(1)

Regulation (EU, Euratom) 2022/2434 of the European Parliament and of the Council (2) amended Regulation (EU, Euratom) 2018/1046 (the ‘Financial Regulation’) by establishing the diversified funding strategy as a single funding method for the implementation of borrowing and debt management operations carried out by the Commission. Article 220a of the Financial Regulation is to apply to programmes of financial assistance for which the basic acts enter into force on or after 9 November 2022. The diversified funding strategy is not to apply to existing programmes, under which borrowing and lending operations should continue to be carried out under the traditional back-to-back method, in accordance with Article 220 of the Financial Regulation. The back-to-back method might also apply, by way of exception, to new financial assistance programmes and is to apply to any Euratom programmes.

(2)

Pursuant to Article 220a of the Financial Regulation, the Commission is to establish the necessary arrangements for the implementation of the diversified funding strategy. These arrangements should comprise a governance framework, risk management procedures and a cost allocation methodology, which should ensure that all costs incurred by the Union that relate to financial assistance are to be borne by the beneficiary country. It is therefore necessary to establish the arrangements applicable to borrowing and debt management operations carried out by the Commission under the diversified funding strategy and to the related lending operations.

(3)

The Commission has applied for the first time the diversified funding strategy to borrowing operations in the context of NextGenerationEU (‘NGEU’), the Union’s temporary instrument to support the economic recovery from the COVID-19 crisis. This has allowed the successful mobilisation of funds for non-repayable support and loans under Regulation (EU) 2021/241 of the European Parliament and of the Council (3) and other Union programmes referred to in Article 2(2) of Council Regulation (EU) 2020/2094 (4).

(4)

The governance model and the processes needed for the implementation of the diversified funding strategy under NGEU have been established in accordance with Commission Implementing Decision C(2021)2502 (5). These arrangements include among others a governance framework, risk management and compliance procedures. A cost allocation methodology was developed in Commission Implementing Decision (EU, Euratom) 2022/2545 (6). It is appropriate to base the arrangements for the implementation of the diversified funding strategy pursuant to Article 220a of the Financial Regulation on the governance model for NGEU.

(5)

Although this Decision should apply mainly to operations carried out under the diversified funding strategy, it is appropriate to extend some of the arrangements laid down therein to operations carried under the back-to-back method. This approach would ensure consistency across the different programmes, to the extent applicable. It would also guarantee that all operations are covered by the highest standard of rules, in accordance with the principle of sound financial management. This should be the case for arrangements relating to risk management and compliance procedures.

(6)

An annual borrowing decision should set out the elements of the planned borrowing and debt management operations and should provide an authorisation for liquidity management operations over a period of one year. In particular, it should determine the dimensions of the borrowing and debt management operations to be undertaken with a view to framing the overall exposure of the Union’s budget and of loan beneficiaries. To this end, it should set a range for maximum issuance amounts of long-term funding for all purposes, a maximum outstanding amount of short-term funding, the maximum average maturity of the Union’s long-term funding, a limit for the final outstanding amount per issuance and, if applicable, the maximum amount of Commission issuances which can be held on its own account and can be used as an additional funding source or to support the secondary market. The annual borrowing decision should also provide the authorisation to invest cash holdings, in excess of those needed to make disbursements, in money market instruments.

(7)

In order to ensure that the required funds are available to meet commitments under the related financial assistance programmes as they fall due for payment, borrowing and debt management operations under the diversified funding strategy should be undertaken on the basis of biannual funding plans. The funding plans would frame those operations during this period by reference to the payments that must be made to implement the related programmes in the next semester and in following periods. The establishment of the funding plan should therefore ensure a link to the expected payment needs on a multi-annual basis in order to ensure smooth planning and organisation of funding operations. Borrowing proceeds intended to satisfy payment needs expected in further periods may be managed via liquidity management operations. The funding plan should be established based on the limits and authorisations set out in the annual borrowing decision. The funding plan is the basis to inform market participants of the indicative funding plans in the period ahead.

(8)

By fixing an indicative maximum amount of borrowing covering, as a rule, a period of six months, and establishing certain other key parameters of the planned operations, the funding plan would also ensure higher predictability of issuances, while maintaining flexibility and providing for transparency in the markets. The targeted investor base needs information about upcoming issuances and an indication on the timing to prepare investment planning on their side. The capacity to optimise the structure of borrowing through money market transactions and debt management operations during the implementation of funding plans, enables the Commission to obtain more advantageous outcomes and reduce risk of liquidity shortages.

(9)

The annual borrowing decision and the funding plan should serve as a basis for information by the Commission to the European Parliament and the Council in accordance with Article 220a(2) of the Financial Regulation, as well as for communication to the markets and to the public. Furthermore, the Commission should report to the European Parliament and the Council about all aspects of its borrowing and debt management strategy, in a comprehensive manner and on a regular basis, pursuant to Article 220a(2) of the Financial Regulation.

(10)

The definition of accurate and meaningful funding plans under the diversified funding strategy depends on the regular and timely communication of information by authorising officers responsible for the implementation of the financial assistance programmes within the time frames and amounts for expected payment approvals. This information should be communicated to the Directorate-General for the Budget, as the service responsible for the definition and implementation of the funding plans, through the Commission financial forecasting tool.

(11)

The diversified funding strategy should seek to obtain the most advantageous financial conditions for the Union, through the sound planning and smooth execution of transactions on the best possible terms in the prevailing market conditions. Given the need to raise funding in order to allow disbursements to be made to the respective programmes, the Commission has limited discretion as regards the timing of market transactions. The diversified funding strategy equips the Commission with a wider range of funding techniques, including short-term financing, allowing it to reduce market execution risk when required to raise funds in more adverse market circumstances.

(12)

Funding instruments under the diversified funding strategy should include, inter alia, a variety of benchmark bonds and EU-Bills. Borrowing operations under the diversified funding strategy should be organised as auctions, syndicated transactions or private placements, whichever is most appropriate given the size and nature of the operations.

(13)

The diversified funding strategy should include the ability to issue short-term instruments and maintain a liquidity buffer, enabling the Commission to absorb mismatches in timing between borrowing and disbursements, and to meet a disbursement request in case of adverse funding conditions. Short-term borrowing operations via EU-Bills should be implemented through regular auctions to provide flexibility and efficiency. Those auctions should be organised in such a manner as to ensure a transparent and predictable issuer status of the Union and an equal treatment of participants.

(14)

Debt management operations under the diversified funding strategy enable better management of interest rate and other financial risks. It is therefore appropriate to allow the use of derivatives such as swaps to manage interest rate or other financial risks in relation to loans for the beneficiary countries, while always respecting the principle of budgetary balance, or enter into secured or unsecured money market transactions with debt management offices of Member States, supranational institutions, national public sector agencies, central banks credit institutions and investment firms with an appropriate credit standing or central counterparties. In this context, the Commission should also be authorised to buy back and/or hold its own bonds for the purposes of liquidity management and supporting liquidity in the market for Union bonds.

(15)

Liquidity management operations enable the Commission to obtain more advantageous terms on any cash holdings in excess of those needed to make forecasted disbursements. With that purpose, it is therefore appropriate to allow investment of excess cash balances through money market instruments when opportune. Such opportunities could arise as unexpected shortfalls in disbursements compared to forecasts result in accumulation of unforeseen cash balances. Alternatively, the Commission, in anticipation of periods of high disbursement outflows, may raise funds in advance in order to avoid a high concentration of operations in a limited time with attendant risks for the execution and pricing of those operations. It is appropriate to consult the Chief Risk Officer and the accounting officer when establishing or amending the liquidity management strategy.

(16)

Lending operations should be carried out in accordance with the relevant basic act and the corresponding loan agreements. It is appropriate to lay down minimum conditions under which loans are disbursed. It should also be ensured that beneficiary countries bear all costs related to the loan incurred by the Union in accordance with a methodology laid down by the Commission in a separate decision complemented by detailed guidelines for calculating such costs.

(17)

Beneficiary countries should be offered the possibility to request the Commission to arrange loans at a fixed hedging of interest rate. This would require the Commission to use financial instruments such as interest rate swaps in order to offer fixed rate loans. The costs for managing risks with derivatives should be borne by the beneficiary country.

(18)

Borrowing operations under existing financial assistance programmes are carried out under the ‘EU-Euratom Debt Issuance Programme’ established in 2019 and updated in 2021 (the ‘Debt Issuance Programme’). This includes, inter alia, an Offering Circular containing all the required information to the markets according to the applicable legislation, and operational and contractual arrangements with counterparties that are instrumental to borrowing activities. Borrowing operations under the diversified funding strategy should be carried out under the Debt Issuance Programme, following the introduction of the necessary amendments in the existing documentation.

(19)

In order to implement borrowing, debt and liquidity management operations under the diversified funding strategy, appropriate operational capacities should be established, including transaction settlement capacities, an auction platform, and the possibility to have recourse to repurchase transactions and swaps.

(20)

In order to carry out borrowing, debt and liquidity management operations under the diversified funding strategy and related lending operations, the Commission should open dedicated accounts exclusively for the purpose of these operations. The same considerations as for the accounts for NGEU operations should apply to these accounts. In particular, to address the liquidity risk stemming from these operations, secure and purpose-specific prudential cash holdings for payments should be established. The requirement to hold such a dedicated prudential cash buffer represents an integral and indispensable part of the risk management approach for a diversified funding strategy. In order to ensure that these critical cash holdings are not subject to any counterparty risk arising from failure of the institution with whom these reserves are kept, it is imperative that these prudential cash holdings be held with a central bank. Those cash holdings should be held in a dedicated account with the European Central Bank (‘ECB’) and should be kept to the lowest level needed to meet upcoming payments during a short-term period but may vary in amount as a function of the issuance and disbursement schedule. A contract on fiscal agency services should be concluded with the ECB allowing the coverage of the related costs. Any other amounts in excess of the prudential cash holdings might be invested through money market instruments or held on dedicated accounts with authorised counterparties.

(21)

Furthermore, a risk management and compliance framework for borrowing, debt management, liquidity management and lending operations should ensure the protection of the financial interests of the Union and ensure that all activities are conducted in a manner consistent with the highest standards of integrity, probity, and sound financial and risk management. In that respect, the role of Chief Risk Officer previously established under Implementing Decision C(2021)2502 was extended to apply to all operations under the diversified funding strategy under Commission Implementing Decision (EU, Euratom) 2022/2544 (7). The Chief Risk Officer should be supported by the Risk and Compliance Committee in the fulfilment of her or his tasks. In order to ensure that the composition of the Risk and Compliance Committee is fit to provide appropriate support to the Chief Risk Officer, to align the composition of the Risk and Compliance Committee with best practices and to account for the extended scope of the Chief Risk Officer’s tasks, certain changes are required. Such changes should include the addition of the Director of the Directorate in charge of the issuance of debt to finance Union programmes as a permanent observer of the Risk and Compliance Committee to allow sharing insight when overseeing the operations, the possibility to appoint up to three independent experts and the specification of clearer requirements for the designation of Risk and Compliance Committee members.

(22)

The Chief Risk Officer, in accordance with best practices and recognised international standards should draw up a High Level Risk and Compliance Policy that contains risk and compliance guidelines for the implementation of the operations in full independence. The progressive deployment of debt management and liquidity management operations entails additional risks, such as counterparty credit risk. These operations require additional monitoring by the Chief Risk Officer to ensure that they remain within the risk management framework set out in the High Level Risk and Compliance Policy. To that extent, the Chief Risk Officer should in parallel to the progressive deployment of these operations, define new risk limits and risk monitoring solutions.

(23)

In particular, the Chief Risk Officer should ensure that operations comply with the High Level Risk and Compliance Policy and that risks related to these operations are identified, understood, managed, and reported to the Chief Risk Officer. In carrying out those tasks, the Chief Risk Officer should be supported by a Compliance Officer, who should report directly to the Chief Risk Officer on matters regarding conformity with rules, procedures and prevention of money laundering and terrorist financing.

(24)

The governance model and the processes needed for the implementation of the diversified funding strategy under NGEU have been established in accordance with Implementing Decision C(2021) 2502, repealed by Implementing Decision (EU, Euratom) 2022/2544 which established the arrangements applicable to borrowing and debt management operations carried out by the Commission under the diversified funding strategy and to the related lending operations. This Decision builds upon the principles established by those implementing decisions. To ensure that arrangements applicable to all operations implemented through the diversified funding strategy are uniform, it is appropriate to repeal Implementing Decision (EU, Euratom) 2022/2544.

(25)

To ensure that the annual borrowing decision is adopted in accordance with and in parallel to this Decision, and in good time to enable the implementation of the bond issuance programme which needs to commence immediately in 2024, this Decision should enter into force as a matter of urgency on the day following that of its publication in the Official Journal of the European Union,