Opinion of the Economic and Social Committee 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'
Date: 1997-10-29
Institutions: European Economic and Social Committee
Subjects: credit guarantee, credit institution, financial solvency, management audit, share capital

21. 1. 98

EN

Official Journal of the European Communities

C 19/9

Opinion of the Economic and Social Committee 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’ (1)

(98/C 19/04)

On 25 June 1997 the European Council decided to consult the Economic and Social Committee,
under Articles 57(2) and 198 of the Treaty establishing the European Community, on the
above-mentioned proposal.

The Section for Industry, Commerce, Crafts and Services, which was responsible for preparing
the Committee’s work on the subject, adopted its opinion on 8 October 1997. The rapporteur
was Mr Levitt.

At its 349th plenary session (meeting of 29 October 1997) the Economic and Social Committee
adopted the following opinion by 106 votes in favour, two against and one abstention.

1.

Introduction

1.1. Purpose of the Capital Adequacy Directive and its

amendment

1.1.1.
Council Directive 93/6/EEC on the capital
adequacy of investment firms and credit institutions
(CAD) harmonizes capital requirements for credit insti-
tutions and investment firms in respect of positions on
their trading books which are subject to market risk.
Market risk is the risk of losses arising from movements
in market prices. The CAD sets out the method to be
applied in calculating capital requirements to cover
interest rates, equities,
positions in debt securities,
foreign exchange and financial products which are
derived from them. It also defines the nature of the Own
Funds which must be held to cover these requirements.

1.1.2. With Council Directive 93/22/EEC in invest-
ment services in the securities field, it forms the basis of
the coordination of prudential rules for investment
business which permits the mutual recognition of author-
ization by national authorities. These two directives,
together with directives relating specifically to credit
institutions and insurance companies, form the basis of
the single market in financial services.

1.1.3.
The CAD was agreed at a time when nego-
tiations aimed at harmonizing capital requirements for
market risk were proceeding in wider international fora.
It was foreseen at that time that the CAD might need to

(1) OJ C 240, 6. 8. 1997, p. 24.

be amended in consequence (Article 14). In January
1996, the Basle Committee on Banking Supervision
published an amendment to the 1988 Capital Accord to
incorporate market risks.

1.1.4.
The CAD also contained (Article 13) an invi-
tation to the Commission to propose capital require-
ments for trading positions in commodities and com-
modities derivatives. The 1996 amendment to the Capital
Accord also covers capital requirements in respect of
such positions.

The proposal to amend 93/6/EEC is designed
1.1.5.
to bring the EU capital adequacy regime into line with
what has now been agreed by G10 banking supervisors
and, subject to the comments in section 3 below, the
Commission’s proposal follows Basle in its essential
respects.

1.1.6.
The ESC in its favourable opinion on the
Commission’s original 1990 proposal for the CAD
retained three guiding principles for judging the pro-
posal:

— it should create a broadly level playing field between
banking and non-banking firms trading in securities
market;

— it should enhance — or at least not impair — the

attraction of the EU as a financial centre;

— it should not restrict access to the financial markets,
stifle competition, innovation and consumer choice.

1.1.7.
In addition, the ESC noted — in relation to the
own funds requirements which resulted from the CAD
— that these ‘should be as consistent as possible, from
the technical point of view, with the risk monitoring
instruments which already exist in the institutions’.

C 19/10

EN

Official Journal of the European Communities

21. 1. 98

1.1.8.
the current proposal.

These guiding criteria remain valid in analysing

1.2.

Institutions covered

The proposed directive will apply to investment firms
and credit institutions.

1.3. Summary of amendment

1.3.1.

The proposal has three elements:

— amendments to allow firms, subject to rigorous
safeguards, to use internal statistical models to
calculate their capital requirements for market risk
rather than the standardized method outlined in
Annexes I, II , III and VII. In particular a new
Annex VIII is proposed;

— amendments to incorporate commodities risk into
the CAD, in particular a new Annex VII. Gold
will, however, be treated as foreign exchange and
amendments in particular to Annex III of CAD are
proposed to allow this;

— an amendment to correct an unintended anomaly in
the CAD whereby the issuance of subordinated debt
automatically excludes that issuer’s equity from
being included in a portfolio qualifying for a con-
cessionary 2 % specific risk weighting even if they
are highly rated.

1.3.2.
The first two of these are the most significant
and take up Basle’s proposals on market risk. They are
analysed in detail below. In keeping with the rationale
of the 1993 directive, this proposal allows the market
risks as measured by the new Annexes VII and VIII to
be covered by the expanded definition of Own Funds
created by the 1993 proposal.

models for the purposes of calculating regulatory capital
requirements would encourage firms to refine their
understanding of and control over the risks they face to
the benefit of all. This is important, and to the benefit
of the supervisory authorities, savers and shareholders,
because there have been a number of financial scandals
in recent times which have revealed inadequate top
management understanding and control of market risks.

2.1.2.
There is also a competitive aspect to the
matter. The Amendment to the Basle Capital Accord
will take full effect from the end of 1997. From that
point, banks from non-EU jurisdictions will be able to
use internal models to calculate market risk capital
requirements. While the 1993 CAD does not prevent
firms from using these models for the purposes of
calculating regulatory capital requirements,
this is
subject to the condition that the result is a capital
charge which may be no lower than the charge under
the standardized method created by the CAD. Whether
or not an institution using internal models will have
a lower capital charge than under the 1993 CAD will
depend upon the nature of its positions, but it is
anticipated that capital requirements be lower in some
cases. This reduction is not a lowering of standards,
but reflects the recognition by supervisors that properly
constructed models (and national authorities will be
required to apply strict criteria before approving their
use) allow banks and investment firms to be better
able to capture, control and reduce the economic and
financial risks that they run. This will involve very
significant investment by institutions in developing
and implementing models and the management
information and procedures they necessitate. But the
potential benefits — improved understanding and
control of
for a capital
requirement which is more precisely tailored to the
real risks being run — are also significant. However,
since Member States must apply at least the minimum
requirements stipulated by EU directives, many EU
firms will not have an incentive to use internal models
to calculate capital requirements until such time as the
CAD is modified to permit this.

risk and the potential

2. General remarks

2.1. Why CAD needs to be amended:

2.1.3.
significant for the EU and its firms:

This has two consequences, both of which are

2.1.1.
Some banks and investment firms already use
internal models to achieve a better understanding of the
risks to which they are exposed, and to achieve a better
basis for the control of risk and the management of the
economic capital of the business. Allowing the use of

— some EU firms may be subject to competitive
disadvantage vis-à-vis third country firms by virtue
of having to meet higher capital charges where the
use of models would imply lower requirements.
These represent enforced economic inefficiency;

21. 1. 98

EN

Official Journal of the European Communities

C 19/11

— EU firms — and EU supervisors — are not able to
align internal and regulatory measures of risk. Such
an alignment provides incentives for firms to strive
constantly to improve their risk measurement and
risk management systems, as the ESC recognized in
its opinion on the Commission’s 1990 proposal. It is
important, and in the interests of the soundness of
the financial system and of customers, that EU firms
remain in the front rank of such developments.

of the charge determined by the standardized method.
The Commission proposal contains this provision
(Annex VIII point 5), which may have to be dropped or
amended in the foreseeable future. The Basle Committee
of Banking Supervisors also envisages the possibility of
amending its Capital Accord in the light of the experience
acquired through back testing e.g. in relation to the
multiplication factor.

This underlines the need for urgent progress on the
proposal.

2.1.4.
It is also necessary to amend the CAD to allow
positions in commodities and in commodities derivatives
to be held in the trading book.

2.1.5.
The Commission has limited its proposals to
the minimum needed to allow the prompt implemen-
tation of internationally agreed standards in the EU so
as to ensure as rapid progress through the legislative
procedure as possible. This is in the interests both of the
competitiveness of the EU and of enhancing control of
risks in EU financial institutions and is to be welcomed.

2.2.3. Means therefore need to be found of ensuring
that EU legislation keeps pace, from a technical perspec-
tive, with developments both in the markets and in other
regulatory fora. Arguably, full directives such as those
currently proposed do not readily permit this given the
length of the legislative procedure. Nor is the full
co-decision procedure required for legislative proposals
really necessary for amendments on such technical
points of detail. This points to the need for comitological
provisions.

2.2.4.
The Committee therefore recommends that
proposals be devised to make this sort of highly technical
regulation subject to comitology as soon as possible. If
the Commission does not believe that it is likely to be
able to achieve this in the foreseeable future, an
alternative approach would be to adopt less prescriptive
wording which permitted supervisors greater flexibility
in applying agreed international standards, allowing
them to incorporate technical changes into national
regulations without delay.

2.2. Future Technical Amendments to the Regulation
of Financial Services in the EU — Keeping EU
regulation at the forefront of developments

3. Specific remarks

2.2.1.
The Commission’s proposal is highly technical
and a response to progress in international regulatory
fora. It should be noted that discussions on other
technical issues related to this proposal continue, both
among banking supervisors at the BIS, among securities
supervisors in IOSCO and between the two bodies.

2.2.2.
In particular, discussions continue among
banking supervisors on modelling specific risk (1) and
the minimum specific risk charge which is set at 50 %

(1) Market risk is composed of two elements: general and
specific. General market risk captures the exposure to
movement in the market as a whole. Specific risk is the
risk that an individual instrument moves by more or less
than the general market in day-to-day trading and includes
event risk — the risk that an individual instrument moves
precipitously relative to the general market.

3.1.
Article 1 points 1-8 and Annex I contain for the
most part amendments which are consequential on
the decision to bring positions in commodities and
commodities derivatives within the scope of the CAD
and on the decision to allow firms to use internal models
to calculate capital requirements. Annex I also contains
mostly consequential amendments. A more detailed
guide to the Commission’s proposal is included as an
Annex to this opinion.

3.1.1.
The principal amendments are contained in
Article 1 point 6 and in Annex II. Annex II contains the
two new Annexes to be added to the CAD, a new
Annex VII on commodities risk and a new Annex VIII
on internal models. Article 1 point 6 proposes a
transitional regime which competent authorities may
apply to investment firms which are not yet able to
model commodities risk according to the method in
Annex VIII, but for whom the standardized method set
out in Annex VII is not deemed appropriate.

C 19/12

EN

Official Journal of the European Communities

21. 1. 98

For ease of understanding, this analysis groups the
Commission’s proposal under the two principal elements
identified above, internal models and commodities.

3.2.

Internal models

3.2.1.
Firms will be allowed to use models to calculate
capital requirements for interest rate risk, equity risk,
foreign exchange risk and commodities risk. The use of
such models is subject to prior approval by the competent
authorities and the satisfaction of a number of
demanding qualitative and quantitative criteria. These
qualitative and quantitative criteria follow what has
been determined internationally in Basle.

3.2.2.
The purpose of the qualitative criteria is to
ensure that firms using models have market risk manage-
standards that are conceptually sound and
ment
implemented with integrity. These are set out
in
points 2-4 of Annex VIII. They are tough so as to ensure
that the use of internal models leads to no dilution of
regulatory standards, but are of necessity expressed in
language which leaves a large measure of discretion to
the competent authorities. They will need this discretion
in order to take into account the nature of individual
firms. Particular stress is laid upon the responsibilities
of management and directors in ensuring high standards
and effective controls. While high standards of controls
may be expected of all institutions, the precise nature of
the controls will need to vary according to the nature of
an institution’s business and its geographical spread.

3.2.3.
The quantitative criteria set out the minimum
statistical parameters for measuring risk. These are set
out in points 9-11 of Annex VIII and they follow the
requirements of Basle. The 99th percentile one-tailed
confidence interval means that the model should calcu-
late a value-at-risk (VAR) value which matches or
exceeds the trading outcome 99 times out of 100, that is
to say that an institution which uses this technique
should not suffer a loss which exceeds the VAR value it
has calculated 99 times out of 100.

3.2.4.
The capital requirement of a firm which uses
internal models will be the greater of the previous day’s
VAR or the average daily VAR of the previous 60 business
days multiplied by the multiplication factor of three. If
the back testing programme reveals weaknesses with
the model or with the institution’s internal controls the
multiplication factor may be increased to four by the
addition of a plus factor. The multiplication factor of
three, together with the possibility of adding a plus

factor, means that the approach is very conservative,
and that a large reserve of capital will be held against
market risks. Financial firms have argued that the
approach is much too conservative and that a multipli-
cation factor of three is excessive and will result in
excessive capital allocation against market risks. In
particular, it has been suggested that the multiplication
factor means that greater sophistication is not adequately
rewarded: no matter how good a bank’s model may be,
it is still subject to a minimum factor of three. This is
an issue to which Basle has promised to return at a
future date, and future changes cannot be ruled out.

3.2.5.
It should be noted that volatilities are to be
derived over an effective period of at least a year.
However, historical volatility may be of limited useful-
ness in certain circumstances e.g. illiquid, deregulating
or emerging markets, or with complex new financial
products. In these circumstances it is important that
banks use data which adequately reflect the real risks
being run and have other controls in place to control
exposures to these risk factors. The text might be
clarified on this point.

3.2.6.
Firms will also be required to provide evidence
of the accuracy of their models by conducting regular
back testing i.e. comparing the trading outcomes of the
businesses covered by the model with the predictions of
the model. There are a number of problems with the
Commission’s proposals on back testing (point 7 of
Annex VIII) which could place EU institutions at a
disadvantage with their competitors without offering
significant compensating benefits in terms of protecting
investors or strengthening the financial system.

3.2.7. T h e

s p e c i f i c a t i o n

o f

t h e

d a i l y

b a c k t e s t

This is a key issue. Institutions will be required to back
test daily, comparing the value at risk against both
actual and hypothetical (1) trading outcomes. This is

(1) ‘Hypothetical outcome’ in this context means the hypo-
thetical change in the value of a firm’s portfolio between
close of business on successive days assuming no change
in the portfolio. (Whatever the outcome on the substance
of the argument developed here, the drafting of the second
sub-paragraph of paragraph 7 of Annex VIII needs to be
made substantially clearer on this point.).

21. 1. 98

EN

Official Journal of the European Communities

C 19/13

costly and burdensome and is stricter than Basle requires.
Basle urges banks to develop a capacity to perform back
tests using both, but envisages that supervisors will
differ in the emphasis that they wish to place on either
test.

3.2.8.
The Committee believes that the focus of the
Commission’s attention should be on testing against
actual trading outcomes, leaving it to national super-
visors how much attention need be paid to testing
against hypothetical outcomes.

3.2.9.
Back testing against hypothetical outcomes
provides a purely statistical test of the integrity of the
model. Testing against actual outcomes sheds light on
the extent to which the model captures all trading risk
to which a bank is exposed. It is a test of how a model
performs in live situations.

3.2.10.
There is also an issue of practicality. It is not
a trivial matter to perform two sets of daily back tests.
It should also be noted that the controls ensuring the
accuracy of data on actual outcomes have to be much
more rigorous as they will be used for management and
statutory profit and loss reporting as well as for tax
purposes, and that it is very expensive (especially in
computing terms) to derive hypothetical outcomes for
every aspect of a bank’s trading operations on a daily
basis. Ultimately, of course, it is actual trading outcomes
which matter and which determine the solvency of
financial institutions, and for this reason too, testing
against actual outcomes should be the principal focus
of both the firm’s and the supervisor’s attention.

3.2.11.
It should be noted that the United States in
implementing the same Basle provisions has chosen to
focus solely on actual trading outcomes.

3.2.12.
The Commission’s proposal requires further
clarification. The point is technical, but important in
ensuring the coherence of back testing as a regulatory
tool. Annex VIII paragraph 7 suggests that the value-at-
risk number calculated by means of the model — which
uses a 10 day holding period — should be compared
with the change in the value of the portfolio. If this is
left unchanged this would require firms to compare the
capital requirement generated by their model to cater
for a ten-day price move with a one-day profit or loss
figure. This would produce misleading results and not
be an adequate test of the models being used.

3.2.13.
Basle’s paper ‘The Supervisory Framework
for the use of “Back testing” in conjunction with the
internal models approach to Market Risk Capital
Requirements’ makes it clear (p. 3) that because daily
trading outcomes are being used ‘the back testing
framework described here involves the use of risk
measures calibrated to a one-day holding period’. For
the avoidance of any doubt, and to ensure the coherence
of back testing programmes, the Commission should
follow Basle in making it clear that for the purposes of
back testing a one day holding period should be used.

3.2.14. U n c l a r i t y a b o u t

t h e p l u s f a c t o r

Where back testing reveals shortcomings in a firm’s
internal model which are not so serious as to call into
question the basic integrity of the model but which are
nevertheless material, the competent authorities may
impose a ‘plus factor’. The plus factor is a number
between 0 and 1 which is added to the multiplication
factor so that the multiplication factor is, in effect,
raised from three to four.

3.2.15.
It is not clear from the Commission’s text
which ‘overshootings’ or exceptions to use the language
of Basle ‘count’ for purposes of setting the plus factor.
Consistent with the arguments deployed above, the
Committee believes that only exceptions which arise
from back testing against actual outcomes should count
as overshootings for the purposes of Table 5.

The Commission admits that in an exceptional
3.2.16.
situation the authorities may waive the requirement to
add a plus factor. But ‘exceptional situation’ is too high
— and too unclear — a test. Basle is significantly less
rigid and, particularly where a bank has between five
and nine exceptions within the 250 working day period,
calls upon supervisors to exercise judgement in inter-
preting back testing results. The Basle Committee notes
that there are a number of reasons why even high quality
models may produce results with between five and nine
exceptions over such a period and notes that ‘increases
in the plus factor are not meant to be purely automatic’.
The Commission’s proposal reflects the intentions of
Basle in respect of models which generate 10 or more
exceptions over the 250 observations.

In the interests of ensuring that European
3.2.17.
banks operate on the same basis as institutions outside

C 19/14

EN

Official Journal of the European Communities

21. 1. 98

the EU, the proposal should be amended to better reflect
Basle which states that back testing results which show
between 5 and 9 overshootings ‘should generally be
presumed to imply an increase in the multiplication
factor unless the bank can demonstrate that such an
increase is not warranted’.

The requirement

3.2.18.
to report overshootings
‘immediately’ with reasons is not reasonable. It is
reasonable — under normal circumstances — to expect
institutions to report to the competent authorities the
following business day that there may be the possibility
of an overshooting. But an institution will need time to
discover where the problem lies and whether the
overshooting is a genuine one or whether it arises
because, for example, the trading outcome was subject
to error and has had to be restated. It would be
reasonable to expect an institution to produce a detailed
report for the supervisor within a week.

3.2.19. M o d e l l i n g s p e c i f i c r i s k

Point 5 of Annex VIII provides that where an institution
does not model specific risk, it is subject to the specific
risk charges specified according to the standardized
method of the CAD. However, where an institution
does model specific risk accurately, it is nevertheless
subject to a minimum specific risk charge of 50 % of the
standard charge.

3.2.20.
This is pointlessly burdensome and creates
the wrong incentives for institutions. The standardized
specific risk charge makes no allowance for diversifi-
cation, which is a well-accepted method of reducing risk
and, in particular, of reducing specific risk. It is expensive
in terms both of the capital requirements generated and
the computer systems required to calculate capital
requirements under two unrelated methods. It also fails
to give institutions adequate benefit of improvements to
their model, and thus diminishes the incentives to
improve specific risk modelling. To that extent it also
weakens the incentives to improve risk control
in
financial institutions.

3.2.21.
Although it is also a feature of Basle, it is
under review and may well be changed in the near
future. National supervisors should therefore have the
discretion to give full recognition of specific risk models
where they are satisfied of the accuracy of those models.

3.3. Commodities and commodities derivatives

The Commission’s proposal expands the definition of
the trading book contained in the CAD to embrace
positions in commodities and commodities derivatives.
This is essential if their treatment is to fall under the
terms of this directive.

The proposal follows the Amendment to the
3.3.1.
Basle Capital Accord in allowing firms to opt between
three possible approaches depending on the degree
of sophistication of the firm and the extent of its
involvement in commodities trading. Firms may either
use internal models (see below), the maturity ladder
approach (Annex VII points 13-16) or a highly penal
simplified approach which is only appropriate for those
doing de minimis levels of business (Annex VII point 17).

3.3.2.
The maturity ladder approach follows Basle in
making no distinction between categories of commodi-
ties. Gold is treated differently, being regarded as foreign
exchange. This is because the volatility of gold is more
in line with foreign currencies and banks manage
positions in gold in a similar manner to foreign currency
positions. Points 3(a)-3(c) of Annex I are consequential
to this.

3.3.3.
Differences between the volatility character-
istics of other commodities (e.g. between precious and
base metals) are not taken into account. The Basle
Committee notes (p. 29) that it has adopted this approach
for simplicity, despite the differences in volatility
between different commodities given the fact that
banks normally run rather small open positions in
commodities. It also states (p. 28) that both the simplified
approach and the maturity ladder approach ‘are appro-
priate only for banks which, in relative terms, conduct
only a limited amount of commodities business. Major
traders would be expected over time to adopt a models
approach ...’.

The CAD, however, has a broader scope than
3.3.4.
Basle since it also applies to investment firms. Some
investment firms conduct a significant amount of com-
modities business relative to their size. The Basle
approach therefore requires some modification.

3.3.5.
The Commission has determined that these
investment firms may experience difficulty in applying
models immediately upon entry into force of the direc-
tive, and that they will need time to develop such models
and the appropriate risk management systems that go
with them. It is therefore proposed (Article 1 point 6)
that Member States should, until end-December 1999
be empowered to use the maturity ladder approach

21. 1. 98

EN

Official Journal of the European Communities

C 19/15

described in Annex VII but to set spread, carry and
outright rates to be applied to positions in commodities
which are different from those set out in points 13 and
16(ii) and (iii).

3.3.6. Member States’ discretion is considerably lim-
ited by the provisions of Article 1 point 6 which, inter
alia, require the competent authorities which take
advantage of these provisions to provide empirical
justification of their actions.

3.3.7. Overall, with the caveat outlined below, the
Commission’s approach to this issue seems well-
balanced. It is desirable that firms should have the
incentive to develop appropriate risk management and
modelling, but also that legitimate business needs be
taken into account. It is also right that any differential
treatment as between banks and investment firms be
removed after the transitional period.

3.3.8. Nevertheless, there are very real difficulties in
modelling commodity risk on account of the varying
liquidity of the market and the fact that commodity
prices may move in sudden ‘jumps’ rather than gradually.
The time that will be needed to devise the appropriate
models and satisfy the supervisors of their validity
should not be underestimated. This means that a two
year transitional period is barely generous. Given the
limited competitive distortions between banks and
investment firms that would be caused — banks which
used models would still have lower capital charges than
investment firms using some intermediate regime — it
would be possible safely to envisage a lengthier transition
or at least a further review at the end of the two year
period.

4. Conclusions

4.1.
The ESC welcomes and approves the Com-
mission’s proposal and urges the Council and the
Parliament to consider it with all speed. This is necessary
in the interests of protecting the competitive position
of EU firms operating in international and highly

Brussels, 29 October 1997.

competitive markets; it will also enhance the prudential
control of banks and investment firms which is self-
evidently desirable from a public policy perspective and
is in the interests of the financial stability of the EU
financial system and of the customers of financial
institutions.

There are a number of points on which further

4.2.
attention and some amendments may be required.

4.2.1.
Consideration needs to be given as to how
highly technical amendments to financial services legis-
lation is effected so as to ensure that EU legislation
remains current in a fast-moving international environ-
ment. The ESC recommends that greater use be made
of comitology in this area.

The Commission’s proposals on the back
4.2.2.
testing of internal models require some amendment to
bring them closer to the intentions of international
regulators and to avoid putting EU institutions at a
competitive disadvantage through excessive, prescriptive
requirements. In particular, financial institutions should
not have to backrest daily on two different bases, and it
should be clear which basis forms the basis on which
regulators will apply increased capital charges. In line
with Basle, national regulators should also have greater
flexibility than the Commission proposes in applying
increased capital charges via the plus factor to banks
which have had between 5 and 9 overshootings within
a 250 working day period.

The ESC recommends that the principal focus
4.2.3.
of back testing should be against actual outcomes in
order to capture how models perform in live situations.

4.2.4. National supervisors should have the discretion
to give full recognition to specific risk models where
they are satisfied as to the accuracy of those models.

The

4.2.5.
transitional
approach of providing
arrangements for investment firms which have a substan-
tial involvement in commodities, but which are not yet
able to model this risk is the correct one. The ESC
considers, however, that a two year transitional period
may not be sufficient and may need to be reviewed.

The President

of the Economic and Social Committee

Tom JENKINS

C 19/16

EN

Official Journal of the European Communities

21. 1. 98

APPENDIX

to the opinion of the Economic and Social Committee

This appendix sets out how the Commission’s proposal amends the 1993 directive.

1997 proposal

Impact on 1993 CAD

Purpose

Article 1.1(a)

Replaces Art. 2.6(a) & (b)

Article 1.1(b)

Replaces Art. 2.15 and 2.16

Amends the definition of the trading book to allow
positions in commodities and commodities derivatives to
be included

Amends the definition of warrant so that it extends to
commodities. The definition of covered warrant is deleted
as otiose and replaced by a definition of stock financing

Article 1.1(c) & (d)

Replaces Art. 2.17 and 2.18 Amend respectively the definitions of repurchase agree-
ments and securities lending in order to make them
respectively
relevant to commodities

Article 1.2

Article 1.3

Article 1.4

Article 1.5

Article 1.6

Article 1.7 & Annex 1

Article 1.8 & Annex II

Articles 2.3 & 4

Replaces Art 4.1(I) & (ii)

Allows the use of models for calculating capital charges
in the trading book

Replaces Art. 5.2

Ensures that all institutions, including those which use
internal models, are subject to large exposures require-
ments

Replaces Art 7.10 and 11 first
sentence

Extends the ambit of the CAD consolidation provisions
to capital requirements calculated via the internal models
approach and to charges for commodities business.

Replaces Art. 8.5

Inserts new Art. 12a

Change to firms’ reporting obligations consequent upon
the inclusion of commodities within CAD

Allows Member States a two year transitional period
in which they can exempt investment firms from the
application of the new Annex VII on commodities

Amends
annexes

the

existing CAD Article 1.7 states that the existing annexes to CAD are

modified by the provisions contained in Annex 1.

Inserts the new Annexes VII and Article 1.8 provides for the addition of two new annexes
to CAD, the texts of which are contained in Annex 11.
VIII
These new annexes become Annexes VII and VIII.
Annex VII contains the detailed provisions on commodi-
ties, whereas Annex VIII contains the detailed provisions
on internal models.

Annex 1.1(a) & (b)

Amend Annex 1.4 & 5

Annex 1.1(c)

Amends Annex 1.6

Annex I.1(d)

Amends Annex 1.33 (I)

Standard provisions for the adoption and entry into force
of directives. Requires Member States to have taken
action to implement the directive by 31 December 1997.

Amendments consequential
approach.

to the internal models

Consequential to the suppression of the definition of
covered warrant.

Corrects the unintended effect of the current text which
excludes from the concessionary specific risk charge
highly rated issuers which have issued subordinated debt.

Annex 1.2(a), (b) & (c)

Amend Annex II.1, II.3 and II.4.1
respectively

Brings commodities within the settlement and counter-
party risk requirements of the CAD.

21. 1. 98

EN

Official Journal of the European Communities

C 19/17

1997 proposal

Impact on 1993 CAD

Purpose

Annex 1.3(a), (b) & (c)

Amend Annex III.1, III.3, and
III.4 respectively

Annex I.3(d)

Replaces Annex III 7.

Bring gold within the scope of the capital regime for
foreign exchange; point 3(a) also converts the 2 % de
minimis ‘free zone’ into a threshold which should produce
higher capital requirements

Where national authorities establish a model for calculat-
ing capital requirements for foreign exchange it must
now apply the same standards as those being applied to
internal models

Annex I.4 (a), (b) & (c)

Amend Annex V.2, V.4, V.6 & Allows Tier 3 capital to be used to meet the capital
requirements on commodities risk and trading book risks
V.7
calculated by internal models.

Annex 1.5(a) & (b)

Amend Annex VI.2 (I) and VI.8
(2)

Extend the scope of the rules on large exposures to cover
risks covered by internal models.

Annex II

Inserts new annexes VII & VIII

Annex VII apply Basle’s norms on commodities, whereas
Annex VIII acts upon Basle’s norms in the area of internal
models.

Opinion of the Economic and Social Committee on the ‘Proposal for a Council Directive on
registration documents for motor vehicles and their trailers’ (1)

(98/C 19/05)

On 5 August 1997 the Council decided to consult the Economic and Social Committee, under
Article 75 of the Treaty establishing the European Community, on the above-mentioned
proposal.

The Section for Industry, Commerce, Crafts and Services, which was responsible for preparing
the Committee’s work on the subject, adopted its opinion on 8 October 1997. The rapporteur
was Mr Kubenz.

At its 349th plenary session on 29-30 October 1997 (meeting of 29 October 1997), the Economic
and Social Committee adopted the following opinion by 99 votes to one, with three abstentions.

1. Preamble

1.1.
In 1996, a total of 164 553 000 private vehicles
and 22 032 000 commercial vehicles were registered in
the European Community, giving a total of:

— 186 585 000 vehicles (2) and 20 000 000 trailers (3).

1.2.
In Germany some 20 % of all motor vehicles and
trailers on the road are re-registered every year. Tens of
millions of re-registrations are carried out each year in
the European Union.

1.3.
Since 1 January 1993, the European Union has
become an internal market without internal borders in
which there is free movement of goods, people, services
and capital. Since that date, the Member States have
applied Council Directive 70/156/EEC of 6 February
1970 (4) on the approximation of the laws of the Member

(1) OJ C 202, 2. 7. 1997, p. 13.
(2) Official data from DG III of the European Commission,

broken down according to countries.
(3) Economic and Social Committee estimate.

(4) OJ L 42, 23. 2. 1970, p. 1 (Opinion of the Economic and

Social Committee: OJ C 48, 16. 4. 1969, p. 14).