CELEX: 51995PC0170
Language: en
Date: 1995-05-10
Title: 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")

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)
 ---pagebreak---                                                   - 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 J C 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.
 ---pagebreak--- 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.
 ---pagebreak---                                            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       Proposal for a European Parliament and
Council Directive amending Council           Council Directive amending Council
Directive 89/647/EEC with respect to the     Directives 89/647/EEC and 93/6/EEC
supervisory recognition of contracts for     with respect to the supervisory recognition
novation      and     netting   agreements   of contracts for novation and netting
("contractual netting")                      agreements ("contractual netting")
                                             Recital 3a (new)
                                             Whereas the effect of the rules envisaged
                                             for the recognition of netting will be to
                                             reduce the level of credit institutions'
                                             compulsory cover through their own
                                             funds;
Recital 4                                    Recital 4
Whereas        for     credit   institutions Whereas, however, for credit institutions
incorporated in the Member States, only      incorporated in the Member States, only
an amendment of Directive 89/647/EEC         an amendment of Directive 89/647/EEC
can open a similar possibility for the       can open a similar possibility for the
supervisory recognition of bilateral         supervisory recognition of bilateral
netting and thereby provide them with        netting and thereby provide them with
equal conditions of competition; whereas     equal conditions of competition; whereas
the rules are both well balanced and suited  the rules are both well balanced and suited
to further reinforce the application of      to further reinforce the application of
prudential supervisory measures to the       prudential supervisory measures to the
sector of credit institutions;               sector of credit institutions;
 ---pagebreak---                                             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 to Directive 89/647/EEC is Annex II to Directive 89/647/EEC is
replaced by the Annex hereto.               replaced by the Annex hereto.
                                            To Annex II point 5. first subparagraph of
                                            Directive 93/6/EEC^ the following
                                            sentence shall be added:
                                            "Competent authorities       shall mean the
                                            national authorities which are empowered
                                            by   law    or   regulation    t£t supervise
                                            investment firms,"
Article 3                                   Article 3
1. Member States shall bring into force     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
 ---pagebreak---                                        _r
Annex, Annex II, point 2, Table 2, Annex, Annex II, point 2, Table 2,
footnote (1)                                 footnote (1)
(1) In the case of interest-rate contracts,  (1) In the case of interest-rate contracts,
credit institutions may, subject to the      credit institutions may, subject to the
consent of their supervisory authorities,    consent of their competent authorities,
choose either original or residual maturity, choose either original or residual maturity.
Annex, Annex II, point              3    (a) Annex, Annex II, point              3    (a)
introductory sentence:                       introductory sentence:
The supervisory authorities may recognize    The competent authorities may recognize
as risk reducing the following types of      as risk reducing the following types of
contracts for novation and netting           contracts for novation and netting
agreements:                                  agreements:
                                             Annex, Annex II, point 3 (a), second
                                             subparagraph (new):
                                             ^Counterparty* shall mean any entity
                                             (including natural persons) having the
                                             power to conclude a contractual netting
                                             agreement.
Annex, Annex II, point 3 (b), first Annex, Annex II, point 3 (b), first
paragraph, introductory sentence:            paragraph, introductory sentence:
The supervisory authorities may recognize    The competent authorities may recognize
as risk reducing a contract for novation or  as risk reducing a contract for novation or
a netting agreement under the following       a netting agreement under the following
conditions only:                             conditions only:
 ---pagebreak---                                                  G
Annex, Annex           II, point 3 (b), Annex, Annex                II, point 3 (b),
subparagraph           (ii),     introductory subparagraph          (ii),    introductory
sentence:                                     sentence:
(ii) the credit institution has furnished to  (ii) the credit institution has arranged to
the supervisory authorities written and       show clearly and precisely to the
reasoned legal opinions that, in the event    competent authority the list of written and
of a legal challenge, the relevant Courts     reasoned legal opinions available to the
and administrative authorities would find     authority that, in the event of a legal
that in the cases described under (i) the     challenge, the relevant Courts and
claims and obligations of the credit          administrative authorities would find that
institution to be confined to the net value   in the cases described under (i) the claims
as described in (b) (i) above under:          and obligations of the credit institution to
                                              be confined to the net value as described
                                              in (b) (i) above under:
                                              Annex, Annex II, point 3 (b), first
                                              paragraph "a" (new, to be inserted):
                                              The competent authorities may accept
                                              reasoned legal opinions drawn up by
                                              group or types of contractual netting.
Annex, Annex II, point 3 (b), second Annex, Annex II, point 3 (b), second
paragraph:                                    paragraph:
The supervisory            authorities, after The       competent      authorities,   after
consultation when necessary with other        consultation when necessary with other
relevant supervisory authorities, must be     relevant supervisory authorities, must be
satisfied that the contractual netting is     satisfied that the contractual netting is
legally valid under the law of each of the    legally valid under the law of each of the
relevant jurisdictions. If one of these       relevant jurisdictions. If one of these
supervisory authorities is not convinced of   supervisory authorities is not convinced of
the legal validity of the contractual netting the legal validity of the contractual netting
under the law of its country the relevant     under the law of its country the relevant
contract for novation or the relevant         contract for novation or the relevant
 netting agreement may not be recognized       netting agreement may not be recognized
 as risk reducing for either of the            as risk reducing for either of the
 counterparties.                               counterparties.
 ---pagebreak---                                             ^7
Annex, Annex II, point 3 (b), fourth Annex, Annex II, point 3 (b), fourth
paragraph:                                 paragraph:
With respect to a smooth functioning of    With respect to a smooth functioning of
the single market, Member States are       the single market, Member States are
obliged to strive for a uniform assessment obliged to strive for a uniform assessment
of the agreements for contractual netting  of the agreements for contractual netting
by their competent authorities.            by their competent authorities. Such
                                           action by the competent authorities must
                                           not be responsible fbr distorting
                                           competition,
 ---pagebreak---                                            ^8
                                                                   ISSN 0254-1475
                                                             COM(95) 170 final
                                              DOCUMENTS
EN                                                                            10
                                     Catalogue number : CB-CO-95-192-EN-C
                                                              ISBN 92-77-88434-7
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