AMENDED PROPOSAL FOR A EUROPEAN PARLIAMENT AND COUNCIL DIRECTIVE AMENDING COUNCIL DIRECTIVE 89/647/EEC AND 93/6/EEC WITH RESPECT TO THE SUPERVISORY RECOGNITION OF CONTRACTS FOR NOVATION AND NETTING AGREEMENTS ("CONTRACTUAL NETTING")
Date: 1995-05-10
Institutions: European Commission
Subjects: clearing agreement, competition, credit institution, exchange rate, financial solvency, interest

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. 

^ O JC  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 
agreements 
("contractual  netting") 

netting 

and 

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' 
their  own 
compulsory  cover 

through 

Recital 4 

funds; 

Recital 4 

for 

credit 

Whereas 
institutions 
incorporated  in  the  Member  States,  only 
an  amendment  of  Directive  89/647/EEC 
can  open  a  similar  possibility  for  the 
supervisory 
of  bilateral 
recognition 
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; 

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 
of  bilateral 
recognition 
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 

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 

Article 1 

Annex  II 
replaced  by the Annex hereto. 

to  Directive  89/647/EEC 

is  Annex  II  to  Directive  89/647/EEC 

is 

replaced by the Annex hereto. 

To Annex  II point  5.  first  subparagraph  of 
Directive 
following 
93/6/EEC^ 
sentence shall be  added: 

the 

"Competent  authorities 

shall  mean 

the 

national  authorities  which  are  empowered 

by 
law  or 
investment firms," 

regulation 

t£t  supervise 

Article  3 

Article  3 

1.  Member  States  shall  bring  into  force 

1.  Member  States  shall  bring  into  force 

the  laws,  regulations  and  administrative 

the  laws,  regulations  and  administrative 

provisions  necessary  to  comply  with  this 

provisions  necessary  to  comply  with  this 

Directive  by  31  December  1994  at  the 

Directive  by  31  December  1995  at  the 

latest.  They  shall  forthwith 

inform  the 

latest.  They  shall  forthwith  inform 

the 

Commission  of  the  fact  of  the  enactment 

Commission  of  the  fact  of  the  enactment 

of these provisions. 

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 
introductory sentence: 

II,  point 

3 

(a)  Annex,  Annex 

II,  point  3 

(a) 

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 
and  netting 
agreements: 

and  netting  contracts 

for  novation 

for  novation 

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 

(b),  Annex,  Annex 

II,  point  3 
(ii), 

introductory  subparagraph 

sentence: 

Annex,  Annex 
subparagraph 
sentence: 

II,  point  3 
(ii), 

(b), 
introductory 

to 

(ii)  the  credit  institution  has  furnished  to  (ii)  the  credit  institution  has  arranged  to 
the 
the  supervisory  authorities  written  and  show  clearly  and  precisely 
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, 
relevant  Courts  and 
the 
the  credit  administrative  authorities  would  find  that 
claims  and  obligations  of 
in the cases described  under (i) the claims 
institution  to be confined  to the net  value 
in  (b)  (i)  above  under:  and obligations  of the credit  institution  to 
as  described 
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: 

competent 

authorities, 

authorities, 

supervisory 

The 
after 
after  The 
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 
the 
the  as 
risk 
counterparties. 

risk 
counterparties. 

for  either  of 

for  either  of 

reducing 

reducing 

^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.  Such 
by their competent authorities. 
action  by  the  competent  authorities  must 
distorting 
not 
competition, 

responsible 

fbr 

be 

^8 

ISSN 0254-1475 

COM(95) 170  final 

DOCUMENTS 

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10 

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ISBN 92-77-88434-7 

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