introduce the 
provisions needed tQ ensure such 
recognition as soon as possible: 
Article 1 
Annex II to Directive 89/647/EEC is Annex II to Directive 89/647/EEC is 
replaced by the Annex hereto. replaced by the Annex hereto. 
To Annex II point 5. first subparagraph of 
Directive 93/6/EEC^ the following 
sentence shall be added: 
"Competent authorities shall mean the 
national authorities which are empowered 
by law or regulation t£t supervise 
investment firms," 
Article 3 Article 3 
1. Member States shall bring into force 
the laws, regulations and administrative 
provisions necessary to comply with this 
Directive by 31 December 1994 at the 
latest. They shall forthwith inform the 
Commission of the fact of the enactment 
of these provisions. 1. Member States shall bring into force 
the laws, regulations and administrative 
provisions necessary to comply with this 
Directive by 31 December 1995 at the 
latest. They shall forthwith inform the 
Commission of the fact of the enactment 
of these provisions. 
Annex, Annex II, point 1, first sentence Annex, Annex II, point 1, first sentence 
Subject to the consent of their supervisory Subject to the consent of their competent 
authorities, credit institutions may choose authorities, credit institutions may choose 
one of the methods set out below to one of the methods set out below to 
measure the risks associated with the measure the risks associated with the 
transactions listed in Annex III. transactions listed in Annex III. 
C)OJN°L 141,11.6.1993, p. 1 
_r 
Annex, Annex II, point 2, Table 2, Annex, Annex II, point 2, Table 2, 
footnote (1) footnote (1) 
(1) In the case of interest-rate contracts, (1) In the case of interest-rate contracts, 
credit institutions may, subject to the credit institutions may, subject to the 
consent of their supervisory authorities, consent of their competent authorities, 
choose either original or residual maturity, choose either original or residual maturity. 
Annex, Annex II, point 3 (a) Annex, Annex II, point 3 (a) 
introductory sentence: introductory sentence: 
The supervisory authorities may recognize The competent authorities may recognize 
as risk reducing the following types of as risk reducing the following types of 
contracts for novation and netting contracts for novation and netting 
agreements: agreements: 
Annex, Annex II, point 3 (a), second 
subparagraph (new): 
^Counterparty* shall mean any entity 
(including natural persons) having the 
power to conclude a contractual netting 
agreement. 
Annex, Annex II, point 3 (b), first Annex, Annex II, point 3 (b), first 
paragraph, introductory sentence: paragraph, introductory sentence: 
The supervisory authorities may recognize The competent authorities may recognize 
as risk reducing a contract for novation or as risk reducing a contract for novation or 
a netting agreement under the following a netting agreement under the following 
conditions only: conditions only: 
G 
Annex, Annex II, point 3 (b), Annex, Annex II, point 3 (b), 
subparagraph (ii), introductory subparagraph (ii), introductory 
sentence: sentence: 
(ii) the credit institution has furnished to (ii) the credit institution has arranged to 
the supervisory authorities written and show clearly and precisely to the 
reasoned legal opinions that, in the event competent authority the list of written and 
of a legal challenge, the relevant Courts reasoned legal opinions available to the 
and administrative authorities would find authority that, in the event of a legal 
that in the cases described under (i) the challenge, the relevant Courts and 
claims and obligations of the credit administrative authorities would find that 
institution to be confined to the net value in the cases described under (i) the claims 
as described in (b) (i) above under: and obligations of the credit institution to 
be confined to the net value as described 
in (b) (i) above under: 
Annex, Annex II, point 3 (b), first 
paragraph "a" (new, to be inserted): 
The competent authorities may accept 
reasoned legal opinions drawn up by 
group or types of contractual netting. 
Annex, Annex II, point 3 (b), second Annex, Annex II, point 3 (b), second 
paragraph: paragraph: 
The supervisory authorities, after The competent authorities, after 
consultation when necessary with other consultation when necessary with other 
relevant supervisory authorities, must be relevant supervisory authorities, must be 
satisfied that the contractual netting is satisfied that the contractual netting is 
legally valid under the law of each of the legally valid under the law of each of the 
relevant jurisdictions. If one of these relevant jurisdictions. If one of these 
supervisory authorities is not convinced of supervisory authorities is not convinced of 
the legal validity of the contractual netting the legal validity of the contractual netting 
under the law of its country the relevant under the law of its country the relevant 
contract for novation or the relevant contract for novation or the relevant 
netting agreement may not be recognized netting agreement may not be recognized 
as risk reducing for either of the as risk reducing for either of the 
counterparties. counterparties. 
^7 
Annex, Annex II, point 3 (b), fourth Annex, Annex II, point 3 (b), fourth 
paragraph: paragraph: 
With respect to a smooth functioning of With respect to a smooth functioning of 
the single market, Member States are the single market, Member States are 
obliged to strive for a uniform assessment obliged to strive for a uniform assessment 
of the agreements for contractual netting of the agreements for contractual netting 
by their competent authorities. by their competent authorities. Such 
action by the competent authorities must 
not be responsible fbr distorting 
competition, 
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ISSN 0254-1475 
COM(95) 170 final 
DOCUMENTS 
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