COMMISSION OF THE EUROPEAN COMMUNITIES 
C0MC90) 141 final- SYN'257 
Brussels, 23 May 1990 
Proposal for a 
COUNCIL DIRECTIVE 
on capital adequacy of 
investment firms and credit institutions 
(presented by the Commission) 
EXPLANATORY MEMORANDUM 
GENERAL CONSIDERATIONS 
1. The present proposal for a Directive on the Capital Adequacy of 
Investment Firms and Credit Institutions is a necessary follow-up to the 
proposal for a Directive on Investment Services In the securities field, 
presented by the Commission to the Council on 3 January 1989 (on which 
there is already an amended proposal presented by the Commission on 8 
February 1990 after the advice of the European Parliament and the 
Economic and Social Committee). 
The proposal for a directive on Investment Services is intended to open 
the way for investment firms authorized in their home Member States to 
have access to all other Member States' financial markets - either by 
establishing branches, or by providing services, therein - on the basis 
of certain conditions that closely follow those established for credit 
Institutions In the Second Banking Coordination Directive, adopted In 
December 1989. According to the programme set out In the White Paper 
"Completing the Internal Market", these freedoms should be based on 
coordination of key rules as regards the authorization and the on-going 
supervision of financial Institutions. 
2. The coordination must be such as to ensure that the main objective of 
the proposal - to ensure that both the health of the general financial 
system and Individual investors are adequately protected In the new 
Integrated European market - Is achieved. It should also meet two 
- 2 -
other goals. First, it should establish a broadly level playing field 
between non-bank investment firms and credit institutions trading In the 
securities markets. Consistently with this objective, the rules set 
out In the proposed Directive should not provide an incentive for an 
investment firm to opt for one Institutional structure, e.g. that of a 
credit Institution - rather than another. Second, the Directive should 
enhance, or at least not Impair, the attractiveness of Europe as a 
financial centre. 
Capital requirements for investment firms Which are. Dût credit 
Institutions 
3. The proposal establishes minimum Initial capital requirements for 
Investment firms which are not credit Institutions, requirements for the 
latter being already fixed by the Second Banking Directive. These have 
been set at levels which ensure that when It starts its activities, an 
Investment firm has sufficient, Initial financial resources in view of 
the nature of its business and second, which do not form unnecessary 
barriers to the entry Into the market of new firms. Accordingly, 
different amounts are established for different kinds of investment 
firms, taking into account the types of business carried out by them. 
4. The initial capital requirements for firms which are not credit 
institutions are lower than those laid down for credit institutions in 
the Second Banking Coordination Directive. This Is for two reasons. 
First, investment firms which are not credit Institutions typically are 
more specialized than credit institutions; the latter engage In a wider 
variety of activities and thus need higher initial capital. Second, 
under Annex 5 of the present Directive, investment firms which are not 
credit institutions are also required to hold "base capital" equivalent 
to three months' of their fixed overheads, a requirement which takes 
account of the wide variation in the size of non-bank Investment firms. 
5. In order to provide for the ongoing financial soundness of such firms, 
capital requirements are set to cover the market risks to which they are 
exposed. 
- 3 -
5.1 The first requirement is the position risk requirement (Annexes 1 
and 2). According to the rules proposed, each firm must keep in the 
form of capital a certain percentage of Its long and short 
positions, after allowance has been made for hedging and netting. 
This percentage varies according to the nature of the Instruments in 
which the firm has a position and according to the credit-standing 
of the issuers concerned. This requirement is intended to cover the 
risk of adverse price movements In the underlying securities 
whatever their cause (e.g. Interest rate risk changes or shifts In 
an issuer's credit worthiness). 
5.2 Second, there is a foreign exchange risk requirement which is set In 
relation to a firm's vulnerability to losses arising purely from 
adverse exchange rate movements. This is laid down in Annex 4. 
5.3 The third requirement relates to unsettled transactions, i.e. to 
transactions in which one or other party has not paid for the 
securities it has contracted to buy or not delivered the securities 
it has contracted to sell. In such a situation, there is a risk 
that the counterparty will not be able to carry out Its obligations 
and also a risk of a malfunctioning of the settlement system itself; 
In either of these cases the firm may suffer a loss. 
5.4 Finally there Is the "base" requirement In Annex 5, under which each 
firm Is required to hold own funds equivalent to one quarter of the 
previous year's fixed overheads. This requirement is intended to 
cover all other risks faced by investment firms, e.g. the risk that 
market turnover collapses reducing a firm's broking income to a 
level insufficient to cover its expenses. 
- 4 -
Capital requirements for credit Institutions 
6. The scope of the proposed Directive extends to all credit Institutions, 
including those which are not Investment firms. This is because several 
of the main risks dealt with by the Directive, such as the risk of 
losses from Interest rate and exchange rate movements, apply to their 
traditional activities such as deposit taking and lending, as well as to 
their investment business. In consequence not only should the entire 
business of credit Institutions which are Investment firms be supervised 
In respect of these risks, but also that of those which are not 
investment firms. 
7. As regards provision against market risks on securities positions, the 
Directive has to take account of the capital requirements imposed by the 
Solvency Ratio Directive (Council Directive 89/647/EEC), which 
Implicitly make some provision for risks other than credit risks. It 
would thus be inappropriate to require credit institutions already 
meeting the Solvency Ratio Directive to provide additional capital 
against market risk in general; to do so would put them at a 
disadvantage in comparison with non-bank investment firms from elsewhere 
In the Community and in third countries. 
8. The Directive therefore offers a choice of two main options in respect 
of credit institutions. Under both of these options, alI credit 
Institutions are required to :-
(I) provide additional capital against foreign exchange risk In 
accordance with the rules laid down in Annex 4, unless their 
foreign currency open positions are subject to a limit 
calculated as a percentage of their own funds (Article 4 (2)). 
(This is necessary because the Solvency Ratio Directive does 
not explicitly take account of foreign currency risks); 
(II) set up their own systems to monitor and control market risks 
(other than foreign currency risk) on their overall business 
(Article 4 (3); 
- 5 -
9. However, as regards market risk on open positions in equities and fixed-
rate securities and counterparty risk, Article 4 (4) allows the 
supervisory authorities in each Member State to choose between two 
alternative approaches: -
either (a) to continue to apply the requirements of the Solvency 
Ratlo Direct ive; 
or (b) to set capital requirements on the short-term "trading 
books" of credit institutions, calculated in accordance 
with the rules for non-credit institutions as set out in 
Annexes 1 - 3 of the Directive In substitution for the 
requirements of the Solvency Ratio Directive. For this 
purpose a definition of the "trading book" is given In 
Article 2 of the Directive. 
10. The supervisory authorities of credit institutions may choose either to 
apply one of the options to all the credit Institutions in their charge, 
or to decide which of their credit Institutions should apply which 
system on a case-by-case basis. 
11. The provision of the "trading book" option allows credit Institutions to 
have their capital requirements in this area of business measured In the 
same way as Investment firms which are not credit institutions. In this 
way the trading book option is consistent with the goal of ensuring a 
broadly level playing field between those investment firms which are, 
and those which are not, credit institutions. It is also desirable on 
prudential grounds, because the requirements in Annexes 1 to 3 provide a 
more comprehensive treatment of the various risks In investment services 
business than the Solvency Ratio Directive, which is mainly concerned 
with credit, as opposed to market, risks. 
- 6 -
Own Resources 
12. The definition of "own resources" for credit Institutions, and 
investment firms which are not credit institutions, is dealt with in 
Annex 6 of the Directive. In the case of credit Institutions the 
definition Is the same as that laid down in Council Directive 
Nfi 89/299/EEC. This definition Is dictated by the need to ensure the 
long-run solvency of credit institutions - a need based In part on the 
Illiquid nature of most of their assets - In order to realize the 
fundamental supervisory goals of depositor protection and the stability 
of the financial system. 
13. However Member States may permit credit Institutions under the "trading 
book" option to use an alternative definition of "own resources" with 
regard to the requirements on their trading books. This Includes a much 
higher proportion of subordinated debt than In the previous definition, 
though a ceiling is placed on such debt so that the key supervisory 
goals are not compromised. The provision of the alternative definition 
allows such credit institutions to more easily meet the volatile own 
resources requirements associated with their trading positions, and 
ensures that the nature of their own resources is broadly similar to 
that for Investment firms which are not credit institutions using the 
"alternative definition" described in paragraph 14. 
14. The competent authorities may apply the definition of "own resources" In 
Council Directive 89/299/EEC to this latter group, or an "alternative 
definition". This alternative definition is focussed more on liquidity 
than solvency; thus Illiquid assets are deducted in full from capital, 
but a greater amount of subordinated debt is allowed. The highly liquid 
nature of such firms' assets means that requiring them to provide 
capital In this form against the risks they run Is fully consistent with 
the fundamental objectives of securities market supervisors. It is also 
In line with the approach adopted by US securities market supervisors. 
- 7 -
COMMENTS ON THE INDIVIDUAL ARTICLES 
Article 1 
15. This provides for all investment firms, as defined in the Council 
Directive on Investment Services (.../... EEC), and for all credit 
institutions subject to the requirements of the Council Directive on a 
Solvency Ratio for Credit Institutions 89/647/EEC, to be within the 
scope of this Directive. 
Article 2 
16. This Article defines certain terms used in the Directive, which are not 
defined or explained in the Investment Services Directive. 
Article 3 
17. Levels of Initial and minimum capital are laid down here for investment 
firms that are not credit Institutions. The purpose of such 
requirements Is to ensure that such firms have enough starting capital 
to begin business in the provision of the services they have been 
authorized to supply. Two categories of such firms are, however, 
excluded from both these obligations and the business-related 
requirements referred to in Article 4. These are local firms and 
investment advisers. They are excluded because their failure poses no 
threat to investors, or to the general stability of the financial 
system. 
18. Allowance is made for firms in existence at the time the Directive is 
implemented which fail to meet the minimum levels stipulated for them in 
the Article, and also for firms whose Initial capital falls short after 
Its Implementation due to losses. These provisions broadly mirror those 
In the Second Banking Coordination Directive, although an additional 
clause allows very small firms to continue In existence in cases where, 
as a result of the death of the owner, control shifts to an heir. 
Article 4 
19. This Article describes in general terms the financial requirements for 
firms covered by the Directive. An important distinction Is made 
between those Investment firms which are not credit Institutions and 
those which are. The former firms are required to put up capital 
against each of the risks identified In the Directive, In the manner 
laid down in Annexes 1 to 5. Their overall requirement is the sum of 
the requirements laid down in each of these Annexes. 
20. The requirements for credit institutions differ in a number of respects 
from those for non-banks. First, by contrast to investment firms which 
are not credit Institutions, they are not required to provide capital 
against the 'other risks' catered for in Annex 5, such as the risk of a 
fall In general market turnover and an Individual bank's broking income 
failing with it. This exclusion Is justified on the basis that such 
risks are de minimis for most credit institutions, whereas they are 
often of paramount importance for other investment firms. Second, in 
regard to their credit institutions, Member States may choose to impose 
a limits, instead of a capital requirements, system, to protect against 
foreign exchange risk. The provision of the limits option is 
justifiable because the capital requirements In the Solvency Ratio 
Directive already take some account of this risk. Third, all credit 
institutions are obliged to establish internal systems to monitor and 
control the market risks associated with their business in toto, and not 
simply those associated with their securities trading activities. 
Finally, Member States supervisors are given the choice of Imposing 
either the Solvency Ratio Directive requirements to their credit 
institutions' trading activities In bonds and equities, or the 
requirements for non-banks detailed in Annexes 1 to 3. 
9 -
Article 5 
21. A mark-to-market valuation of positions on a daily basis is required by 
this Article, except in the case of credit institutions which are 
subject to the Solvency Ratio Directive requirements on all of their 
bus Iness. 
Article 6, 
22. This Article lays down both the type, and the frequency, of the 
Information a firm must provide its competent authorities. 
Article 7 
23. Under this Article Member States are required to nominate one or more 
authorities to grant authorizations and to carry out the various 
supervisory tasks envisaged by the Directive. 
24. It stipulates that It is also open to a Member State to nominate 
professional associations to act in this role, provided that their 
status is recognized in the overall statutory scheme of supervision in 
the country concerned. 
25. Where several authorities have been nominated in a given Member State 
for the purposes of the Directive they are required to cooperate closely 
In order to ensure an adequate level of supervision. 
Article 8 
26. This Article permits amendments to be made to the Directive's rules in 
certain areas by use of a committee procedure. It Is modelled upon 
Article 22 of the Second Banking Directive. 
10 -
THE ANNEXES 
27. Annexes 1 to 5 describe how the risks In a firm's positions, and thus 
the capital required to safeguard it, are to be calculated, while Annex 
6 deals with the composition of the capital that is to be provided. 
Annex 1 
28. This Annex explains how firms' net positions are to be measured, 
including the conditions under which gross positions in an Instrument 
may be reduced by the holding of offsetting positions In either the same 
Instrument or a derivative of It. Once measured, the net positions are 
subject to the capital requirements set out in Annexes 2 and 4. 
29. The Annex allows for a degree of flexibility in the way in which options 
and swaps are treated. 
Annex 2 
30. This Annex explains how capital requirements on fixed rate Instruments 
and equities are to be calculated. Lower requirements are set on paper 
Issued by 'qualifying' firms from the private sector than on that from 
other firms, In view of the lower price volatility of the former. 
Qualifying Issuers include credit institutions, and private sector firms 
whose securities are listed on Member State, or recognized third 
country, stock exchanges. This Annex also permits the use of 
alternative systems for measuring capital requirements that are based 
on the mathematical concept of duration, in certain circumstances. 
- 11 -
Annex 3 
31. This Annex covers the risk to a firm of a deal it has entered Into not 
being settled for whatever reason, for example the counterparty Involved 
failing to meet its side of the bargain, or a malfunctioning of the 
settlement system. It explains the method of calculating the capital 
required to provide a buffer against the losses arising In such cases. 
Annex 4 
32. This Annex describes the calculation of the foreign exchange risk 
requirement. The purpose of this requirement is to provide a capital 
buffer against losses arising from adverse movements in foreign exchange 
rates when the credit institution or Investment firm has an open 
position. The method of calculation Is also used In calculating foreign 
exchange limits for credit Institutions If the competent authorities so 
require under Article 4. 
Annex 5 
33. Capital requirements are set in this Annex to safeguard firms against 
the diverse risks that are not addressed by Annexes 2 to 4, for example 
the losses arising from a market-wide fall in turnover. 
Annex 6 
34. Annex 6 Is concerned with the definition of this capital or 'own funds'. 
It gives the competent authorities in each Member State the option of 
applying the definition of own funds laid down in the Council Directive 
on the Own Funds of Credit Institutions (89/299/EEC) or the alternative 
definition set out in this Annex, to Investment firms which are not 
credit institutions. Firms using the latter are allowed to include a 
- 12 -
larger amount of subordinated debt in their own funds than under the 
former definition, but, unlike credit Institutions, are strictly 
required to deduct their illiquid assets. Credit institutions are 
required to apply the definition in Council Directive 89/299/EEC, except 
In the case of those which are required to meet the capital requirements 
In Annexes 2 and 3. In this latter case the competent authorities may 
permit an alternative definition which is similar, though not identical, 
to the alternative definition for non-banks. 
- 13 -
Proposal for a 
COUNCIL DIRECTIVE 
on capital adequacy of 
investment firms and credit institutions 
THE COUNCIL OF THE EUROPEAN COMMUNITIES, 
Having regard to the Treaty establishing the European Economic Community, 
and in particular the first and third sentences of Article 57(2) thereof, 
Having regard to the proposal from the Commission^1), 
In cooperation with the European Par I lament^2), 
Having regard to the opinion of the Economic and Social Committee^3), 
Whereas Council Directive ... of ... on investment services in the 
securities fleld^4) has as its main objective that of allowing 
Investment firms authorized by the competent authorities of their home 
Member States and supervised by those same authorities to establish 
branches and provide services freely in other Member States; whereas it 
accordingly provides for coordination of the rules relating to the 
authorization and pursuit of business of investment firms; 
(1) OJ No 
(2) OJ No 
(3) OJ No 
(4) OJ No 
- 14 -
Whereas Directive .... does not, however, establish common standards for 
the own funds of investment firms, nor Indeed does it establish the 
amounts of Initial capital of such firms; whereas it does not establish a 
common framework for the monitoring of market risks incurred by the same 
firms; whereas Directive makes reference, in several of its 
provisions, to another Community initiative, the objective of which would 
be precisely to adopt coordinated measures in those fields-, 
Whereas the approach that has been adopted is to achieve only the 
essential harmonization necessary and sufficient to secure the mutual 
recognition of authorization and of prudential supervision systems; 
whereas the adoption of coordination measures as regards the definition 
of own funds of Investment firms, the establishment of the amounts of 
initial capital and the establishment of a common framework for the 
monitoring of market risks of investment firms are essential aspects of 
the harmonization necessary for the achievement of mutual recognition and 
thus the completion of the internal financial market; 
Whereas the Member States may also establish rules stricter than those 
provided for In the present Directive; 
Whereas this Directive forms part of the wider International effort to 
bring about approximation of the rules in force in major countries 
regarding the on-going supervision of investment firms; 
Whereas common basic standards for the own funds of investment firms are 
a key feature In the creation of an Internal market In the Investment 
services sector since own funds serve to ensure the continuity of 
Investment firms and to protect investors; whereas such harmonization 
will strengthen the supervision of Investment firms; whereas such 
standards must apply to all investment firms in the Community-, 
- 15 -
Whereas in a common financial market investment firms, whether they are 
credit Institutions or not, engage in direct competition with one 
another ; 
Whereas the criteria for determining the composition of own funds must 
not be left to the sole discretion of Member States-, 
Whereas the adoption of common basic standards on the own funds of 
Investment firms will be in the best interests of the Community in that 
it will prevent distortions of competition and will strengthen the 
Community financial system; 
Whereas investment firms which are credit institutions already have the 
definition of own funds provided for in the Council Directive 89/299/EEC 
of 17 April 1989 on the own funds of credit Institutions C); 
Whereas, there are reasons why the definition of own funds of Investment 
firms may be adapted from that in Directive 89/299/EEC In order to take 
account of the particular characteristics of the activities of those 
firms; 
* 
Whereas, however, the basis for a definition of own funds for investment 
firms, which are not credit Institutions, should be the definition of own 
funds of credit institutions; 
Whereas it is necessary to establish at Community level the amounts of 
minimum initial financial resources that competent authorities must 
require from Investment firms In order to grant them authorisation-, 
Whereas these amounts should be fixed at a level which should ensure that 
firms engaging in investment services have the capacity to fulfil their 
obligations without, at the same time, representing an inappropriate 
barrier to entry In the market by new firms; 
(1) OJ No 124, 5.5.1989, p. 16. 
- 16 -
Whereas It Is appropriate to give Member States the possibility of 
reducing these amounts In cases where Investment firms are not authorized 
to hold customers' monies or securities, nor to act as market makers, nor 
to underwrite, nor to take positions of their own; 
Whereas existing investment firms should be permitted to continue their 
business even if they do not comply with the minimum amount fixed for new 
firms; 
Whereas, as regards Investment firms which are credit institutions, the 
amount of minimum initial capital is already established in the Second 
Council Directive 89/646/EEC of 15 December 1989 coordination of laws, 
regulations and administrative provisions relating to taking up and 
pursuit of the business of credit Institutions and amending Directive 
77/780/EEC)<1>; 
Whereas It Is necessary to provide a common framework for the supervision 
and monitoring of market risks of investment firms; 
Whereas such a framework must cover the main risks incurred by investment 
firms and, in particular, position risks, counterparty/settlement risks, 
interest rate risks and foreign exchange risks; 
Whereas the best approach to ensure the financial soundness of investment 
firms is to impose on them the obligation to provide at all times a 
certain amount of own funds to cover each of the risks associated with 
their particular activities; 
(1) OJ No 386, 30.12.1989, p. 1. 
- 17 -
Whereas, for credit institutions, one main part of the risk associated 
with their business is already covered by the Council Directive 
89/647/EEC of 18 Decmeber 1989 on a solvency ratio for credit 
Institutions^2); 
Whereas, for that reason, It is appropriate to give the competent 
authorities the possibility to choose between either applying 
Directive 89/647/EEC to the whole book of credit Institutions or applying 
the framework provided for in this Directive to their trading book; 
Whereas, in any case, credit Institutions must comply with the provisions 
of this Directive as regards the coverage of their foreign exchange risk; 
Whereas the existence, in all credit institutions, of internal systems 
for monitoring and controlling the market risks on all their business is 
a particularly important way of minimizing such risks; whereas, 
consequently, It is necessary that such systems be approved by the 
competent authorities; 
Whereas technical modifications 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 sector; whereas the Commission 
shall accordingly make such modifications as are necessary within the 
limits of the Implementing powers conferred on the Commission by the 
Treaty; 
HAS ADOPTED THIS DIRECTIVE 
(2) OJ No 386, 30.12.1989, p. 14. 
- 18 
SCOPE 
Art Icle 1 
1. Member States shall apply the requirements of this 
Directive to investment firms defined In accordance with 
the 3rd Indent of Article 1 of Directive .../.../EEC, 
[relating to investment services] and to credit 
institutions as defined in Article 2. 
2. A Member State may impose additional or more stringent 
requirements on the investment firms and credit 
institutions that it has authorised. 
- 19 -
DEFINITIONS 
ArtIcle 2 
For the purposes of this Directive: 
"credit Institutions" means all Institutions meeting the 
definition in the 1st Indent of Article 1 of the Council 
Directive 77/780/EEC<1> which are subject to the 
requirements arising from Council Directive 89/647/EEC^2) ; 
the "trading book" of a credit institution shall include 
Its proprietary positions in transferable securities or 
derivative instruments, which are taken on by the credit 
Institution In order to benefit from actual or expected 
differences between their buying and selling prices, or In 
order to hedge other elements of the trading book; 
"exchange-traded instruments" means instruments which are 
traded on, or under the rules of, a stock exchange, or 
financial futures or options exchange established and 
officially recognized in the relevant Member State, or 
established in a third country and recognized by the 
competent authorities of the relevant Member State. 
Instruments which are traded on such exchanges and markets 
shall be classified as equities, debt instruments, futures, 
options, convertibles and warrants, In this Directive; 
"over-the-counter 
I nstruments; (OTC) Instruments" means other 
(1) OJ No L 322, 17.12.1977, p. 30. 
(2) OJ No L 386, 30.12.1989, p. 14. 
- 20 -
"qualifying Issuer" means a credit institution, or a firm 
whose securities are listed on a stock exchange in a Member 
State, or In a stock exchange in a third country when this 
exchange is recognized by the competent authorities of the 
relevant Member State; 
"central government" refers to the central government or 
central bank of Member States and all other countries which 
are members of the Organization for Economic Cooperation 
and Development (OECD) and any country which has concluded 
special lending arrangements with the International 
Monetary Fund (IMF) associated with the IMF General 
Arrangements to Borrow (GAB); 
"other public sector" means regional governments and local 
authorities in countries which are members of the OECD or 
which have concluded special arrangements with the IMF 
associated with the IMF's GAB; 
"convertible" means a security, which, at the option of the 
holder, can be exchanged for another security, usually the 
equIty of the i ssuer; 
"warrant" means a security which gives the holder the right 
to purchase a number of shares of common stock, or bonds, 
at a stipulated price up until the warrant's expiration 
date ; 
"repurchase agreement" means an agreement in which a firm 
sells securities subject to a commitment to repurchase them 
(or substituted securities of the same description) at a 
specified future time and price, according to the 
provisions of Article 12(2) of the Council Directive 
86/635/EEC*1>; 
(1) OJ No L 372, 31.12.1986, p. 1. 
21 -
"reverse repurchase agreement" means an agreement in which 
a firm buys securities from a counterparty and agrees to 
sell them (or substituted securities of the same 
description) back to that counterparty at a specified 
future time and price, according to the provisions of 
Article 12(2) of Directive 86/635/EEC; 
"clearing member" means a member of both the exchange and 
the clearing house, thus having a direct contractual 
relationship with the central counterparty (market 
guarantor). Non-clearing members must have their trades 
routed through a clearing member; 
"local firm" means 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, which is guaranteed by a clearing member of 
the same exchange, with this guarantee being taken Into 
account in the setting of the guarantor's capital 
requirements; 
"delta" means the expected change in an option price as a 
proportion of a small change in the price of the instrument 
underlying the option; 
for the purposes of Point 5 of Annex 1, "long position" 
means a position in which a firm has fixed the interest 
rate it will receive at some time In the future, and "short 
position" means a position in which It has fixed the 
Interest rate It will pay at some time in the future-, 
- 22 -
"own funds" means own funds as defined In Directive 
89/299/EEC. However this definition may be modified, for 
credit Institutions, In the circumstances described in 
Point 2 of Annex 6. In the case of Investment firms which 
are not credit Institutions, the competent authorities may 
use the definition set out In Point 4 of Annex 6 instead; 
"initial capital" means capital as defined In Points (1) 
and (2) of Article 2(1) of Directive 89/299/EEC. The paid-
up share capital component of this shall comprise all 
amounts regardless of their actual designations, which, in 
accordance with the legal structure of the Institution 
concerned, are regarded under national law as equity 
capital subscribed and paid by the shareholders or other 
proprletors. 
INITIAL CAPITAL AND DEROGATIONS FROM CAPITAL REQUIREMENTS 
ArtIcle 3 
1. References to investment firms In Articles 3 to 6 denote 
only those investment firms which are neither credit 
Institutions, nor local firms, nor firms engaged purely in 
the business of supplying investment advice. 
2. Investment firms shall have initial capital of at least 
ECU 500 000. 
3. Member States may reduce this amount to ECU 50 000 where a 
firm is neither authorised to hold customers' monies or 
securities, nor to act as a market maker, nor to underwrite 
except where the firm is involved only in the distribution 
of issues on a best efforts basis. 
- 23 -
4. Member States may reduce the amount In paragraph 2 to 
ECU 100 000 In the case of firms who hold cl lents' monies 
or securities in acting as agents or portfolio managers, 
but who do not hold trading positions of their own. 
5. Notwithstanding paragraphs 2, 3 and 4, Member States may 
continue the authorisation of investment firms in existence 
before this Directive is implemented, whose own funds are 
less than the initial capital levels specified in those 
paragraphs. The own funds of such firms shall not fall 
below the highest level recorded after the date of 
notification of this Directive. 
6. If control of an investment firm falling within paragraph 5 
Is taken, other than through inheritance, by a natural or 
legal person other than the person who controlled it 
previously, the own funds of that institution must attain 
at least the appropriate level prescribed for initial 
capital In paragraphs 2, 3 and 4. 
7. However, in certain specific circumstances and with the 
consent of the competent authorities, where there Is a 
merger of two or more Investment firms, the own funds of 
the firm resulting from the merger need not attain the 
level of initial capital referred to in paragraphs 2, 3 and 
4. However the own funds of the new Investment firm may 
not fall below the total own funds of the merged firms at 
the time of the merger, as long as the appropriate levels 
pursuant to paragraphs 2, 3 and 4 have not been attained. 
8. An investment firm's own funds may not fall below the 
amount of initial capital required under paragraphs 2, 3 
and 4 or the amounts of own funds required under paragraphs 
5, 6 and 7. However, if, In the cases referred to in 
paragraphs 2,3,4,5 and 7 the own funds should be reduced, 
the competent authorities may, where the circumstances 
justify It, allow an investment firm a limited period in 
which to rectify its situation or cease Its activities. 
- 24 -
PROVISION AGAINST RISKS 
Art icle 4 
1. Investment firms shall provide at all times a certain 
amount of own funds to cover each of the various risks 
associated with their particular activities. The sum of 
these amounts, which shall be calculated in accordance 
with the methods outlined in paragraph 5 below and 
Annexes 1 to 5, shall be their overall own funds 
requirement. They shall ensure that their overall own 
funds requirement is lower than or equal to the own 
funds that they hold. 
2. Credit institutions shall provide, in addition to the 
requirements set in Directive 89/647/EEC and any set in 
paragraphs 4 and 5 below, own funds to cover their 
foreign exchange risk-, this amount shall be calculated 
in accordance with the method outlined in Annex 4. 
Pending further harmonisation however, Member States 
may waive the application of this requirement in 
relation to credit institutions whose business is 
limited as follows: their overall net foreign exchange 
position, calculated in accordance with Annex 4, must 
not exceed the equivalent of 10% of own funds. 
The competent authorities shall require credit 
institutions to set up systems, which need to be 
approved by the competent authorities, to monitor and 
control the interest rate, equity price and 
counterparty/settlement risks on all of their business. 
- 25 -
The competent authorities shall require credit 
institutions - either on a general, or on an 
individual basis - to meet the capital requirements 
set out in Directive 89/647/EEC on all of their 
business, or may, instead of this, require them to meet 
the capital requirements laid down in Annexes 2 and 3 
hereto on their trading books, and the requirements of 
Directive 89/647/EEC on the rest of their business. 
The competent authorities in Member States shall 
require that investment firms have adequate own funds 
to cover the risks arising in connection with business 
that is outside the activities listed in Council 
Directive ../.../EEC [relating to investment services]. 
In addition they shall ensure that the own funds of 
investment firms, and those credit institutions that 
are required to meet the capital requirements in 
Annexes 2 and 3 hereto, protect them against the risks 
In those Instruments that fall within the activities of 
Council Directive ../.../EEC (relating to investment 
services] but which are not explicitly catered for in 
this Directive, and, in the case of such credit 
Institutions, are within the trading book. All cases 
covered by this paragraph shall be reported to the 
Commission by the relevant competent authorities. 
EVALUATION OF POSITIONS FOR REPORTING PURPOSES 
ArtIcle 5 
1. Positions shall be marked to market daily by investment 
firms and credit institutions unless Annexes 2, 3 and 5 
hereto do not appSy to them. 
- 26 
In the absence of readily available market prices 
e.g. In the case of dealing in new issues on the 
primary markets, the authorities may waive the 
requirement under paragraph 1, and require firms to 
use alternative methods of evaluation provided that 
these methods are sufficiently prudent, and have been 
approved by the competent authorities. 
REPORTING REQUIREMENTS 
Art icle 6 
Member States shall require that investment firms and 
credit Institutions provide the competent authorities 
of the home Member State with all the information 
necessary to assess their compliance with the rules 
adopted In accordance with this Directive. Member 
States shall also ensure that investment firms' and 
credit Institutions' internal control mechanisms and 
administrative and accounting procedures permit the 
verification of their compliance with such rules at all 
t imes. 
- 27 -
2. Investment firms which are not credit institutions 
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 which are 
authorised to deal as principal, at least once every 
three months in the case of those firms described in 
Article 3(4), and at least once a year In the case of 
those firms covered by Article 3(3). Such reports must 
be received by the competent authorities within two 
weeks of the end of the reporting period. 
3. Credit institutions shall be obliged to report in the 
manner specified by the competent authorities at the 
same time as they are obliged to report under Directive 
89/647/EEC, and at more frequent intervals if the 
competent authorities so request. 
COMPETENT AUTHORITIES 
ArtIcle 7 
1. Member States shall designate the authorities which are 
to carry out the duties provided for in this Directive. 
They shall Inform the Commission thereof, indicating 
any division of duties. 
2. The authorities referred to in paragraph 1 must be 
public authorities or bodies officially recognized by 
national law or by public authorities to be part of the 
supervisory system prevailing in the relevant Member 
State. 
3. The authorities concerned must be granted all the 
powers necessary to carry out their tasks. 
- 28 -
The competent authorities of different Member States 
shall collaborate closely to carry out the duties 
provided for In this Directive, particularly when 
investment services are provided on a services basis or 
by the establishment of branches In one or more Member 
States. They shall supply one another on request with 
all information likely to facilitate the supervision of 
the capital adequacy of investment firms and credit 
Institutions and particularly the verification of their 
compliance to the rules laid down in this Directive. 
Any exchange of Information between competent 
authorities which Is provided for in this Directive in 
respect of Investment firms shall be subject to the 
obligation of professional secrecy as set out in 
Article 20 of Directive .../.../EEC [Felating to 
investment services] and, in respect of credit 
Institutions, subject to the obligation set out in 
Article 12 of Council Directive 77/780/EEC. 
COMMITTEE 
Art icle 8 
1. The technical amendments to be made to this Directive 
In the following areas shall be adopted In accordance 
with the procedure laid down In paragraph 2: 
- definitions in Article 2; 
- Initial capital requirements in 
- ArtIcle 3; 
- ceiling referred to In Article 4(2); 
- treatment of Instruments within the scope of 
Directive ../.../EEC relating to Investment 
services , but not covered In this Directive; 
- calculation of net open positions In Annex 1; 
- Annex 2; 
- 29 -
- counterparty/settlement risk weights in Annex 3-, 
- foreign exchange risk weights in Annex 4-, 
- time period used in Annex 5; 
- definition of own funds in Points 2, 4 and 5 of 
Annex 6. 
2. Whenever the technical amendments referred to in the 
first paragraph are to be made to this Directive, 
Article 23(2), of Council Directive ../.../EEC 
[relating to investment services] shall apply. 
FINAL PROVISIONS 
Art Icle 9 
1. Member States shall bring into force the laws, 
regulations and administrative provisions necessary to 
comply with this Directive by 1 January 1993 at the 
latest. They shall forthwith inform the Commission 
thereof. 
The provisions adopted pursuant to the first paragraph 
shall make express reference to this Directive. 
2. Member States shall communicate to the Commission the 
texts of the main laws, regulations and administrative 
provisions which they adopt in the field covered by 
this D I rect I ve. 
Art icle 10 
This Directive is addressed to the Member States. 
Done at Brussels, For the Counc iI 
The President 
- 30 -
ANNEX 1 
CALCULATION OF NET OPEN POSITIONS 
Equity and debt Instruments 
1. The firm's long and short positions In the same equity, 
debt and convertible issues shall be netted. In 
calculating the net position the competent authorities 
may allow positions in derivative instruments to be 
treated as the underlying (or notional) 
security/securities. The competent authorities shall 
allow the netting of identical financial futures, 
options and warrants, contracts. 
2. Debt Instruments denominated in the same currency shall 
be grouped by maturity (according to Annex 2) in 
reflection of the residual maturity of fixed rate 
Instruments, and the period to repricing of other 
Instruments. 
3. Debt Instruments shall be categorised by issuer as 
follows: central government, other public sector, 
qualifying and other. 
Convert IbI es 
4. No netting is allowed between convertibles and 
offsetting positions in the underlying Instrument 
Itself, unless the competent authorities adopt an 
approach under which the likelihood of a particular 
convertible being converted is taken Into account, or 
have a capital requirement to cover any potential loss 
which could be incurred on conversion. 
- 31 -
Other Instruments 
5. Interest rate futures and forward rate agreements 
(FRAs) which are not based on an underlying Instrument, 
will be treated as combinations of long and short 
positions. Thus a long futures position will be treated 
as a combination of a borrowing maturing on the 
delivery date of the futures contract and a holding of 
an asset maturing on the expiration date of the future. 
The opposite holds for a short position. Both the 
borrowing and asset holding will be included in the 
central government column of Table 1 In Annex 2. A 
future or a forward which is based on an underlying 
debt instrument will be treated as either a long or 
short position in the underlying Instrument. Its 
maturity will be taken to be the period until delivery 
or exercise of the contract, plus the life of the 
underlying security, or, If the life of the underlying 
security exceeds a year, as this life itself. The 
competent authorities may allow the requirement for an 
exchange-traded future to be equal to the margin held 
at the exchange if they are fully satisfied that it 
provides an accurate measure of the risk associated 
with the future. 
Opt Ions on Interest rates, debt instruments, equities, 
financial futures, swaps and foreign currencies, are 
treated as If they were positions in the delta 
multiplied by the amount of the underlying instrument 
to which the option refers. The delta used should be 
that of the exchange concerned, or, where this Is not 
available or for OTC options, that calculated by the 
firm Itself, subject to the competent authorities being 
satisfied that the model used by the firm is 
reasonable. The competent authorities shall require 
that the other risks, apart from the delta risk, 
associated with options are safeguarded against. The 
competent author 11les may a I I ow the requIrement agaInst 
- 32 -
a written, exchange-traded option to be equal to the 
margin held at the exchange if they are fully satisfied 
that it provides an accurate measure of the risk 
associated with the option, and for the requirement on 
a bought, exchange-traded or OTC option to be the same 
as for the instruments 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 will be set in relation to 
the Instrument underlying it. 
7. Swaps will be treated for Interest rate risk purposes 
on the same basis as on-balance sheet instruments. Thus 
an interest rate swap under which a firm receives 
floating rate interest and pays fixed rate interest 
will 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. Competent authorities may 
however set alternative requirements to these for firms 
using swap models which provide, to the satisfaction of 
the competent authorities, a more accurate measure of 
the r I sks In swaps. 
8. Warrants shall be treated in the same way that options 
are treated In paragraph 6. 
Currency conversion 
9. All net positions, irrespective of their sign, must be 
converted on a daily basis Into the firm's reporting 
currency at the prevailing spot exchange rate before 
the Ir aggregatIon . 
- 33 -
ANNEX 2 
Position risk 
1. Investment firms shall calculate their net positions as 
def i ned In Annex 1 . 
2. Investment firms will apply the weights shown in Table 
1 to their net, fixed interest rate positions, whether 
In their own or foreign currencies, as calculated in 
Annex 1, and thus calculate their weighted long 
positions and their weighted short positions. 
Table 1 
Residual Central Other public sector Other 
maturity 
X 
up to 3 months 0.3 0.5 8.0 
more than 3 up to 6 months 0.5 1.0 8.0 
more than 6 up to 12 months 1.0 1.6 8.0 
more than 1 up to 2 years 1.6 3.6 8.0 
more than 2 up to 5 years 2.9 4.9 10.0 
more than 5 up to 10 years 3.8 5.8 15.0 
more than 10 up to 20 years 4.8 6.8 15.0 
Over 20 years 5.8 7.8 15.0 
3. The capital requirement will be : 
the sum of the weighted long positions 
plus the sum of the weighted short positions 
less any hedging allowances, calculated as follows: 
150% of any weighted long (or short) position in 
central government bonds which can be offset in 
part or fully against a weighted short (or long) 
position in central government bonds In the same or 
an adjacent maturity band; Central 
government 
and European 
Commun i ty 
X 
0.3 
0.5 
1.0 
1.6 
2.9 
3.8 
4.8 
5.8 Other 
and publ 
I qua tc sector 
llfylng 
X 
0.5 
1.0 
1.6 
3.6 
4.9 
5.8 
6.8 
7.8 
Durât ion - 34 -
100% of any weighted long (or short) position in 
central government bonds which can be offset in 
part or fully against a weighted short (or long) 
position in central government bonds in the next-
but-one maturity band; 
In the case of hedges between positions in the 
'other public sector and qualifying' bonds (the 
second category in Table 1), the respective 
percentages are 120% and 80%, rather than the 150% 
and 100% used for central government bonds. 
In the case of a hedge between a position in 
central government bonds and a position in 'other 
public sector and qualifying' bonds, the respective 
percentages are also 120% and 80%. 
(Note that the unused portion of partially offset 
weighted positions can be employed in this 
process.) 
4. Competent authorities in a Member State may use a 
system for applying capital requirements to the 
interest rate dependent business of investment firms, 
which reflects duration, instead of the rules set out 
in paragraphs 2 to 3 above, so long as the requirements 
emanating from it are broadly equivalent to those 
resulting from the application of the rules in 
paragraphs 2 to 3. 
EquItles 
5. The capital required against a long or a short equity 
position shall be 10% of its value in the case of a 
qualifying equity and 25% for any other equity. 
- 35 -
6. The competent authorities may allow a reduction in the 
requirement for any reduction in risk due to 
diversification, whether through the investment firm 
holding a large number of long, or short, positions in 
equities or equities derivatives, or from Its holding 
long and short positions in different equities and 
equities derivatives. However any such reduction shall 
only be allowed on the basis that the resulting capital 
requirement is sufficient to cover the firm against a 
10% change in the general level of equity prices on its 
ma I n markets. 
Underwriting of debt and equity Instruments 
7. In the case of underwriting of issues of debt and 
equity instruments, the competent authorities may allow 
the weights referred to in paragraphs 2 and 5 above to 
be reduced by 60% during the first week, by 35% during 
the second week, and by 20% during the third week 
following the day on which the underwriting firm 
entered Into an irrevocable commitment to purchase the 
securities, provided that the securities in question 
are to be traded on a regulated market recognised by 
the competent authorities. 
Risk concentration 
8. An Investment firm which has, or is committed to, a 
long or short position in a particular issue of 
securities which exceeds 25% of the total issue, shall 
meet an additional capital requirement equivalent to 
100% of the requirement against the unhedged position 
set out in paragraphs 2 and 5 above. 
- 36 -
An Investment firm's total exposure to an issuer cannot 
exceed 25% of its own funds without the investment firm 
notifying the competent authorities: the firm shall 
meet an additional capital requirement against such 
exposures, calculated by summing the requirements 
against each unhedged position In the overall exposure. 
- 37 -
ANNEX 3 
Counterparty/settlement risk 
In the case of transactions In which bonds and equities 
(excluding repurchase and reverse repurchase 
agreements) are unsettled after their due delivery 
dates, a firm must calculate the price difference to 
which It is exposed. This is the difference between the 
agreed settlement price for the bond or equity In 
question, and its current market value, where the 
difference could involve a loss for the firm. It must 
multiply this difference by the appropriate factor in 
Column A of Table 1 in order to calculate Its capital 
requIrement. 
Notwithstanding paragraph 1, a firm can, at the 
discretion of its competent authorities, calculate its 
capital requirements by multiplying the agreed 
settlement price of every transaction which is 
unsettled between 5 and 45 days after its due date, by 
the approprI ate factor in Column B of Table 1. From 45 
or more 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. 
Table 1 
Number of days after 
due settlement date Column A Column B 
5-15 
16-30 
31-45 
46 +more 8% 0.25% 
50% 0.5% 
75% 2.0% 
100% see para. 2 
- 38 -
Repurchase and reverse repurchase agreements 
3. In the case of repurchase agreements the firm shall put 
up the difference between the market value of the 
securities, and the amount borrowed by the firm (which 
is their original sale value) where this difference Is 
positive. In the case of reverse repurchase agreements 
the firm shall put up the difference between the amount 
It has lent plus accrued interest, and the market value 
of the securities it has received (which Is their 
original sale value plus accrued interest) where this 
difference is positive. In the case of both repurchase 
agreements and reverse repurchase agreements the 
competent authorities may reduce the requirement to the 
extent that the borrower provides the lender with the 
margin that is normally required in the market in 
quest Ion. 
OTC derivative Instruments 
4. The requirement shall be calculated as follows: first 
the firm will sum (I) the total replacement cost 
(obtained by marking to market) of ail Its contracts, 
Including bought equity option contracts, with 
positive values and (ii), in the case of interest rate 
and exchange rate contracts, an amount for potential 
future credit exposure, calculated by multiplying the 
total notional principal amount of its contracts by the 
following weights, as appropriate: 
Res IduaI matur I ty Interest rate 
contracts Exchange rate 
cont racts 
less than one year 
one year and over 0.5% 1 .0% 
5.0% 
- 39 -
The capital requirement will be 4% of the sum of (I) and 
(II) where the counterparty Is in the non-bank private 
sector, 2% of the sum where it is in the banking sector 
and/or In the regional government or local authority sector, 
and zero if it Is the central government. 
- 40 -
ANNEX 4 
Foreign exchange risk 
1. The overall net foreign exchange position, calculated 
In accordance with the procedures set out below, shall 
be assigned an 8% capital requirement. 
2. A two-stage calculation shall be used. 
3. First, the firm's net open currency position in each 
currency (Including the reporting currency) shall be 
calculated. This position shall consist of the addition 
of the following elements (positive or negative): 
the net spot position (I.e. all asset items less ail 
liability items, including accrued interest, in the 
currency in question); 
the net forward position (i.e. all amounts to be 
received less all amounts to be paid under forward 
exchange transactions, Including currency futures and 
the principal on currency swaps not Included in the 
spot pos11 ion) ; 
guarantees (and similar instruments) that are certain 
to be caI led ; 
net future Income/expenses (at the discretion of the 
reporting institution; when this discretion has been 
used, It may not be changed without the prior approval 
of the competent authorities); 
the net delta (or delta-based) equivalent of the total 
book of foreign currency options. 
- 41 -
Second, net short and long positions in each currency 
other than the reporting currency, shall be converted 
at spot rates Into the reporting currency. They shall 
then be summed separately to form respectively the 
total of the net short positions and the total of the 
net long positions. The higher of these two totals will 
be the firm's overall net foreign exchange position. 
Net positions In composite currencies may be decomposed 
into the component currencies according to the quotas 
In force. 
- 42 -
ANNEX S 
Other risks 
Investment firms, excluding credit institutions, shall 
be required to hold own funds equivalent to one quarter 
of their previous year's fixed overheads. The competent 
authorities may adjust this requirement in the event of 
a material change to a firm's business since the 
previous year. When the firm has not completed a 
year's business, Including on the day it starts up, the 
requirement will be a quarter of the fixed overheads 
figure projected in its business plan, unless an 
adjustment to this plan Is required by the authorities. 
For firms that are starting up, own funds shall be 
greater than or equal to this amount, and initial 
capital at least equal to the requirements laid down in 
Art icle 3. 
- 43 -
ANNEX 6 
Own funds 
1. The own funds of credit Institutions shall be defined 
In accordance with Council Directive 89/299/EEC. 
2. Notwithstanding paragraph 1, the competent authorities 
may permit those credit institutions which are obliged 
to meet the capital requirements on their trading book 
that are laid down in Annexes 2 and 3, to use an 
alternative definition of own funds when meeting these 
requirements. This alternative definition shall 
include share capital and reserves as defined in Points 
(1) and (2) Article 2(1) of Council Directive 89/299/EEC, 
and subordinated loan capital subject to the following 
conditions. First, this subordinated loan capital 
shall not exceed 250% of the share capital and reserves 
Included in this definition. Second, the use of this 
alternative definition shall not result in adding more 
than 25% to the total amount of own funds which would 
result from applying Council Directive 89/299/EEC to 
the credit Institution as a whole. Third, the 
conditions laid down in 5(2) below must apply to this 
subordinated loan capital. 
3. The own funds of investment firms which are not credit 
Institutions shall be defined in accordance with 
Council Directive 89/299/EEC. 
4(1) Notwithstanding the requirements of paragraph 3, the 
competent authorities may permit investment firms which 
are not credit institutions an alternative definition 
of own funds. This shall include: 
(2) share capital and reserves as defined in 1(1) and 1(2) 
of Article 2 of Council Directive 89/299/EEC-, 
44 -
(3) minus intangible assets within the meaning of Article 
4(9) ('assets') of Council Directive 86/635/EEC; 
(4) plus net profits (or minus net losses) after allowance 
for all anticipated tax liabilities; 
(5) plus subordinated loan capital subject to the 
conditions set out In paragraph 5(2); 
(6) minus illiquid assets. 
5(1) Firms shall be required to satisfy their auditors and 
competent authorities that they have adequate systems 
to calculate with reasonable accuracy at any time the 
financial position of the firm. 
(2) The subordinated loan capital referred to in 4(5) 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 
circumstances, other than the winding-up of the 
investment firm, the debt will become repayable before 
the agreed repayment date, unless the supervisory 
authorities agree to it having been given two days' 
notice. Subordinated debt may not be repaid if such 
repayment would mean that the own funds of the firm in 
question would then stand at below 120% of the firm's 
overall requirement. 
(3) The subordinated loan capital referred to in 4(5) may 
not exceed a maximum of 250% of the sum total of items 
4(2) plus 4(4) less 4(3) and should only approach this 
maximum in particular circumstances acceptable to the 
relevant competent authorities. 
- 45 -
(4) illiquid assets include: 
fixed assets (except to the extent that land and 
buildings are allowed to count against secured 
loans); 
Investment in connected companies if these 
companies are subsidiaries or if the shares are not 
readily realisable investments; 
deposits made, other than those which are with a 
credit institution, local authority or regional 
government and available for repayment within 
ninety days, and also excluding margin payments in 
connection with futures or written options 
contracts -, 
guarantees given; 
deficiencies In subsidiaries; 
all other assets (including physical stocks) unless 
they are subject to the capital requirements set 
out in this Directive, or pursuant to Article 4(5). 
- 46 -
COMPETITIVENESS AND EMPLOYMENT IMPACT STATEMENT 
PROPOSAL FOR A COUNCIL DIRECTIVE ON CAPITAL ADEQUACY 
OF INVESTMENT FIRMS AND CREDIT INSTITUTIONS 
I. What Is the main reason for introducing the measure? 
The main reason for Introducing the measure is to ensure that 
consumers of financial services are adequately protected by imposing 
minimum capital requirements on investment firms. 
I I. Features of the businesses In question 
The scope of the proposal covers credit Institutions and non-
bank investment firms which are dealers or brokers in securities, as 
well as portfolio managers and investment advisers. 
a) There are many SMEs, mainly in the United Kingdom. 
b) There is no particular regional concentration. 
- 47 -
III. What direct OPl IgatlQns does this measure impose on 
businesses? 
Businesses are required to comply with requirements relating 
to minimum start-up capital which varies with the type of risk 
resulting from the activities the firm is carrying out. 
For low-risk activities, such as investment advice only or 
"locals", there Is no initial or on-going capital requirement. 
(Locals are members of financial futures or options exchanges whose 
transactions are guaranteed by other member firms of the exchange.) 
The general start-up capital Is set at ECU 500 000. Member States 
may reduce this requirement to ECU 50 000 for firms which do not hold 
customers' money or securities, or to ECU 100 000 for brokerage firms 
which hold customers' money or securities but who do not take trading 
positions for their own account. Firms already In existence before 
implementation of the directive may be granted an exemption 
(grandfathering clause) from these initial capital requirements. 
Firms will also have to meet on-going capital requirements 
based on an expenditure measure and on their position risk, 
counterparty risk and foreign exchange risk. These risks are 
strictly proportional to the size of each business and to the size of 
the risk taken. 
IV. What indirect obligations are local authorities 
likely to impose on businesses? 
None 
- 48 -
V. Are there anv special measures In respect of SMEs? 
Implicitly SMEs will be the main bénéficiaires of the 
"grandfathering clause" concerning Initial capital, as well as of the 
exception for "locals" and pure Investment advisers. 
VI. What Is the ilkeiv effect on: 
a) the competitiveness of businesses? 
Investment firms' own funds should reflect the risks taken 
and the size of their transactions. This should improve their 
performance and reduce their failure rate. 
b) employment? 
Because of the "grandfathering clause" there should be no 
reduction In the number of already existing firms. There Is likely 
to be some reduction In the number of new entrants as not all 
candidates would be able to meet the initial capital requirement of 
ECU 50 000 or ECU 100 000. This effect might, however, well be 
compensated for by the fact that all authorised firms could engage In 
securities business throughout the Community on the basis of home 
country authorisation and supervision. In addition, consumers of 
financial services should have more confidence in small and medium-
sized Investment firms, knowing that they are likely to be 
sufficiently capitalized in relation to the size of their business. 
The survival rate of new entrants should increase because of a larger 
capacity to absorb losses. 
49 -
VII. Have both sides of Industry been consulted? 
There have been no consultations with representatives of 
employees. 
As far as the business sector is concerned, there have been 
requests made to the Commission by representatives of the financial 
futures and options exchanges in France, the Netherlands and the 
United Kingdom in favour of "locals". These demands have been met by 
the exclusion of "locals" from initial and on-going capital 
requirements. 
In addition, there have been requests made by FIMBRA 
concerning the level of the Initial start-up requirements. These 
demands have been met, as far as compatible with consumer protection, 
by excluding pure investment advisers from any capital requiremnets, 
by providing an Intermediate level of start-up capital of ECU 100 000 
for brokers who do not take positions, and by the "grandfathering 
clause" for existing firms. 
ISSN 0254-1475 
COM (90) 141 final 
DOCUMENTS 
EN is 
Catalogue number : CB-CO-90-249-EN-C 
ISBN 92-77-60799-8 
PRICE 1 - 30 pages: 3-50 ECU per additional 10 pages: 1.25 ECU 
Office for Official Publications of the European Communities 
L-2985 Luxembourg