Proposal for a Council Decision amending Decision 2003/77/EC laying down multiannual financial guidelines for managing the assets of the ECSC in liquidation and, on completion of the liquidation, the Assets of the Research Fund for Coal and Steel
Date: 2007-07-20
Institutions: European Commission
Subjects: ECSC, financial management, fund (EU), research, validation of expenditure

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 20.7.2007 
COM(2007)435 final 

2007/0150(CNS) 

Proposal for a 

COUNCIL DECISION 

amending Decision 2003/77/EC laying down multiannual financial guidelines for 
managing the assets of the ECSC in liquidation and, on completion of the liquidation, 
the Assets of the Research Fund for Coal and Steel 

(presented by the Commission) 

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EXPLANATORY MEMORANDUM 

1)  CONTEXT OF THE PROPOSAL 

110 

•  Grounds for and objectives of the proposal 

Article 2 of Council Decision 2003/77/EC (the "Financial Guidelines") states "that the 
Commission  shall  reassess  the  operation  and  effectiveness  of  the  financial  guidelines 
and shall propose any appropriate amendments" every five years and, for the first time, 
before  31  December  2007.  The  amendments  proposed  are  the  result  of  the  first  such 
review in the light of the experience gained in the first five years of operation and of 
recent market developments. 

The  objective  is  to  further  enhance  the  efficiency  of  the  Financial  Guidelines  by 
adapting them to market developments and by clarifying certain concepts.  

120 

•  General context 

Following the expiry of the ECSC Treaty on 23 July 2002, management of the assets of 
the  ECSC  in  liquidation  ("ECSC  i.L.")  and,  upon  completion  of  the  liquidation,  the 
Assets of the Research Fund for Coal and Steel were entrusted to the Commission.  

From  the  asset  allocation  and  investment  limits  set  by  the  Council  Decision 
2003/77/EC, and in particular to provide "the highest return available, consistent with 
maintaining a high degree of security and stability over the long-term" (point 3 of the 
Financial Guidelines), the Commission derived a target structure for the investments of 
the ECSC i.L. portfolio. This target structure aims to distribute the investments equally 
out to 10 years within certain tolerances. The only exception is the allocation for one 
year or  less,  which  is doubled to provide a  liquidity cushion.  The structure  was fully 
implemented at the end of 2006. 

This  structure  has  permitted  ECSC  i.L.  to  have  sufficient  liquidity  to  meet  all 
budgetary  payment  requests  in  a  timely  manner  without  unwanted  and  comparably 
expensive liquidation of investment positions. 

The  investment  categories  permitted  have  been  clearly  set  out  in  point  4.  Investment 
funds  have  been  considered  in  several  cases,  but  so  far  there  has  been  no  economic 
case for investing in such funds given our conservative risk criteria, maturity restriction 
and the financial efficiency of direct investments in bonds. The Commission requires 
that  all  investment  classes  of  a  fund  need  to  respect  the  investment  criteria  of  the 
Financial Guidelines. 

A  stable  return,  which  compares  favourably  with  a  market  benchmark,  has  been 
achieved with very low risk. 

Quarterly reports have been sent to the Member States and have not elicited comments 
or questions. 

However,  the  experience  gained  in  applying  the  Financial  Guidelines  and  recent 
the  Financial 
market  developments  necessitate  certain  minor  amendments 
Guidelines. These are to a large extent of a technical nature.  

to 

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130 

141 

•  Existing provisions in the area of the proposal 

2003/77/EC 

•  Consistency with the other policies and objectives of the Union 

Not applicable. 

2)  CONSULTATION OF INTERESTED PARTIES AND IMPACT ASSESSMENT 

•  Consultation of interested parties 

219 

Not applicable. 

229 

230 

•  Collection and use of expertise 

There was no need for external expertise. 

•  Impact assessment 

Not applicable. 

The  proposal  concerns  modifications  of  a  technical  nature  to  an  existing  Council 
Decision. 

3)  LEGAL ELEMENTS OF THE PROPOSAL 

305 

•  Summary of the proposed action 

The Financial Guidelines laid down for the management of the assets of the ECSC i.L. 
and, upon completion of the liquidation, the Assets of the Research Fund for Coal and 
Steel  have  been  reviewed  in  accordance  with  Article  2  of  Council  Decision 
2003/77/EC. 

Following  this  review,  a  number  of  minor  changes  to  the  Financial  Guidelines  are 
proposed. The changes reflect the experience gained in the first five years of operation, 
developments  in  the  financial  markets  in  which  ECSC  i.L.  operates  and  finally  the 
change to internationally accepted accounting rules for the Commission as a whole. 

There are clarifications of several definitions, namely the maturity concept of a bond, 
which  is  refined  to  cover  the  definition  used  by  asset-backed  securities  (ABS),  the 
definition of government issued or government guaranteed securities and the definition 
of "debt" issued by banks. The rules for sale and repurchase operations are brought up 
to market standards. In addition, certain rating-related provisions are clarified and the 
maximum  maturity  permitted  is  extended  to  take  account  of  the  changing  issuance 
pattern of the Member States. 

Already  in  the  past,  the  financial  statements  of  the  ECSC  i.L.  were  prepared  on  an 
accrual  basis.  Now,  the  provisions  on  accounting  have  been  updated  to  reflect  the 
change to internationally accepted accounting rules for the whole Commission. 

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310 

•  Legal basis 

Protocol annexed to the Treaty establishing the European Community on the financial 
consequences of the expiry of the ECSC Treaty and on the Research Fund for Coal and 
Steel. 

Council Decision 2003/76/EC. 

329 

•  Subsidiarity principle 

The proposal falls under the exclusive competence of the Community. The subsidiarity 
principle therefore does not apply. 

•  Proportionality principle 

332 

Not applicable. 

341 

342 

409 

570 

•  Choice of instruments 

Proposed instruments: other. 

Other means would not be adequate for the following reason(s). 

A decision is required to modify the original decision. 

4)  BUDGETARY IMPLICATION 

The proposal has no implication for the Community budget. 

5)  ADDITIONAL INFORMATION 

•  Detailed explanation of the proposal 

Point 3 of the Annex to Council Decision 2003/77/EC 

Many  Member  States  auction  what  the  financial  market  considers  as  "ten-year 
benchmark  bonds"  with  a  maturity  up  to  10  years  and  six  months,  allowing  them  to 
increase  the  bond's  size,  and  thus  its  liquidity,  with  additional  issuance  over  the 
following  months.  In  order  to  be  able  to  purchase  such  bonds  at  issue,  when  it  is 
typically  most  advantageous,  it  is  proposed  to  increase  the  maximum  maturity 
permitted in point 3 (a)(iii) from 10 years to 10 1/2 years from the payment date of the 
bond. 

In  addition,  it  proposed  to  clarify  that  asset  backed  securities  ("ABS"),  which  is  an 
increasingly important issue class, can be invested in based on the "expected maturity". 
ABS are securities backed by  assets such as mortgages or other types of receivables. 
They  are  typically  subdivided  into  tranches  with  different  ratings  and  different 
expected maturity dates, whereas the legal maturity date is dictated by the receivables 
underlying the structure and is typically much longer. However, for all but the lowest 

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rated  tranches  the  expected  maturity  date  corresponds  to  the  maturity  date  in  the 
normal sense of the word and is treated as such by market participants. It is therefore 
proposed  to  use  the  expected  maturity  as  the  determinant  for  whether  ABS  with  a 
rating of AAA or its equivalent, considered the only suitable investments for the ECSC 
i.L.,  qualify  for  investment  and  apply  the  same  maturity  restrictions  as  proposed  for 
other bonds, i.e. 10 years and six months. 

In the case of the repurchase and reverse repurchase operations described in point 3(b), 
it is proposed to drop the requirement for no on-selling, as this could be interpreted as 
requiring the return of physically the same bond(s), not appropriate for dematerialised 
securities.  It  is  most  important  to  ensure  that  the  securities  returned  are  legally  and 
economically  equivalent.  Therefore  a  sentence  is  included  stipulating  that  ECSC  i.L. 
should be able to obtain equivalent securities, a market-standard definition of which is 
added. 

Point 4 

It is proposed to clarify which type of issuers may be considered as sovereign risk due 
to  a  high  degree  of  government  ownership,  government  guarantee  or  government 
control despite not being issued by the central administration itself. The interpretation 
follows that of market participants and market regulators and is, in addition, subject to 
minimum rating requirements for both point 4(a)(i) and point 4(a)(ii). 

It is proposed to clarify explicitly that the debt instruments referred to in point 4(a)(iii) 
include bonds. 

It is proposed to clarify that the maximum limit of 20 % of an issue size specified in 
point 4(b) is to be applied and checked only at the time of purchase.  

It  is  proposed  to  add  a  sentence  to  clarify  that  the  Commission  should  endeavour  to 
replace  investments  which  are  downgraded  below  the  minimum  levels  required 
provided that satisfactory financial terms can be obtained. 

Furthermore, a sentence has been added to clarify that if a bond is rated higher than the 
issuer, as  is possible  for secured bonds, or the issuer has  no  rating,  as is possible for 
secured bonds and ABS, the rating of the bond is applicable. 

Point 6 

The  Financial  Regulation  applicable  to  the  general  budget  of  the  European 
Communities, Council Regulation (EC, Euratom) No. 1605/2002, provides that starting 
from budget year 2005 the accounting shall be accrual based (Articles 125 and 1811). 
In addition, Article 133 of the Financial Regulation provides that the accounting rules 
and methods and the harmonised chart of accounts to be applied by all institutions shall 
be guided by the internationally accepted accounting standards for the public sector but 
may  depart  from  these  where  justified  by  the  specific  nature  of  the  Communities' 
activities. 

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Before  the  revision  of  Article  181  of  the  Financial  Regulation  adopted  by  Council  Regulation  (EC, 
Euratom) No 1995/2006 of 13 December 2006 (OJ L 390, 30.12.06, p.1) 

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According to Article 3 of Council Decision 2003/76/EC, the ECSC i.L. shall draw up 
each  year  a  profit-and-loss  account,  balance  sheet  and  financial  report  to  show, 
separately  from  the  other  financial  operations  of  the  remaining  Communities,  the 
liquidation  operations  and  the  investment  transactions.  These  financial  statements  are 
consolidated  by  the  Commission  annually  in  accordance  with  Article  275  of  the  EC 
Treaty  and  the  Financial  Regulation.  As  the  internationally  accepted  accounting 
standards  have  changed,  the  reference  to  Council  Directives  78/660/EEC  and 
86/635/EEC  has  become  obsolete.  To  take  account  of  the  specific  nature  of  its 
operation, the ECSC i.L. draws up its financial report following recommendations for 
financial institutions. Consequently, the ECSC i.L. establishes an income statement, a 
balance sheet, a statement of changes in equity, a cash flow statement, and notes to the 
financial statements.  

Point 7 

It  is  proposed  to  send  reports  on  a  six-monthly  basis  henceforth.  As  previous  reports 
did  not  result  in  any  comments  or  questions,  it  is  considered  that  a  six-monthly 
reporting rhythm would be more efficient both for the Member States, allowing them 
to  give  enhanced  attention  to  a  less  frequent  report,  and  for  the  Commission  by 
reducing its administrative costs. 

E-3676 

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2007/0150(CNS) 

Proposal for a 

COUNCIL DECISION 

amending Decision 2003/77/EC laying down multiannual financial guidelines for 
managing the assets of the ECSC in liquidation and, on completion of the liquidation, 
the Assets of the Research Fund for Coal and Steel 

THE COUNCIL OF THE EUROPEAN UNION, 

Having regard to the Treaty establishing the European Community,  

Having regard to the Protocol annexed to the Treaty establishing the European Community on 
the financial consequences of the expiry of the ECSC Treaty and on the Research Fund for 
Coal and Steel, 

Having regard to Council Decision 2003/76/EC of 1 February 2003 establishing the measures 
necessary  for  the  implementation  of  the  Protocol,  annexed  to  the  Treaty  establishing  the 
European Community, on the financial consequences of the expiry of the ECSC Treaty and on 
the Research Fund for Coal and Steel2, and in particular Article 2(2) thereof, 

Having regard to the proposal from the Commission3, 

Having regard to the opinion of the European Parliament4, 

Whereas: 

(1) 

(2) 

For  the  purposes  of  the  Protocol  annexed  to  the  Treaty  establishing  the  European 
Community  on  the  financial  consequences  of the  expiry  of  the  ECSC  Treaty  and  on 
the  Research  Fund  for  Coal  and  Steel,  the  Commission  manages  the  assets  of  the 
ECSC in liquidation and, on completion of the liquidation, the Assets of the Research 
Fund for Coal and Steel. 

In  accordance  with  Article  2  of  Council  Decision  2003/77/EC  of  1  February  2003 
laying down multiannual financial guidelines for managing the assets of the ECSC in 
liquidation and, on completion of the liquidation, the Assets of the Research Fund for 
Coal and Steel , the Commission has reassessed the operation and effectiveness of the 
financial guidelines. 

(3) 

The experience gained in the first five years of implementation and developments in 
financial market practice show a need to adapt these guidelines. 

2 
3 
4 

OJ L 29, 5.2.2003, p. 22. 
OJ C , , p. . 
OJ C , , p. . 

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(4) 

(5) 

(6) 

(7) 

The guidelines should reflect standard market practice and definitions as regards, inter 
alia,  the  maturity  concepts  used,  equivalent  securities  in  the  case  of  repurchase 
agreements and applicable ratings. 

Subject to rating requirements, certain public entities should be assimilated to Member 
States or other sovereigns in the context of the investment limits. 

The  guidelines  should  take  into  account  the  changes  in  the  accounting  rules  of  the 
Commission. 

For reasons of efficiency and in order to reduce administrative costs, the frequency of 
reporting should be adapted. 

(8) 

Decision 2003/77/EC should therefore be amended accordingly, 

HAS ADOPTED THIS DECISION:  

Article 1 

The Annex to Decision 2003/77/EC is amended as follows. 

(1) 

Point 3 is amended as follows: 

(a) 

Point (a)(iii) is replaced by the following :  

"fixed  and  floating  rate  bonds  with  a  maturity  or,  in  the  case  of  asset-backed 
securities, an expected maturity not exceeding a remaining life of 10 years and 
six months from the payment date, provided that they are issued by any of the 
categories of authorised issuers;" 

(b) 

Point (b) (i) is replaced by the following : 

reverse 

repurchase  and 

repurchase  agreements,  provided 

"(i) 
the 
counterparts  are  authorised  for  such  transactions,  and  provided  that  the 
Commission  remains  in  a  position  to  repurchase  equivalent  securities  that  it 
may have sold at the contractual deadline. Equivalent securities are securities 
(i) issued by the same issuer, (ii) which form part of the same issue, and (iii) 
are of an identical type, nominal value, description and amount as the securities 
lent out except where subject to a corporate action or redenomination;" 

(2) 

Point 4 is amended as follows: 

(a) 

Point (a)(i) to (iii) is replaced by the following:  

"(a) The investment shall be limited to the following amounts: 

(i) 
for bonds issued or guaranteed by Member States or institutions of the 
Union,  EUR  250  million  per  Member  State  or  institution;  bonds  issued  or 
guaranteed  by  regional  or  local  authorities  or  government-owned  and/or 
government-controlled public enterprises or institutions can be included under 

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the limit of the respective Member State, provided that they have a credit rating 
of not less than 'AA' or its equivalent; 

(ii) for bonds issued or guaranteed by other sovereign borrowers, their regional 
or local authorities or government-owned and/or government-controlled public 
enterprises or institutions, or by supranational borrowers, with a credit rating of 
not less than 'AA' or its equivalent, EUR 100 million per issuer or guarantor; 

(iii)  for  deposits  with  and/or  debt  instruments,  including  bonds,  of  an 
authorised bank, the lower of either EUR 100 million per bank or 5 % of the 
bank's own funds;" 

(b) 

Point (b) is replaced by the following : 

"The investment  in any single bond issue, subject to the limits given in point 
(a), shall not be more than 20 % of the total amount of such issue at the time of 
purchase." 

(c) 

In point (d) the following second paragraph is added :  

"Once the Commission has become aware of a downgrade below the minimum 
rating  requirements, 
the  corresponding 
investments, subject to acceptable financial terms." 

it  shall  endeavour 

to  replace 

(d) 

The following point (e) is added: 

"If the rating of a bond is higher than the rating of the issuer or the issuer has 
no rating, the rating of the bond is applicable." 

(3) 

Point 6 is replaced by the following: 

"6. ACCOUNTING 

The management of the funds shall be accounted for in the annual accounts for 
the ECSC in liquidation and, on completion of the liquidation, the Assets of the 
Research Fund for Coal and Steel. These shall be based upon and presented in 
accordance  with  the  EC  Accounting  Rules  as  adopted  by  the  Commission's 
Accounting  Officer,  taking  into  account  the  specific  nature  of  the  ECSC  in 
liquidation and, upon completion of the liquidation, the Assets of the Research 
Fund  for  Coal  and  Steel.  The  accounts  will  be  approved  by  the  Commission 
and examined by the Court of Auditors. The Commission shall engage external 
firms to carry out an annual audit of its accounts." 

(4) 

In point 7, the second paragraph is replaced by the following :  

"A  detailed  report  on  management  operations  carried  out  under  these 
guidelines shall be drawn up every six months and sent to the Member States." 

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This  Decision  shall  take  effect  on  the  day  following  that  of  its  publication  in  the  Official 
Journal of the European Union. 

Article 2 

Article 3 

This Decision is addressed to the Member States. 

Done at Brussels, 

For the Council 
The President 

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