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Document 52004PC0486

Proposal for DIRECTIVES OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL Re-casting Directive 2000/12/EC of the European Parliament and of the Council of 20 March 2000 relating to the taking up and pursuit of the business of credit institutions and Council Directive 93/6/EEC of 15 March 1993 on the capital adequacy of investment firms and credit institutions.

/* COM/2004/0486 final */

52004PC0486

Proposal for DIRECTIVES OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL Re-casting Directive 2000/12/EC of the European Parliament and of the Council of 20 March 2000 relating to the taking up and pursuit of the business of credit institutions and Council Directive 93/6/EEC of 15 March 1993 on the capital adequacy of investment firms and credit institutions. /* COM/2004/0486 final */


EN

|| COMMISSION OF THE EUROPEAN COMMUNITIES

Brussels, 14.7.2004

COM(2004) 486 final

2004/0155 (COD) 2004/0159 (COD) Volume I

 

Proposal for

DIRECTIVES OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL

Re-casting Directive 2000/12/EC of the European Parliament and of the Council of 20 March 2000 relating to the taking up and pursuit of the business of credit institutions and Council Directive 93/6/EEC of 15 March 1993 on the capital adequacy of investment firms and credit institutions.

(presented by the Commission) {SEC(2004) 921}

EXPLANATORY MEMORANDUM

1.           GENERAL COMMENTS

A single financial market in the EU will be a key factor in promoting the competitiveness of the European economy and the lowering the capital cost to companies. The Financial Services Action Plan announces a directive on new capital adequacy rules for credit institutions and investment firms in 2004, in step with progress at G-10 level in the Basel Committee on Banking Supervision[1].

The agreement by the G-10 Basel Committee on Banking Supervision of the so-called Basel Accord in 1988 (Basel I) led to the adoption of minimum capital requirements across over 100 countries[2]. It was broadly contemporaneous to the adoption of key EU directives (Directive 89/299/EEC of 17.4.1989 on own funds, Directive 89/647/EEC of 18.12.1989 on a solvency ratio, consolidated in Directive 2000/12/EC of the European Parliament and of the Council of 20.3.2000 relating to the taking up and pursuit of the business of credit institutions).

These directives addressed credit institutions’ risks arising from credit-granting activities. Directive 93/6/EEC of 15.3.1993 on the capital adequacy of investment firms and credit institutions extended both the credit risk and market risk rules to investment firms.

1) The need for improved European requirements.

The existing rules have made a significant contribution to the single market and high prudential standards. However, various important shortcomings have been identified.

1. Crude estimates of credit risks result in an extremely crude measure of risk and is in danger of falling into disrepute.

2. Scope for capital arbitrage: innovations in markets have enabled financial institutions to effectively arbitrage the mismatch between institutions’ own allocation of capital to risks and minimum capital requirements.

3. Lack of recognition of effective risk mitigation: the present Directives do not provide appropriate levels of recognition for risk mitigation techniques.

4. Incompleteness of the risks covered under the existing directives, including operational risk, which are not subject to any capital charges.

5. Absence of requirement for supervisors to evaluate the actual risk profile of credit institutions to satisfy themselves that adequate capital is held having regard to that risk profile.

6. Absence of requirement for supervisory cooperation: in an increasingly cross-border market authorities must cooperate effectively with each other in the supervision of cross-border groups to reduce regulatory burdens.

7. Absence of proper market disclosures: the present Directives do not facilitate effective market discipline for reliable information for market participants to make well-founded assessments.

8. Lack of flexibility in the regulatory framework: the current EU system the lacks the flexibility to keep pace with rapid developments in financial markets and risk management practices, and with improvements in regulatory and supervisory tools.

What would happen under a “no policy change” scenario?

There is strong consensus that the present situation is unsustainable. Capital requirements and risks would continue to be misaligned resulting in limited effectiveness of the prudential rules and increased risks to consumers and financial stability. The full extent of the risks that some financial institutions are undertaking would still not be captured. In addition, the newest and most effective risk management techniques would not be actively encouraged or recognised and financial services groups operating in more than one Member State would continue to be subject to disproportionate burdens resulting from multiple layers of regulation and supervision. Finally, the EU would be unable to benefit appropriately from future developments, given the difficulty in speedily updating the current EU regulatory framework. In view of the proposed global implementation of the new Basel Accord the EU financial services sector would be significantly disadvantaged compared with its overseas competitors.

2) The approach of the Directive

The Commission’s 1998 Financial Services Action Plan stated that the EU needed accurate, internationally consistent, up to date prudential standards. They should also be proportionate recognising the reduction in risks arising from the context in which exposures are incurred, and in particular lending to consumers and to small- or medium-sized entities. Rules should apply to both credit institutions and investment firms (level playing field) but also need to be proportionate and take fully into account the ‘biodiversity’ of EU financial institutions.

2.           Consultation and impact assessment

a) Consultation of stakeholders and interested parties

The Commission has been engaged in consultation with stakeholders and interested parties since November 1999. Three full consultation papers have been issued on 22.11.1999, 5.2.2001 and 1.7.2003. A full and structured dialogue with stakeholders was organised on 18.11.2002. Consultation papers on specific technical issues have been published (real estate and covered bonds on 7.4. 2003; ‘expected losses and unexpected losses´ on 26.11.2003; collective investment undertakings on 3.2.2004).

Commentators have generally been very supportive of the major objectives of the project. Enhanced risk-sensitivity leading to greater financial stability is supported and there is now a pressing need for the rules to be updated, to respond to the significant advances in techniques for risk measurement and management in financial services, and to reflect increased regulatory and supervisory sophistication. There is strong support for the Commission’s approach that the EU capital framework should be revised consistent with the new international framework but differentiated where necessary for EU specificities.

Less complex institutions

There is broad and significant support for the application of the new rules in Europe – to all credit institutions and investment services providers whatever the legal nature and complexity of the institution, also to avoid ‘second class’ institutions that would be likely to result if some were excluded. This reflects the perception that the proposed new framework has been well designed for the purposes of broad application.

Flexibility of the new directive

There is continued wide and strong support for the approach proposed to ensure that the new framework is responsive to market and supervisory innovation to maintain an optimally efficient and competitive EU financial services sector. Stakeholders support the approach where enduring principles and objectives are set out in the articles and provide the mandate for the more detailed and technical provisions contained in the annexes. The procedure for amending the annexes must ensure full and effective consultation with interested parties.

Investment firms

Significant modifications have been introduced to address concerns expressed by some from the investment firm sector about being subject to capital requirements which they perceive to be more appropriate for credit institutions.

Complexity

Some respondents asked for simplification and less prescription. The Commission has increased the clarity and user-friendliness of the text. The design will be attractive to those institutions seeking simple rules to apply or wishing to progress gradually to more complex capital rules. The proposed new framework contains a range of options and approaches of different degrees of sophistication.

Since 1999 there have also been several consultations on detailed issues. The proposal has been taken account of very detailed and useful comments from interested parties, in particular the banking and investment firm industry.

b) Impact assessment

An extended impact assessment has been carried out to identify whether there is a need for action at EU level and, if so, the action required.

The Basel Committee published a quantitative impact study (QIS3) involving credit institutions across 40 countries to assess the impact of the new Basel proposals on banks' minimum capital requirements. The Commission assisted in extending this study to EU countries not represented in Basel. The key conclusions were that the new rules will in general reduce capital requirements for EU credit institutions by around 5% compared to present levels. Furthermore, the outcomes for the different approaches are in line with objectives – particularly combining capital neutrality with appropriate incentives for institutions to move towards more sophisticated approaches. Finally, smaller domestic credit institutions adopting the simple approach will face slightly reduced capital charges; larger internationally active credit institutions adopting the more advanced approach will face substantially unchanged capital charges; smaller but specialised and sophisticated EU credit institutions adopting the advanced approach might face substantially lower capital requirements than at present. Importantly, the main source of reduction in capital requirements is the ‘retail’ portfolio, which is mostly composed of loans to Small and Medium Enterprises (SMEs) below EUR 1 million and residential mortgage loans. The new operational risk capital charge is the main source of offset of this decrease in capital requirements for credit institutions.

In addition, at the request of the Barcelona European Council the Commission commissioned a study on the consequences of the draft proposed new capital requirements for credit institutions and investment firms in the EU[3]. The final report, prepared by PricewaterhouseCoopers, is positive about the impact (with only two areas of criticism – investment firms and venture capital - both of which have been addressed in the Commission’s proposals).[4] The key conclusions are that the new capital requirements framework should be positive for the EU, and for prudential regulation in the EU. EU credit institutions’ capital requirements should decrease by ± 5% (€ 90 billion) and translate into an annual increase in profits of ± € 10-12 billion. There is no disadvantage for smaller credit institutions and no indication that the new regime will force mergers or consolidation. The decision to cover all credit institutions in the directive will not put EU firms at a competitive disadvantage, nor is the US decision to apply only advanced approaches to some 20 big credit institutions a significant competitive factor. Implementation costs for EU credit institutions are not solely driven by Basel II and many of these investments (perhaps as high as 80%) would have happened anyway, although over a longer period. Importantly, there will be no negative impact on the availability and cost of finance for SMEs in most EU Member States (‘procyclicality’ effects are less - and less damaging - than the present rules). SME fears stem from insufficient information understanding of Basel II. The macro-economic effects of Basel II on the EU-economy are small - there could be a benign supply-side shock to the economy reducing the cost of capital to firms and generating an increase of 0.07% in EU GDP. In general the new capital framework will reduce the banking system’s vulnerability through greater awareness of risk, improved risk management, and a more efficient allocation of capital should have beneficial long-run consequences for the EU economy.

3.           legal basis

The proposals are based on Article 47(2) of the Treaty, which is the legal basis to adopt Community measures aimed at achieving the Internal Market in financial services. The chosen instrument is a Directive as the most appropriate to achieve the objectives and it amends existing directives covering the same technical issues. Its provisions do not go beyond what it is necessary to achieve the objectives pursued.

4.           Comments on the articles

The proposals apply the ‘re-casting technique’ (Interinstitutional Agreement 2002/C 77/01) enabling substantive amendments to existing legislation without a self-standing amending directive. This reduces complexity and makes EU legislation more accessible and comprehensible.

Amendments of a non-substantive nature are made to many provisions to improve the structure, drafting and readability of the directives.

A.          Directive 2000/12/EC

Article 4: Definitions

Article 4 contains certain new definitions concerning essential concepts to clarify their meaning and contribute to a better understanding.

Article 22:

The existing wording has been amended to clarify and develop the obligation for credit institutions to have in place effective internal risk management systems. Given the diversity of credit institutions covered, these requirements will have to be met on a proportionate basis. Relevant technical provisions are in Annex V.

Articles 56-67:

A small number of amendments have been made. Although it is not intended to review the definition of ‘own funds’, as a consequence of the modified approach to expected loss in the Basel Committee (‘Madrid decision’), some limited amendments are necessary.

Articles 68-75:

Credit institutions must hold adequate own funds on an ongoing basis and state the minimum level of those own funds. The provisions specify how the requirements should be met if the credit institution is part of a group (the existing option for Member States’ authorities to waive certain requirements has been retained but with more precision). The calculation of the requirements has been clarified in the light of the introduction of Regulation (EC) no.1606/2002 on international accounting standards.

Articles 76-101:

These provisions replace the existing solvency ratio requirements for credit risk and introduce two methods to calculate risk weighted exposure amounts.

The Standardised Approach (Art. 78-83) is based on the existing framework, with risk weights determined by the allocation of assets and off-balance sheet items to a limited number of risk buckets. Risk sensitivity has been increased by the number of exposure classes and risk buckets (Art. 79). There are lower risk weights for non-mortgage retail items (75%) and residential mortgages (35%). A 150% risk weight for assets which are 90 days past due (100% for residential mortgages) is introduced. The use of credit rating agencies’ ratings to assign risk weights where these are available (‘external ratings’) is permitted (Art 81-83). Relevant technical provisions are in Annex VI.

The Internal Ratings Based (IRB) approach (Art 84-89), permits credit institutions to use their own estimates of the risk parameters inherent in their different credit risk exposures. These parameters form the inputs into a prescribed calculation designed to provide soundness to a 99.9% confidence level. The ‘Foundation’ Approach allows credit institutions to use their own estimates of probability of default, while using regulatory prescribed values for other risk components. Under the ‘Advanced’ Approach, credit institutions may use their own estimates for losses given default and their exposure at default. Credit institutions are allowed to use pooled data in the estimation of risk parameter values. This allows smaller credit institutions to apply a more risk sensitive approach to calculating capital requirements.

The proposed ‘roll-out’ rules (Art. 85) for the IRB approach provide flexibility for credit institutions to move different business lines and exposure classes to the Foundation or the Advanced IRB Approach during a reasonable timeframe. ‘Partial’ use is allowed for non-material exposure classes and business lines (capital requirements can be calculated under the Standardised Approach even if a credit institution uses the IRB Approach for other exposure classes). The proposed EU framework recognises that, for small credit institutions the requirement to develop a rating system for certain counterparties is potentially very burdensome. Permanent partial use for these exposure classes is proposed even in cases where credit institutions’ exposures to such counterparts are material (Art. 89).

Relevant technical provisions for the IRB approach are in Annex VI.

Articles 90-93:

The rules identify common issues for mitigation techniques and treat common underlying risks or economic effects consistently. These include the recognition of a wider range of collateral and guarantee/credit derivative providers than at present. The IRB Foundation Approach gives a prudentially appropriate level of recognition to financial receivables and physical collateral. Alternative methodologies are available for credit institutions to choose between methods of different levels of complexity (a Simple Method – based on an easy-to-use ‘risk weight substitution’ approach; or a Comprehensive Method – involving the application of volatility adjustments to the value of the collateral received). To calculate volatility adjustments more and less complex approaches are made available (a simple ‘Supervisory’ approach where the amounts of the benchmark volatility adjustments are set out in a table; or a more risk-sensitive ‘Own Estimates’ approach). Relevant technical provisions are in Annex VIII.

Articles 94-101:

These articles introduce for the first time a harmonised set of rules for capital requirements for securitisation activities and investments. This provides a significantly improved capital requirements framework – allowing credit institutions to take advantage of the funding, balance-sheet management and other advantages that such transactions can deliver. It will also reduce the extent to which securitisation has been seen as an instrument of capital arbitrage. Relevant technical provisions are in Annex IX.

Articles 102-105:

These provisions introduce requirements to meet the operational risk faced by credit institutions. Three different methodologies are available. A simple approach (Art. 103) based on a single income indicator (Basic Indicator Approach - BIA). This approach provides a capital buffer against operational risk, without requiring credit institutions to develop sophisticated and costly information systems about their risk exposure. A more precise approach based on business lines (Standardised Approach - STA) (Art. 104) is more risk-sensitive as the capital requirement for operational risk is differentiated to reflect the relative risks of different business lines. This approach is likely to be attractive to a large number of smaller / less complex credit institutions. More sophisticated methodologies (Advanced Measurement Approaches - AMAs) (Art. 105) generate their own measures of operational risk, subject to more demanding risk management standards. AMAs are expected to be gradually adopted mainly by large internationally active credit institutions and smaller specialised credit institutions which have developed advanced risk monitoring systems for their main activities. Relevant technical provisions are in Annex X.

Articles 106-119:

A small number of amendments bring consistency between capital requirements and the large exposures rules, in particular to reflect the expanded recognition of credit risk mitigation techniques.

Article 123-124:

These Articles reflect the second ‘pillar’ of the Basel Committee’s capital accord. Art. 51A requires credit institutions to have in place internal processes to measure and manage their risk and the amount of ‘internal’ capital they themselves deem adequate to support those risks. Competent authorities are required (Art. 124) to review compliance by credit institutions with the various legal obligations for organisation and risk control, and to evaluate the risks taken by credit institutions. This assessment will be used by supervisors to determine whether weaknesses exist in controls and capital held. Relevant technical provisions are in Annex XIII.

Articles 125-143:

There is an increasing degree of EU cross-border business and a trend towards centralisation of risk management within cross-border groups. This requires improved coordination and cooperation amongst national supervisory authorities in the EU. The existing and well established role of the consolidating supervisor has thus been developed further. Under Art. 136 supervisors will be provided with a minimum harmonised range of powers to require credit institutions to address any inadequacies in the requirements of the Directive.

Article 144:

A minimum set of disclosure requirements exists for Member States’ authorities to enhance convergence of implementation and introduce transparency.

Articles 145-149:

These provisions reflect the ‘third’ pillar of the Basel Committee’s new capital accord. The disclosure of information by credit institutions to market participants contributes to greater financial soundness and stability, maintains a level playing field and respects the sensitivity of certain information. Art. 147 requires disclosure on a minimum annual basis for most credit institutions - more frequent disclosure may be necessary in the light of specific criteria. Relevant technical provisions are in Annex XII.

Article 150:

The Directive needs to keep pace with market developments. The necessary degree of flexibility is provided by making a distinction between core and technical rules (particularly in the annexes to the directive) that may need adaptations in the short to medium term. Art. 150 adds new technical areas to those in Directive 2000/12/EC (introduced in 1989) and proposes that the new technical Annexes should be able to be modified following the same rapid procedure.

B.           Directive 93/6/EEC on the Capital Adequacy of Investments Firms and Credit Institutions

Article 2: Scope

Article 2 specifies how the requirements apply to individual investment firms, groups of investment firms, and mixed groups.

Article 3: Definitions

There are certain new and amended definitions on essential concepts to clarify their meaning and contribute to a better understanding.

Article 11: Trading book capital treatment

There is an enhanced definition of the ‘trading book’ to increase certainty as to the capital requirements that apply and to restrict possible arbitrage between the ‘banking book’ / ‘trading book’ boundary. Relevant technical provisions are set out in Annex VII.

Articles 18 and 20:

Article 18 prescribes, for credit institutions and investment firms, the minimum capital requirements for market risk. The treatment of positions in collective investment undertakings and credit derivatives and a number of other modifications for increased risk-sensitivity are new. Relevant technical provisions are in Annexes I to VII. Article 20 extends the rules on capital requirements for credit risk and operational risk in Directive 2000/12 to investment firms, as at present. New credit risk elements include the provision of a treatment for credit derivatives and an amended measure of exposure for repurchase transactions and securities/commodities financing transactions. For operational risk there are significant modifications to take account of the specific features of the investment firm sector, with an option to continue the ‘Expenditure Based Requirement’ for investment firms falling into the low-, medium- and medium/high-risk categories.

Article 28: Large exposures

The current situation is continued where credit institutions and investment firms are subject to the same rules, subject to modifications to large exposures for trading book transactions. A new element is an amended measure of exposure for repurchase transactions and securities/commodities financing transactions. Relevant technical provisions are in Annex VI.

Article 33: Valuation of positions for reporting

Enhanced requirements for the valuation of trading book positions are prescribed for prudential soundness in the context of rules designed for trading book positions to be priced on a daily basis. Relevant technical provisions are in Annex VII.

Article 22: Consolidated requirements

The existing option for competent authorities to waive the application of consolidated requirements for groups consisting of investment firms is continued subject to more prudentially sound conditions.

Article 34: Risk management and capital assessment

Article 34 incorporates the obligation for credit institutions (Article 17 of Directive 2000/12), for investment firms to have in place effective internal risk management systems. Given the diversity of the institutions covered, these requirements will have to be met on a proportionate basis. It also applies the requirement in Article 51A of Directive 2000/12 to investment firms to have internal processes to measure and manage the risk they are exposed to and the amount of capital (‘internal’ capital) they deem adequate to support those risks. It adds to the existing risk management requirements for investment firms in Directive 2004/39/EC.

Article 37: Supervision

This Article applies the rules in Directive 2000/12 mutatis mutandis to investment firms.

Article 42

As for Directive 2000/12, Directive 93/6 need to keep pace with market developments. The necessary flexibility is brought by distinguishing between core and technical rules (particularly in the annexes) that will need adaptations in the short to medium run. The technical Annexes should be able to be modified following a rapid procedure. To reflect expected further important developments in regulatory practice in the coming years, a review clause is included for the treatment of counterparty risk.

ê 2000/12/EC

2004/0155 (COD)

Proposal for a

DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL

relating to the taking up and pursuit of the business of credit institutions (recast)

ò new

(Text with EEA relevance)

ê 2000/12/EC (adapted)

THE EUROPEAN PARLIAMENT AND THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community, and in particular the first and third sentences of Article 47(2) thereof,

Having regard to the proposal from the Commission,

Having regard to the opinion of the Economic and Social Committee[5],

Acting in accordance with the procedure laid down in Article 251 of the Treaty[6],

Whereas:

ê 2000/12/EC Recital 1 (adapted)

(1) Council Directive 73/183/EEC of 28 June 1973 on the abolition of restrictions on freedom of establishment and freedom to provide services in respect of self-employed activities of banks and other financial institutions[7], first Council Directive (77/780/EEC) of 12 December 1977 on the coordination of laws, regulations and administrative provisions relating to the taking up and pursuit of the business of credit institutions[8], Council Directive 89/299/EEC of 17 April 1989 on the own funds of credit institutions[9], second Council Directive 89/646/EEC of 15 December 1989 on the coordination of laws, regulations and administrative provisions relating to the taking up and pursuit of the business of credit institutions[10], Council Directive 89/647/EEC of 18 December 1989 on a solvency ratio for credit institutions[11], Council Directive 92/30/EEC of 6 April 1992 on the supervision of credit institutions on a consolidated basis[12], and Council Directive 92/121/EEC of 21 December 1992 on the monitoring and control of large exposures of credit institutions[13] have been frequently and substantially amended. For reasons of clarity and rationality, the said Directives therefore, should be codified and combined in a single text. Ö Directive 2000/12/EC of the European Parliament and of the Council of 20 March 2000 relating to the taking up and pursuit of the business of credit institutions[14] has been substantially amended several times. Since further amendments are to be made, it should be recast in the interest of clarity. Õ

ê 2000/12/EC Recital 2 (adapted)

Pursuant to the Treaty, any discriminatory treatment with regard to establishment and to the provision of services, based either on nationality or on the fact that an undertaking is not established in the Member State where the services are provided, is prohibited.

ê 2000/12/EC Recital 3

(2) In order to make it easier to take up and pursue the business of credit institutions, it is necessary to eliminate the most obstructive differences between the laws of the Member States as regards the rules to which these institutions are subject.

ê 2000/12/EC Recital 4 (adapted)

(3) This Directive constitutes the essential instrument for the achievement of the internal market, a course determined by the Single European Act and set out in timetable form in the Commission's White Paper, from the point of view of both the freedom of establishment and the freedom to provide financial services, in the field of credit institutions.

ê 2000/12/EC Recital 5 (adapted)

(4) Measures to coordinate credit institutions must, both in order to protect savings and to create equal conditions of competition between these institutions, apply to all of them. Due regard must Ö should however Õ be had, where applicable, to the objective differences in their statutes and their proper aims as laid down by national laws.

ê 2000/12/EC Recital 6 (adapted)

(5) The scope of those measures should therefore be as broad as possible, covering all institutions whose business is to receive repayable funds from the public, whether in the form of deposits or in other forms such as the continuing issue of bonds and other comparable securities and to grant credits for their own account. Exceptions must Ö should Õ be provided for in the case of certain credit institutions to which this Directive cannot apply. The provisions of this Directive shall Ö should Õ not prejudice the application of national laws which provide for special supplementary authorisations permitting credit institutions to carry on specific activities or undertake specific kinds of operations.

ê 2000/12/EC Recital 7 (adapted)

(6) The approach which has been adopted is Ö It is appropriate Õ to achieve Ö effect Õ only the essential harmonisation necessary and sufficient to secure the mutual recognition of authorisation and of prudential supervision systems, making possible the granting of a single licence recognised throughout the Community and the application of the principle of home Member State prudential supervision. Therefore, the requirement that a programme of operations must be produced should be seen merely as a factor enabling the competent authorities to decide on the basis of more precise information using objective criteria. A measure of flexibility may Ö should Õ none-the-less be possible as regards the requirements on the legal form of credit institutions of Ö concerning Õ the protection of banking names.

ò new

(7) Since the objective of the proposed action cannot be sufficiently achieved by the Member States and can therefore, by reason of the scale and the effects of the action, be better achieved at Community level, the Community may adopt measures, in accordance with the principle of subsidiarity as set out in Article 5 of the Treaty. In accordance with the principle of proportionality, as set out in that Article, this Directive confines itself to the minimum required in order to achieve those objectives and does not go beyond what is necessary for that purpose.

ê 2000/12/EC Recital 8 (adapted)

(8) Equivalent financial requirements for credit institutions are necessary to ensure similar safeguards for savers and fair conditions of competition between comparable groups of credit institutions. Pending further coordination, appropriate structural ratios should be formulated that will make Ö making Õ it possible within the framework of cooperation between national authorities to observe, in accordance with standard methods, the position of comparable types of credit institutions. This procedure should help to bring about the gradual approximation of the systems of coefficients established and applied by the Member States. It is necessary, however to make a distinction between coefficients intended to ensure the sound management of credit institutions and those established for the purposes of economic and monetary policy.

ê 2000/12/EC Recital 9 (adapted)

ð new

(9) The principles of mutual recognition and home Member State supervision require that Member States' competent authorities should not grant or should withdraw Ö an Õ authorisation where factors such as Ö the Õ content of the activities programmes, the geographical distribution Ö of activities Õ or the activities actually carried on indicate clearly that a credit institution has opted for the legal system of one Member State for the purpose of evading the stricter standards in force in another Member State within whose territory it carries on or intends to carry on the greater part of its activities. A credit institution which is a legal person must Ö should Õ be authorised in the Member State in which it has its registered office. A credit institution which is not a legal person must Ö should Õ have its head office in the Member State in which it has been authorised. In addition, Member States must Ö should Õ require that a credit institution's head office always be situated in its home Member State and that it actually operates there.

ê 2000/12/EC Recital 10 (adapted)

(10) The competent authorities should not authorise or continue the authorisation of a credit institution where they are liable to be prevented from effectively exercising their supervisory functions by the close links between that institution and other natural or legal persons. Credit institutions already authorised must Ö should Õ also satisfy the competent authorities in that respect. The definition of «close links» in this Directive lays down minimum criteria. That does not prevent Member States from applying it to situations other than those envisaged by the definition. The sole fact of having acquired a significant proportion of a company's capital does not constitute participation, within the meaning of «close links», if that holding has been acquired solely as a temporary investment which does not make it possible to exercise influence over the structure or financial policy of the institution.

ê 2000/12/EC Recital 11 (adapted)

(11) The reference to the supervisory authorities' effective exercise of their supervisory functions covers supervision on a consolidated basis which must be exercised over a credit institution where the provisions of Community law so provide. In such cases, the authorities applied to for authorisation must Ö should Õ be able to identify the authorities competent to exercise supervision on a consolidated basis over that credit institution.

ê 2000/12/EC Recital 12 (adapted)

The home Member State may also establish rules stricter than those laid down in Article 5(1), first subparagraph and (2), and Articles 7, 16, 30, 51 for institutions authorised by its competent authorities.

ê 2000/12/EC Recital 13 (adapted)

The abolition of the authorisation requirement with respect to the branches of Community credit institutions necessitates the abolition of endowment capital.

ê 2000/12/EC Recital 14 (adapted)

(12) By virtue of mutual recognition, the approach chosen permits cCredit institutions authorised in their home Member States Ö should be allowed Õ to carry on, throughout the Community, any or all of the activities listed in Annex I by establishing branches or by providing services. The carrying-on of activities not listed in the said Annex enjoys the right of establishment and the freedom to provide services under the general provisions of the Treaty.

ê 2000/12/EC Recital 15 (adapted)

(13) It is appropriate, however to extend mutual recognition to the activities listed in Annex I when they are carried on by financial institutions which are subsidiaries of credit institutions, provided that such subsidiaries are covered by the consolidated supervision of their parent undertakings and meet certain strict conditions.

ê 2000/12/EC Recital 16 (adapted)

(14) The host Member State may Ö should be able Õ, in connection with the exercise of the right of establishment and the freedom to provide services, Ö to Õ require compliance with specific provisions of its own national laws or regulations on the part of institutions not authorised as credit institutions in their home Member States and with regard to activities not listed in Annex I provided that, on the one hand, such provisions are compatible with Community law and are intended to protect the general good and that, on the other hand, such institutions or such activities are not subject to equivalent rules under this legislation or regulations of their home Member States.

ê 2000/12/EC Recital 17 (adapted)

(15) The Member States must Ö should Õ ensure that there are no obstacles to carrying on activities receiving mutual recognition in the same manner as in the home Member State, as long as the latter do not conflict with legal provisions protecting the general good in the host Member State.

ê 2000/12/EC Recital 18 (adapted)

There is a necessary link between the objective of this Directive and the liberalisation of capital movements being brought about by other Community legislation. In any case the measures regarding the liberalisation of banking services must be in harmony with the measures liberalising capital movements.

ê 2000/12/EC Recital 19 (adapted)

(16) The rules governing branches of credit institutions having their head office outside the Community should be analogous in all Member States. It is important at the present time to provide that such rules may not be more favourable than those for branches of institutions from another Member State. It should be specified that tThe Community may Ö should be able to Õ conclude agreements with third countries providing for the application of rules which accord such branches the same treatment throughout its territory, account being taken of the principle of reciprocity. The branches of credit institutions authorised in third countries do Ö should Õ not enjoy the freedom to provide services under the second paragraph of Article 49 of the Treaty or the freedom of establishment in Member States other than those in which they are established. However, requests for the authorisation of subsidiaries or of the acquisition of holdings made by undertakings governed by the laws of third countries are should subject to a procedure intended to ensure that Community credit institutions receive reciprocal treatment in the third countries in question.

ê 2000/12/EC Recital 20 (adapted)

The authorisations granted to credit institutions by the competent national authorities pursuant to this Directive have Community-wide, and no longer merely nationwide, application. Existing reciprocity clauses have therefore no effect. A flexible procedure is therefore needed to make it possible to assess reciprocity on a Community basis. The aim of this procedure is not to close the Community's financial markets but rather, as the Community intends to keep its financial markets open to the rest of the world, to improve the liberalisation of the global financial markets in other third countries. To that end, this Directive provides for procedures for negotiating with third countries and, as a last resort, for the possibility of taking measures involving the suspension of new applications for authorisation or the restriction of new authorisations.

ê 2000/12/EC Recital 21 (adapted)

(17) It is desirable that aAgreement should be reached, on the basis of reciprocity, between the Community and third countries with a view to allowing the practical exercise of consolidated supervision over the largest possible geographical area.

ê 2000/12/EC Recital 22 (adapted)

(18) Responsibility for supervising the financial soundness of a credit institution, and in particular its solvency, rests Ö should lay Õ with the competent authorities of its home Member State. The host Member State's competent authorities retain Ö should be Õ responsibility Ö responsible Õ for the supervision of Ö the Õ liquidity Ö of the branches Õ and monetary policy Ö policies Õ. The supervision of market risk must Ö should Õ be the subject of close cooperation between the competent authorities of the home and host Member States.

ê 2000/12/EC Recital 23 and 24 (adapted)

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(19) The smooth operation of the internal banking market requires not only legal rules but also close and regular cooperation ð and significantly enhanced convergence of regulatory and supervisory practices ï between the competent authorities of the Member States. For the Ö To this end, in particular, Õ consideration of problems concerning individual credit institutions ð and the mutual exchange of information should take place in ï the «groupe de contact» (contact group) ð Committee of European Banking Supervisors ï set up ð by Commission Decision 2004/5/EC [15] ï between the banking supervisory authorities remains the most appropriate forum. That group is a suitable body for the mutual exchange of information provided for in Article 28. That mutual information procedure does Ö should Õ not in any case replace the bilateral collaboration Ö co-operationÕ established by Article 28. The competent host Member State authorities can,. wWithout prejudice to their powers of proper control, Ö the competent authorities of the host Member States should be able Õ continue either, in an emergency, on their own initiative or following the initiative of the competent Ö authorities of Õ home Member State authorities, to verify that the activities of a credit institution established within their territories comply with the relevant laws and with the principles of sound administrative and accounting procedures and adequate internal control.

ê 2000/12/EC Recital 25 (adapted)

(20) It is appropriate to allow the exchange of information between the competent authorities and authorities or bodies which, by virtue of their function, help to strengthen the stability of the financial system. In order to preserve the confidential nature of the information forwarded, the list of addressees must Ö should Õ remain within strict limits.

ê 2000/12/EC Recital 26 and 27 (adapted)

(21) Certain behaviour, such as fraud and insider offences, is liable to affect the stability, including the integrity, of the financial system, even when involving institutions other than credit institutions. It is necessary to specify the conditions under which such exchanges of information Ö in such cases Õ are Ö is Õ authorised.

ê 2000/12/EC Recital 28 (adapted)

(22) Where it is stipulated that information may be disclosed only with the express agreement of the competent authorities, these may Ö should be able Õ, where appropriate, Ö to Õ make their agreement subject to compliance with strict conditions.

ê 2000/12/EC Recital 29

(23) Exchanges of information between, on the one hand, the competent authorities and, on the other, central banks and other bodies with a similar function in their capacity as monetary authorities and, where appropriate, other public authorities responsible for supervising payment systems should also be authorised.

ê 2000/12/EC Recital 30 (adapted)

(24) For the purpose of strengthening the prudential supervision of credit institutions and Ö the Õ protection of clients of credit institutions, it should be stipulated that an auditors must Ö should Õ have a duty to report promptly to the competent authorities, wherever, as provided for by this Directive, he Ö during the performance of their tasks, Õ becomes aware, while carrying out his tasks, of certain facts which are liable to have a serious effect on the financial situation or the administrative and accounting organisation of a credit institution. Having regard to the aim in view, it is desirable for the Ö For the same reason Õ Member States to Ö should also Õ provide that such a duty should apply Ö applies Õ in all circumstances where such facts are discovered by an auditor during the performance of his tasks in an undertaking which has close links with a credit institution. The duty of auditors to communicate, where appropriate, to the competent authorities certain facts and decisions concerning a credit institution which they discover during the performance of their tasks in a non-financial undertaking does Ö should Õ not in itself change the nature of their tasks in that undertaking nor the manner in which they must perform those tasks in that undertaking.

ê 2000/12/EC Recitals 31 to 35 (adapted)

Common basic standards for the own funds of credit institutions are a key factor in the creation of an internal banking market since own funds serve to ensure the continuity of credit institutions and to protect savings. Such harmonisation strengthens the supervision of credit institutions and contributes to further coordination in the banking sector.

Such standards must apply to all credit institutions authorised in the Community.

The own funds of a credit institutions can serve to absorb losses which are not matched by a sufficient volume of profits. The own funds also serve as an important yardstick for the competent authorities, in particular for the assessment of the solvency of credit institutions and for other prudential purposes.

Credit institutions, in an internal banking market, engage in direct competition with each other, and the definitions and standards pertaining to own funds must therefore be equivalent. To that end, the criteria for determining the composition of own funds must not be left solely to Member States. The adoption of common basic standards will be in the best interests of the Community in that it will prevent distortions of competition and will strengthen the Community banking system.

The definition of own funds laid down in this Directive provides for a maximum of items and qualifying amounts, leaving it to the discretion of each Member State to use all or some of such items or to adopt lower ceilings for the qualifying amounts.

ê 2000/12/EC Recital 36 (adapted)

(25) This Directive specifies the Ö that for certain own funds items Õ qualifying criteria for certain own funds items Ö should be specified, without prejudice to the possibility of Õ and the Member States remain free to apply more stringent provisions.

ê 2000/12/EC Recital 37 (adapted)

At the initial stage common basic standards are defined in broad terms in order to encompass all the items making up own funds in the different Member States.

ê 2000/12/EC Recital 38

(26) According to the nature of the items making up own funds, this Directive distinguishes between on the one hand, items constituting original own funds and, on the other, those constituting additional own funds.

ê 2000/12/EC Recital 39 (adapted)

(27) To reflect the fact that items constituting additional own funds are not of the same nature as those constituting original own funds, the amount of the former included in own funds must Ö should Õ not exceed the original own funds. Moreover, the amount of certain items of additional own funds included must Ö should Õ not exceed one half of the original own funds.

ê 2000/12/EC Recital 39 (adapted)

(28) In order to avoid distortions of competition, public credit institutions must Ö should Õ not include in their own funds guarantees granted them by the Member States or local authorities.

ê 2000/12/EC Recital 40 (adapted)

(29) Whenever in the course of supervision it is necessary to determine the amount of the consolidated own funds of a group of credit institutions, the calculation shall Ö should Õ be effected in accordance with this Directive.

ê 2000/12/EC Recital 41 (adapted)

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(30) The precise accounting technique to be used for the calculation of own funds, the solvency ratio ð their adequacy for the risk to which a credit institution is exposed ï, and for the assessment of the concentration of exposures must Ö should Õ take account of the provisions of Council Directive 86/635/EEC of 8 December 1986 on the annual accounts and consolidated accounts of banks and other financial institutions[16], which incorporates certain adaptations of the provisions of Council Directive 83/349/EEC of 13 June 1983 based on Article 44(2)(g) of the Treaty on consolidated accounts Ö [17] Õ ð or of Regulation (EC) No 1606/2002 of the European Parliament and Council of 19 July 2002 on the application of international accounting standards[18] whichever governs the accounting of the credit institutions under national law ï.

ê 2000/12/EC Recital 42 to 47 (adapted)

The provisions on own funds, form part of the wider international effort to bring about approximation of the rules in force in major countries regarding the adequacy of own funds.

In an internal banking market, institutions are required to enter into direct competition with one another and the common solvency ration in the form of a minimum ratio prevent distortions of competition and strengthen the Community banking system.

The Commission will draw up a report and periodically examine, with the aim of tightening them, the provisions on own funds and thus achieving greater convergence on a common definition of own funds. Such convergence will allow the alignment of Community credit institutions' own funds.

The provisions on solvency ratios are the outcome of work carried out by the Banking Advisory Committee which is responsible for making suggestions to the Commission with a view to coordinating the coefficients applicable in the Member States.

The establishment of an appropriate solvency ratio plays a central role in the supervision of credit institutions.

A ratio which weights assets and off-balance-sheet items according to the degree of credit risk is a particularly useful measure of solvency.

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(31) Minimum capital requirements play a central role in the supervision of credit institutions and in the mutual recognition of supervisory techniques. In that respect, the provisions on minimum capital requirements should be considered in conjunction with other specific instruments also harmonising the fundamental techniques for the supervision of credit institutions.

(32) In order to prevent distortions of competition and to strengthen the banking system in the internal market, it is appropriate to lay down common minimum capital requirements.

(33) For the purposes of ensuring adequate solvency it is important to lay down minimum capital requirements which weight assets and off-balance-sheet items according to the degree of risk.

ê 2000/12/EC Recitals 48 to 51 (adapted)

The development of common standards for own funds in relation to assets and off-balance-sheet items exposed to credit risk is, accordingly, an essential aspect of the harmonisation necessary for the achievement of the mutual recognition of supervision techniques and thus the completion of the internal banking market.

In that respect, the provisions on a solvency ratio must be considered in conjunction with other specific instruments also harmonising the fundamental techniques of the supervision of credit institutions.

In an internal banking market, institutions are required to enter into direct competition with one another and the common solvency standards in the form of a minimum ratio prevent distortions of competition and strengthen the Community banking system.

This Directive provides for different weightings to be given to guarantees issued by different financial institutions. The Commission accordingly undertakes to examine whether this Directive taken as a whole significantly distorts competition between credit institutions and insurance undertakings and, in the light of that examination, to consider whether any remedial measures are justified.

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(34) It is essential to take account of the diversity of credit institutions in the Community by providing alternative approaches to the calculation of minimum capital requirements for credit risk incorporating different levels of risk-sensitivity and requiring different degrees of sophistication. Use of external ratings and credit institutions’ own estimates of individual credit risk parameters represents a significant enhancement in the risk-sensitivity and prudential soundness of the credit risk rules. There should be appropriate incentives for credit institutions to move towards the more risk-sensitive approaches.

(35) The minimum capital requirements should be proportionate to the risks addressed. In particular the reduction in risk levels deriving from having a large number of relatively small exposures should be reflected in the requirements.

(36) Increased recognition should be given to techniques of credit risk mitigation within a framework of rules designed to ensure that solvency is not undermined by undue recognition.

(37) In order to ensure that the risks and risk reductions arising from credit institutions’ securitisation activities and investments are appropriately reflected in the minimum capital requirements of credit institutions it is necessary to include rules providing for a risk-sensitive and prudentially sound treatment of such activities and investments.

ê 2000/12/EC Recital 52 (adapted)

Annex III lays down the treatment of off-balance-sheet items in the context of the calculation of credit institutions' capital requirements. With a view to the smooth functioning of the internal market and in particular with a view to ensuring a level playing field Member States are obliged to strive for uniform assessment of contractual netting agreements by their competent authorities. Annex III takes account of the work of an international forum of banking supervisors on the supervisory recognition of bilateral netting, in particular the possibility of calculating the own-funds requirements for certain transactions on the basis of a net rather than a gross amount provided that there are legally binding agreements which ensure that the credit risk is confined to the net amount. For internationally active credit institutions and groups of credit institutions in a wide range of third countries, which compete with Community credit institutions, the rules adopted on the wider international level will result in a refined supervisory treatment of over-the-counter (OTC) derivative instruments. This refinement results in a more appropriate compulsory capital cover taking into account the risk-reducing effects of supervisorily recognised contractual netting agreements on potential future credit risks. The clearing of OTC derivative instruments provided by clearing houses acting as a central counterparty plays an important role in certain Member States. It is appropriate to recognise the benefits from such a clearing in terms of a reduction of credit risk and related systemic risk in the prudential treatment of credit risk. It is necessary for the current and potential future exposures arising from cleared OTC derivatives contracts to be fully collateralised and for the risk of a build-up of the clearing house's exposures beyond the market value of posted collateral to be eliminated in order for cleared OTC derivatives to be granted for a transitional period the same prudential treatment as exchange-traded derivatives. The competent authorities must be satisfied as to the level of the initial margins and variation margins required and the quality of and the level of protection provided by the posted collateral. For credit institutions incorporated in the Member States, Annex III creates a similar possibility for the recognition of bilateral netting by the competent authorities and thereby offers them equal conditions of competition. The rules are both well balanced and appropriate for the further reinforcement of the application of prudential supervisory measures to credit institutions. The competent authorities in the Member States should ensure that the calculation of add-ons is based on effective rather than apparent national amounts.

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(38) Operational risk is a significant risk faced by credit institutions requiring coverage by own funds. It is essential to take account of the diversity of credit institutions in the Community by providing alternative approaches to the calculation of operational risk requirements incorporating different levels of risk-sensitivity and requiring different degrees of sophistication. There should be appropriate incentives for credit institutions to move towards the more risk-sensitive approaches. In view of the emerging state of the art for the measurement and management of operational risk the rules should be kept under review and updated as appropriate including in relation to the charges for different business lines and the recognition of risk mitigation techniques.

(39) In order to ensure adequate solvency of credit institutions within a group it is essential that the minimum capital requirements apply on the basis of the consolidated financial situation of the group. In order to ensure that own funds are appropriately distributed within the group and available to protect savings where needed, the minimum capital requirements should apply to individual credit institutions within a group, unless this objective can be effectively otherwise achieved.

ê 2000/12/EC Recital 53 (adapted)

The minimum ratio provided for in this Directive reinforces the capital of credit institutions in the Community. A level of 8% has been adopted following a statistical survey of capital requirements in force at the beginning of 1988.

ê 2000/12/EC Recital 54

(40) The essential rules for monitoring large exposures of credit institutions should be harmonised. Member States should still be able to adopt provisions more stringent than those provided for by this Directive.

ê 2000/12/EC Recital 55 (adapted)

(41) The monitoring and control of a credit institution's exposures is Ö should be Õ an integral part of its supervision. Ö Therefore Õ Eexcessive concentration of exposures to a single client or group of connected clients may result in an unacceptable risk of loss. Such a situation may Ö can Õ be considered prejudicial to the solvency of a credit institution.

ê 2000/12/EC Recital 56 (adapted)

(42) In an internal banking market, Ö Since Õ credit institutions Ö in the internal market Õ are engaged in direct competition, with one another and monitoring requirements throughout the Community should therefore be equivalent Ö throughout the Community Õ. To that end, the criteria applied to determining the concentration of exposures must be the subject of legally binding rules at Community level and cannot be left entirely to the discretion of the Member States. The adoption of common rules will therefore best serve the Community's interests, since it will prevent differences in the conditions of competition, while strengthening the Community's banking system.

ê 2000/12/EC Recital 57 (adapted)

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(43) The provisions on a solvency ratio for credit institutions include a list of credit risks which may be incurred by credit institutions. That list should therefore be used also for the definition of exposures for the purposes of limits to large exposures. It is not, however, ð While it is appropriate to base the definition of exposures for the purposes of limits to large exposures on that provided for the purposes of minimum own funds requirements for credit risk, it is not ï appropriate to refer on principle to the weightings or degrees of risk laid down in the said provisions. Those weightings and degrees of risk were devised for the purpose of establishing a general solvency requirement to cover the credit risk of credit institutions. In the context of the regulation of large exposures, the aim is. Ö In order Õ to limit the maximum loss that a credit institution may incur through any single client or group of connected clients. It Ö it Õ is therefore appropriate to adopt a prudent approach in which, as a general rule, account is taken of the nominal value of exposures, but no Ö rules for the determination of large exposures which take account of the nominal value of the exposure without applying Õ weightings or degrees of risk are applied.

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(44) While it is desirable, pending further review of the large exposures provisions, to permit the recognition of the effects of credit risk mitigation in a manner similar to that permitted for minimum capital requirement purposes in order to limit the calculation requirements, the rules on credit risk mitigation were designed in the context of the general diversified credit risk arising from exposures to a large number of counterparties. Accordingly, recognition of the effects of such techniques for the purposes of limits to large exposures designed to limit the maximum loss that may be incurred through any single client or group of connected clients should be subject to prudential safeguards.

ê 2000/12/EC Recital 58 (adapted)

(45) When a credit institution incurs an exposure to its own parent undertaking or to other subsidiaries of its parent undertaking, particular prudence is necessary. The management of exposures incurred by credit institutions must Ö should Õ be carried out in a fully autonomous manner, in accordance with the principles of sound banking management, without regard to any Ö other Õ considerations other than those principles. The provision of this Directive require that wWhere the influence exercised by persons directly or indirectly holding a qualifying participation in a credit institution is likely to operate to the detriment of the sound and prudent management of that institution, the competent authorities shall Ö should Õ take appropriate measures to put an end to that situation. In the field of large exposures, specific standards Ö , including more stringent restrictions, Õ should also be laid down for exposures incurred by a credit institution to its own group, and in such cases more stringent restrictions are justified than for other exposures. More stringent restrictions Ö. Such standards Õ need not, however be applied where the parent undertaking is a financial holding company or a credit institution or where the other subsidiaries are either credit or financial institutions or undertakings offering ancillary banking services, provided that all such undertakings are covered by the supervision of the credit institution on a consolidated basis. In such cases the consolidated monitoring of the group of undertakings allows for an adequate level of supervision, and does not require the imposition of more stringent limits on exposure. Under this approach banking groups will also be encouraged to organise their structures in such a way as to allow consolidated monitoring, which is desirable because a more comprehensive level of monitoring is possible.

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(46) Credit institutions should ensure that they have internal capital which, having regard to the risks to which they are or might be exposed, is adequate in quantity, quality and distribution. Accordingly, credit institutions should have strategies and processes in place for assessing and maintaining the adequacy of their internal capital.

(47) Competent authorities have responsibility to be satisfied that credit institutions have good organisation and adequate own funds, having regard to the risks to which the credit institutions are or might be exposed to.

(48) In order for the internal market in banking to operate effectively the Committee of European Banking Supervisors should contribute to the consistent application of this directive and to the convergence of supervisory practices throughout the Community.

(49) For the same reason and to ensure that Community credit institutions which are active in several Member States are not disproportionately burdened as a result of the continued responsibilities of individual Member State competent authorities for authorisation and supervision, it is essential to significantly enhance the co-operation between competent authorities. In this context the role of the consolidated supervisor should be strengthened. The Committee of European Banking Supervisors should support and enhance such co-operation.

ê 2000/12/EC Recital 65 (adapted)

(50) Supervision of credit institutions on a consolidated basis must be aimed Ö aims Õ at, in particular, protecting the interests of the depositors of the said Ö credit Õ institutions and Ö at Õ ensuring the stability of the financial system.

ê 2000/12/EC Recital 59 (adapted)

(51) In order to be effective, supervision on a consolidated basis must Ö should therefore Õ be applied to all banking groups, including those the parent undertakings of which are not credit institutions. The competent authorities must Ö should Õ hold the necessary legal instruments to be able to exercise such supervision.

ê 2000/12/EC Recital 60 (adapted)

(52) In the case of groups with diversified activities Ö where Õ the parent undertakings of which control at least one credit institution subsidiary, the competent authorities must Ö should Õ be able to assess the financial situation of a credit institution in such a group. Pending subsequent coordination, the Member States may lay down appropriate methods of consolidation for the achievement of the objective of this Directive. The competent authorities must Ö should Õ at least have the means of obtaining from all undertakings within a group the information necessary for the performance of their function. Cooperation between the authorities responsible for the supervision of different financial sectors must Ö should Õ be established in the case of groups of undertakings carrying on a range of financial activities Ö . Pending subsequent coordination, the Member States should be able to lay down appropriate methods of consolidation for the achievement of the objective of this Directive. Õ

ê 2000/12/EC Recital 61 (adapted)

(53) The Member States can, furthermore, Ö should be able to Õ refuse or withdraw banking authorisation in the case of certain group structures considered inappropriate for carrying on banking activities, in particular because such structures could not be supervised effectively. In this respect the competent authorities Ö should Õ have the Ö necessary Õ powers mentioned in the first subparagraph of Article 7(1), Article 7(2), point (c) of Article 14(l), and Article 16 of this Directive, in order to ensure the sound and prudent management of credit institutions.

ê 2000/12/EC Recitals 62 to 64 (adapted)

The Member States can equally apply appropriate supervision techniques to groups with structures not covered by this Directive. If such structures become common, this Directive should be extended to cover them.

Supervision on a consolidated basis must take in all activities defined in Annex I. All undertakings principally engaged in such activities must therefore be included in supervision on a consolidated basis. As a result, the definition of financial institutions must be widened in order to cover such activities.

Directive 86/635/EEC, together with Directive 83/349/EEC, established the rules of consolidation applicable to consolidated accounts published by credit institutions. It is therefore possible to define more precisely the methods to be used in prudential supervision exercised on a consolidated basis.

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(54) In order for the internal market in banking to operate with increasing effectiveness and for citizens of the Community to be afforded adequate levels of transparency, it is necessary that competent authorities disclose publicly and in a way which allows for meaningful comparison the manner in which this Directive is implemented.

(55) In order to strengthen market discipline and stimulate credit institutions to improve their market strategy, risk control and internal management organization, appropriate public disclosure by credit institutions should be provided for.

ê 2000/12/EC Recital 66 (adapted)

(56) The examination of problems connected with matters covered by this Directive as well as by other Directive on the business of credit institutions requires cooperation between the competent authorities and the Commission within a banking advisory committee, particularly when conducted with a view to closer coordination. The Banking Advisory Committee of the competent authorities of the Member States does not rule out other forms of cooperation between authorities which supervise the taking up and pursuit of the business of credit institutions and, in particular, cooperation within the «groupe de contact» (contact group) set up between the banking supervisory authorities.

ê 2000/12/EC Recital 67 (adapted)

(57) Technical modifications to the detailed rules laid down in this Directive may from time to time be necessary to take account of new developments in the banking sector. The Commission shall accordingly make such modifications as are necessary, after consulting the Banking Advisory Committee, within the limits of the implementing powers conferred on the Commission by the Treaty. The measures necessary for the implementation of this Directive should be adopted in accordance with Council Decision 1999/468/EC of 28 June 1999 laying down the procedures for the exercise of implementing powers conferred on the Commission Ö [19] Õ .

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(58) In order to avoid disruption to markets and to ensure continuity in overall levels of own funds it is appropriate to provide for specific transitional arrangements.

(59) In view of the risk-sensitivity of the rules relating to minimum capital requirements, it is desirable to keep under review whether these have significant effects on the economic cycle. The Commission, taking into account the contribution of the European Central Bank should report on these aspects to the European Parliament and to the Council.

ê 2000/12/EC Recital 68 (adapted)

Article 36 (1) of this Directive permits joint and several commitments of borrowers in the case of credit institutions organised as cooperative societies or funds to be treated as own funds items under Article 34 (2)(7). The Danish Government has expressed a strong interest in having its few mortgage credit institutions organised as cooperative societies or funds converted into public limited liability companies. In order to facilitate the conversion or to make it possible, a temporary derogation allowing them to include part of their joint and several commitments as own funds is required. This temporary derogation should not adversely affect competition between credit institutions.

ê 2000/12/EC Recitals 69 to 71

(69) The application of a 20% weighting to credit institutions' holdings of mortgage bonds may unsettle a national financial market on which such instruments play a preponderant role. In this case, provisional measures are taken to apply a 10% risk weighting. The market for securitisation is undergoing rapid development. It is therefore desirable that the Commission should examine with the Member States the prudential treatment of asset-backed securities and put forward, before 22 June 1999, proposals aimed at adapting existing legislation in order to define an appropriate prudential treatment for asset-backed securities. The competent authorities may authorise a 50% weighting to assets secured by mortgages on offices or on multipurpose commercial premises until 31 December 2006. The property to which the mortgage relates must be subject to rigorous assessment criteria and regular revaluation to take account of the developments in the commercial property market. The property must be either occupied or let by the owner. Loans for property development are excluded from this 50% weighting.

(70) In order to ensure harmonious application of the provisions on large exposures, Member States should be allowed to provide for the two-stage application of the new limits. For smaller credit institutions, a longer transitional period may be warranted inasmuch as too rapid an application of the 25% rule could reduce their lending activity too abruptly.

(71) Moreover, the harmonisation of the conditions relating to the reorganisation and winding-up of credit institutions is also proceeding.

ê 2000/12/EC Recital 72 (adapted)

(60) The arrangements necessary for the supervision of liquidity risks will also have to be harmonised.

ê 2000/12/EC Recital 73 (adapted)

This Directive must not affect to obligations of the Member States concerning the deadlines for transposition set out in Annex V, Part B

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(61) This Directive respects the fundamental rights and observes the principles recognised in particular by the Charter of Fundamental Rights of the European Union as general principles of Community law.

(62) The obligation to transpose this Directive into national law should be confined to those provisions which represent a substantive change as compared with the earlier Directives. The obligation to transpose the provisions which are unchanged arises under the earlier Directives.

(63) This Directive should be without prejudice to the obligations of the Member States relating to the time-limits for transposition into national law of the Directives set out in Annex XIII, Part B.

ê 2000/12/EC

HAVE ADOPTED THIS DIRECTIVE:

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CONTENTS

TITLE I || SUBJECT MATTER, SCOPE AND DEFINITIONS

TITLE II || REQUIREMENTS FOR ACCESS TO THE TAKING UP AND PURSUIT OF THE BUSINESS OF CREDIT INSTITUTIONS

TITLE III || PROVISIONS CONCERNING THE FREEDOM OF ESTABLISHMENT AND THE FREEDOM TO PROVIDE SERVICES

Section 1 || Credit institutions

Section 2 || Financial institutions

Section 3 || Exercise of the right of establishment

Section 4 || Exercise of the freedom to provide services

Section 5 || Powers of the competent authorities of the host Member State

TITLE IV || RELATIONS WITH THIRD COUNTRIES

Section 1 || Notification in relation to third countries' undertakings and conditions of access to the markets of these countries

Section 2 || Cooperation with third countries' competent authorities regarding supervision on a consolidated basis

TITLE V || PRINCIPLES AND TECHNICAL INSTRUMENTS FOR PRUDENTIAL SUPERVISION AND DISCLOSURE

Chapter 1 || Principles of prudential supervision

Section 1 || Competence of home and host Member State

Section 2 || Exchange of information and professional secrecy

Section 3 || Duty of persons responsible for the legal control of annual and consolidated accounts

Section 4 || Power of sanction and right to apply to the courts

Chapter 2 || Technical instruments of prudential supervision

Section 1 || Own funds

Section 2 || Provision against risks

Subsection 1 || Level of application

Subsection 2 || Calculation of requirements

Subsection 3 || Minimum Level of Own Funds

Section 3 || Minimum own funds requirements for credit risk

Subsection 1 || Standardised Approach

Subsection 2 || Internal Ratings based Approach

Subsection 3 || Credit risk mitigation

Subsection 4 || Securitisation

Section 4 || Minimum own funds requirements for operational risk

Section 5 || Large exposures

Section 6 || Qualifying holdings outside the financial sector

Chapter 3 || Credit institutions' assessment process

Chapter 4 || Supervision and disclosure by competent authorities

Section 1 || Supervision

Section 2 || Disclosure by competent authorities

Chapter 5 || Disclosure by credit institutions

TITLE VI || POWERS OF EXECUTION

TITLE VII || TRANSITIONAL AND FINAL PROVISIONS

Chapter 1 || Transitional provisions

Chapter 2 || Final provisions

ANNEX I || List of activities subject to mutual recognition

ANNEX II || Classification of off-balance-sheet items

ANNEX III || The treatment of derivative instruments

ANNEX IV || Types of derivatives

ANNEX V || Technical criteria on organisation and treatment of risks

ANNEX VI || Standardised Approach

ANNEX VI Part 1 || Risk weights

ANNEX VI Part 2 || Recognition of ECAIs and mapping of their credit assessments

ANNEX VI Part 3 || Use of ECAIs’ credit assessments for the determination of risk weights

ANNEX VII || Internal Ratings based Approach

ANNEX VII Part 1 || Risk weighted exposure amounts and expected loss amounts

ANNEX VII Part 2 || PD, LGD, and Maturity

ANNEX VII Part 3 || Exposure value

ANNEX VII Part 4 || Minimum Requirements for IRB Approach

ANNEX VIII || Credit risk mitigation

ANNEX VIII Part 1 || Eligibility

ANNEX VIII Part 2 || Minimum Requirements

ANNEX VIII Part 3 || Calculating the effects of credit risk mitigation

ANNEX VIII Part 4 || Maturity mismatches

ANNEX VIII Part 5 || Combinations of credit risk mitigation in the Standardised Approach

ANNEX VIII Part 6 || Basket CRM techniques

ANNEX IX || Securitisation

ANNEX IX Part 1 || Definitions for purposes of Annex X

ANNEX IX Part 2 || Minimum requirements for recognition of significant credit risk transfer and calculation of risk-weighted exposure amounts and expected loss amounts for securitised exposures

ANNEX IX Part 3 || External credit assessments

ANNEX IX Part 4 || Calculation

ANNEX X || Operational Risk

ANNEX X Part 1 || Basic Indicator Approach

ANNEX X Part 2 || Standardised Approach

ANNEX X Part 3 || Advanced Measurement Approaches

ANNEX X Part 4 || Combined use of different methodologies

ANNEX X Part 5 || Loss event type classification

ANNEX XI || Technical criteria on the review and evaluation by the competent authorities

ANNEX XII || Technical criteria on disclosure

ANNEX XII Part 1 || General criteria

ANNEX XII Part 2 || General requirements

ANNEX XII Part 3 || Qualifying requirements for the use of particular instruments or methodologies

ANNEX XIII Part A || Repealed Directives, together with their successive amendments (referred to in Article 158)

ANNEX XIII Part B || Deadlines for implementation (referred to in Article 159)

ANNEX XIV || Correlation table

ê 2000/12/EC (adapted)

TITLE I

Ö SUBJECT MATTER, SCOPE AND Õ DEFINITIONS AND SCOPE

ê 2000/12/EC Article 2(1) and (2) (adapted)

Article 1

1.           This Directive concerns Ö lays down rules concerning Õ the taking up and pursuit of the business of credit institutions Ö , and their prudential supervision Õ. This Directive shall apply to all credit institutions.

2.           Article Ö39Õ and 52 to 56 Ö Title V, Chapter 4, Section 1 Õ shall also apply to financial holding companies and mixed-activity holding companies which have their head offices in the Community.

3.           The institutions permanently excluded by paragraph 3 Ö pursuant to Article 5 Õ, with the exception, however, of the Member States’ central banks Ö of the Member States Õ, shall be treated as financial institutions for the purposes of Articles 25 and 52 to 56 Ö 39 and Title V, Chapter 4, Section 1Õ.

ê 2000/12/EC Article 2(3) (adapted)

Article 2

This Directive shall not apply to Ö the following Õ :

– the central banks of Member States,

– post office giro institutions,

– in Belgium, the «Institut de Réescompte et de Garantie/Herdiscontering- en Waarborginstituut»,

– in Denmark, the «Dansk Eksportfinansieringsfond», the «Danmarks Skibskreditfond», and «Dansk Landbrugs Realkreditfond»,

– in Germany, the «Kreditanstalt für Wiederaufbau», undertakings which are recognised under the «Wohnungsgemeinnützigkeitsgesetz» as bodies of State housing policy and are not mainly engaged in banking transactions, and undertakings recognised under that law as non-profit housing undertakings,

– in Greece, the «Ελληνική Τράπεζα Βιομηχανικής Αναπτύξεως,», (Elliniki Trapeza Viomichanikis Anaptyxeos), the «Ταμείο Παρακαταθηκών και Δανείων» (Tamio Parakatathikon kai Danion), and the «Ταχυδρομικό Ταμιευτήριο» (Tachidromiko Tamieftirio),

– in Spain, the «Instituto de Crédito Oficial»,

– in France, the «Caisse des dépôts et consignations»,

– in Ireland, credit unions and the friendly societies,

– in Italy, the «Cassa depositi e prestiti»,

– in the Netherlands, the «Netherlandse Investeringsbank voor Ontwikkelingslanden NV», the «NV Noordelijke Ontwikkelingsmaatschappij», the «NV Industriebank Limburgs Instituut voor Ontwikkeling en Financiering» and the «Overijsselse Ontwikkelingsmaatschappij NV»,

– in Austria, undertakings recognised as housing associations in the public interest and the «Österreichische Kontrollbank AG»,

– in Portugal, «Caixas Económicas» existing on 1 January 1986 with the exception of those incorporated as limited companies and of the «Caixa Económica Montepio Geral»,

– in Finland, the «Teollisen yhteistyön rahasto Oy/Fonden för industriellt samarbete AB», and the «Kera Oy/Kera Ab»,

– in Sweden, the «Svenska Skeppshypotekskassan»,

– in the United Kingdom, the National Savings Bank, the Commonwealth Development Finance Company Ltd, the Agricultural Mortgage Corporation Ltd, the Scottish Agricultural Securities Corporation Ltd, the Crown Agents for overseas governments and administrations, credit unions and municipal banks.

ê Act of accession 2003

– in Latvia, the “kra¯jaizdevu sabiedrı¯bas”, undertakings that are recognised under the “kra¯jaizdevu sabiedrı¯bu likums” as cooperative undertakings rendering financial services solely to their members,

– in Lithuania, the “kredito unijos” other than the “Centrine˙ kredito unija”,

– in Hungary, the “Magyar Fejlesztési Bank Rt.” and the “Magyar Export-Import Bank Rt.”,

– in Poland, the “Spółdzielcze Kasy Oszcze˛dnos´ciowo - Kreditowe” and the “Bank Gospodarstwa Krajowego”.’

ê Directive 2004/xx/EC Art. 3.1 (adapted)

4.         The Commission, pursuant to the procedure set out in Article 60(2) shall decide on any amendments to the list in paragraph 3.

ê 2000/12/EC Article 2(5) and (6) (adapted)

Article 3

1.         Ö One or more Õ cCredit institutions situated in the same Member State and Ö which are Õ permanently affiliated, on 15 December 1977, to a central body which supervises them and which is established in that Ö the Õ same Member State, may be exempted from the requirements of Articles Ö 7 and 11(1)Õ 6(1), 8 and 59 if, no later than 15 December 1979, national law provides that:

(a)          the commitments of the central body and affiliated institutions are joint and several liabilities or the commitments of its affiliated institutions are entirely guaranteed by the central body,

(b)          the solvency and liquidity of the central body and of all the affiliated institutions are monitored as a whole on the basis of consolidated accounts,

(c)          the management of the central body is empowered to issue instructions to the management of the affiliated institutions.

Credit institutions operating locally which are Ö permanently Õ affiliated, subsequent to 15 December 1977, to a central body within the meaning of the first subparagraph, may benefit from the conditions laid down therein if they constitute normal additions to the network belonging to that central body.

ê Directive 2004/xx/EC Art. 3.2 (adapted)

In the case of credit institutions other than those which are set up in areas newly reclaimed from the sea or have resulted from scission or mergers of existing institutions dependent or answerable to the central body, the Commission, pursuant to the procedure set out in Article 60(2) Ö 150 Õ may lay down additional rules for the application of the second subparagraph including the repeal of exemptions provided for in the first subparagraph, where it is of the opinion that the affiliation of new institutions benefiting from the arrangements laid down in the second subparagraph might have an adverse effect on competition.

ê 2000/12/EC Article 2(5) and (6) (adapted)

2.         A credit institution which, as defined Ö referred to Õ in the first subparagraph of paragraph 5 Ö 1 Õ, may also be exempted from the provisions of ArticlesÖ 9 and 10 Õ 5, and also Articles 40 to 51, and 65 Ö Title V, Chapter 2, Sections 2, 3, 4, 5 and 6 and Chapter 3 Õ provided that, without prejudice to the application of those provisions to the central body, the whole as constituted by the central body together with its affiliated institutions is subject to the abovementioned Ö those Õ provisions on a consolidated basis.

In case of exemption, Articles Ö 16, 23, 24, 25, 26(1) to (3), 28 and 29 to 37 Õ 13, 18, 19, 20(1) to (6), 21 and 22 shall apply to the whole as constituted by the central body together with its affiliated institutions.

ê 2000/12/EC Art. 1 (adapted)

Article 4

Definitions

For the purposes of this Directive, Ö the following definitions shall apply: Õ

ê 2000/28/EC Art. 1(1) to (5) (adapted)

(1) «credit institution» shall mean Ö means Õ :

(a)     an undertaking whose business is to receive deposits or other repayable funds from the public and to grant credits for its own account;or

(b)     an electronic money institution within the meaning of Directive 2000/46/EC of the European Parliament and of the Council of 18 September 2000 on the taking up, pursuit and prudential supervision of the business of electronic money institutions[20].

            For the purposes of applying the supervision on a consolidated basis, shall be considered as a credit institution, a credit institution according to the first paragraph and any private or public undertaking which corresponds to the definition in the first paragraph and which has been authorised in a third country.

            For the purposes of applying the supervision and control of large exposures, shall be considered as a credit institution, a credit institution according to the first paragraph, including branches of a credit institution in third countries and any private or public undertaking, including its branches, which corresponds to the definition in the first paragraph and which has been authorised in a third country;

(2) «authorisation» shall mean Ö means Õ an instrument issued in any form by the authorities by which the right to carry on the business of a credit institution is granted;

(3) «branch» shall mean Ö means Õa place of business which forms a legally dependent part of a credit institution and which carries out directly all or some of the transactions inherent in the business of credit institutions; any number of places of business set up in the same Member State by a credit institution with headquarters in another Member State shall be regarded as a single branch;

(4) «competent authorities» shall mean Ö means Õ the national authorities which are empowered by law or regulation to supervise credit institutions;

(5) «financial institution» shall mean Ö means Õ an undertaking other than a credit institution, the principal activity of which is to acquire holdings or to carry on one or more of the activities listed in points 2 to 12 of Annex I;

ò new

(6) «institutions», for the purposes of Sections 2 and 3 of Title V, Chapter 2, means institutions as defined in [Article 2(3) of Council Directive 96/3/EEC[21]];

ê 2000/12/EC Art. 1 (6) to (8) adapted (adapted)

(7) «home Member State» shall mean Ö means Õ the Member State in which a credit institution has been authorised in accordance with Articles 4 to 11 Ö 6 to 9 and 11 to 14 Õ ;

(8) «host Member State» shall mean Ö means Õ the Member State in which a credit institution has a branch or in which it provides services;

(9) «control» shall mean Ö means Õ the relationship between a parent undertaking and a subsidiary, as defined in Article 1 of Directive 83/349/EEC, or a similar relationship between any natural or legal person and an undertaking;

ê 2002/87/EC Art. 29(1)(a) (adapted)

ð new

(10) «participation» for the purposes of supervision on a consolidated basis and for the purposes of points Ö (o) and (p) Õ 15 and 16 of Articles 34 Ö 57 Õ (2), Ö 71 to 73 Õ Article 42 and Title V, Chapter 4 shall mean Ö means Õ participation within the meaning of the first sentence of Article 17 of Ö Council Õ Directive 78/660/EEC Ö [22] Õ, or the ownership, direct or indirect, of 20 % or more of the voting rights or capital of an undertaking;

ê 2000/12/EC Art. 1 (10) to (13) (adapted)

(11) «qualifying holding» shall mean Ö means Õ a direct or indirect holding in an undertaking which represents 10 % or more of the capital or of the voting rights or which makes it possible to exercise a significant influence over the management of the Ö that Õ undertaking in which a holding subsists. Ö ; Õ

(12) «initial capital» shall mean capital as defined in Article 34 (2)(1) and (2);

(12) «parent undertaking» shall mean Ö means Õ

(a)     a parent undertaking as defined in Articles 1 and 2 of Directive 83/349/EEC.

(b)     It shall, for the purposes of supervision on a consolidated basis and control of large exposures, mean Ö Articles 71 to 73, Title V, Chapter 2, Section 5 and Chapter 4 Õ, a parent undertaking within the meaning of Article 1(1) of Directive 83/349/EEC and any undertaking which, in the opinion of the competent authorities, effectively exercises a dominant influence over another undertaking;

(13) «subsidiary» shall mean Ö means Õ

(a)     a subsidiary undertaking as defined in Articles 1 and 2 of Directive 83/349/EEC;

(b)     It shall, for the purposes of supervision on a consolidated basis and control of large exposures, mean Ö Articles 71 to 73, Title V, Chapter 2, Section 5, and Chapter 4 Õ a subsidiary undertaking within the meaning of Article 1(1) of Directive 83/349/EEC and any undertaking over which, in the opinion of the competent authorities, a parent undertaking effectively exercises a dominant influence.

All subsidiaries of subsidiary undertakings shall also be considered subsidiaries of the undertaking that is their original parent;

ò new

(14) “parent credit institution in a Member State” means a credit institution which has a credit institution or a financial institution as a subsidiary or which holds a participation in such an institution, and which is not itself a subsidiary of another credit institution authorised in the same Member State, or of a financial holding company set up in the same Member State, and in which no other credit institution authorised in the same Member State holds a participation;

(15) “parent financial holding company in a Member State” means a financial holding company which is not itself a subsidiary of a credit institution authorised in the same Member State, or of a financial holding company set up in the same Member State;

(16) “EU parent credit institution” means a parent credit institution in a Member State which is not a subsidiary of another credit institution authorised in any Member State, or of a financial holding company set up in any Member State, and in which no other credit institution authorised in any Member State holds a participation;

(17) “EU parent financial holding company” mean a parent financial holding company in a Member State which is not a subsidiary of a credit institution authorised in any Member State;

ê 2000/12/EC Art. 1 (14) to (18) (adapted)

(14) “Zone A» shall comprise all the Member States and all other countries which are full members of the Organisation for Economic Cooperation and Development (OECD) and those countries which have concluded special lending arrangements with the International Monetary Fund (IMF) associated with the Fund's general arrangements to borrow (GAB). Any country which reschedules its external sovereign debt is, however, precluded from Zone A for a period of five years;

(15) «Zone B» shall comprise all countries not in Zone A;

(16) «Zone A credit institutions»       shall mean all credit institutions authorised in the Member States, in accordance with Article 4, including their branches in third countries, and all private and public undertakings covered by the definitions in point 1, first subparagraph and authorised in other Zone A countries, including their branches;

(17) Zone B credit institutions»          shall mean all private and public undertakings authorised outside Zone A covered by the definition in point 1, first subparagraph, including their branches within the Community;

(18) «non-bank sector» shall mean all borrowers other than credit institutions as defined in points 16 and 17, central governments and central banks, regional governments and local authorities, the European Communities, the European Investment Bank (EIB) and multilateral development banks as defined in point 19;

ê 2004/69/EC Art. 1 (adapted)

«multilateral development banks» shall mean the International Bank for Reconstruction and Development, the International Finance Corporation, the Inter-American Development Bank, the Asian Development Bank, the African Development Bank, the Council of Europe Resettlement Fund, the Nordic Investment Bank, the Caribbean Development Bank, the European Bank for Reconstruction and Development, the European Investment Fund, the Inter-American Investment Corporation and the Multilateral Investment Guarantee Agency;

ê 2000/12/EC Art. 1 (20)

(20) «full-risk», «medium-risk», «medium/low-risk» and «low-risk» off-balance-sheet items» shall mean the items described in Article 43(2) and listed in Annex II;

ò new

(18) “public sector entities” means non-commercial administrative bodies responsible to central governments, regional governments or local authorities, or authorities that in the view of the competent authorities exercise the same responsibilities as regional and local authorities;

ê 2002/87/EC Art. 29.1(b) adapted (adapted)

(19) «financial holding company» shall mean Ö means Õ a financial institution, the subsidiary undertakings of which are either exclusively or mainly credit institutions or financial institutions, at least one of such subsidiaries being a credit institution, and which is not a mixed financial holding company within the meaning of Directive 2002/87/EC of the European Parliament and of the Council of 16 December 2002 on the supplementary supervision of credit institutions, insurance undertakings and investment firms in a financial conglomerate[23];

(20) «mixed-activity holding company» shall mean Ö means Õ a parent undertaking, other than a financial holding company or a credit institution or a mixed financial holding company within the meaning of Directive 2002/87/EC, the subsidiaries of which include at least one credit institution;

ê 2000/12/EC Art. 1 (23) (adapted)

(21) «ancillary banking services undertaking» shall mean Ö means Õ an undertaking the principal activity of which consists in owning or managing property, managing data-processing services, or any other similar activity which is ancillary to the principal activity of one or more credit institutions;

ò new

(22) “operational risk” means the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events, and includes legal risk;

ê 2000/12/EC Art. 1 (24) (adapted)

«exposures» for the purpose of applying Articles 47, 48 and 49 shall mean the assets and off-balance-sheet items referred to in Article 43 and in Annexes II and IV thereto Title V, Chapter 2, Section 2, and 3, without application of the risk weightings or degrees of risk there provided for; the risks referred to in Annex IV must be calculated in accordance with one of the methods set out in Annex III, without application of the weightings for counterparty risk; all elements entirely covered by own funds may, with the agreement of the competent authorities, be excluded from the definition of exposures provided that such own funds are not included in the credit institution’s own funds calculation of the solvency ratio for the purposes of Article 44 or in the calculation of other monitoring ratios provided for in this Directive and in other Community acts; exposures shall not include:

– in the case of foreign exchange transactions, exposures incurred in the ordinary course of settlement during the 48 hours following payment, or

– in the case of transactions for the purchase or sale of securities, exposures incurred in the ordinary course of settlement during the five working days following payment or delivery of the securities, whichever is the earlier;

ò new

(23) “central banks” include the European Central Bank unless otherwise indicated;

(24) “dilution risk” means the risk that an amount receivable is reduced through cash or non-cash credits to the obligor;

(25) “probability of default” means the probability of default of a counterparty over a one year period;

(26) “loss” means economic loss, including material discount effects, and material direct and indirect costs associated with collecting on the instrument;

(27) “loss given default” means the ratio of the loss on an exposure due to the default of a counterparty to the amount outstanding at default;

(28) “conversion factor” means the ratio, to the currently undrawn amount of the commitment, of the currently undrawn amount of a commitment subject to an advised limit that will be drawn and outstanding at default;

(29) “expected loss (EL)” shall mean the ratio of the amount expected to be lost on an exposure from a potential default of a counterparty or dilution over a one year period to the amount outstanding at default;

(30) “credit risk mitigation” means a technique used by a credit institution to reduce the credit risk associated with an exposure or exposures which the credit institution continues to hold;

(31) “funded credit protection” means a technique of credit risk mitigation where the reduction of the credit risk on the exposure of a credit institution derives from the right of the credit institution - in the event of the default of the counterparty or on the occurrence of other specified credit events relating to the counterparty - to liquidate, or to obtain transfer or appropriation of, or to retain certain assets or amounts, or to reduce the amount of the exposure to, or to replace it with, the amount of the difference between the amount of the exposure and the amount of a claim on the credit institution;

(32) “unfunded credit protection” means a technique of credit risk mitigation where the reduction of the credit risk on the exposure of a credit institution derives from the undertaking of a third party to pay an amount in the event of the default of the borrower or on the occurrence of other specified events;

(33) “repurchase transaction” means any transaction governed by an agreement falling within the definition of ‘repurchase agreement’ or ‘reverse repurchase agreement’ as defined in [Article 3 point (m) of Directive 93/6/EEC];

(34) “securities or commodities lending or borrowing transaction” means any transaction falling within the definition of ‘securities or commodities lending’ or ‘securities or commodities borrowing’ as defined in [Article 3 point (n) of Directive 93/6/EEC];

(35) “cash assimilated instrument” means a certificate of deposit or other similar instrument issued by the lending credit institution;

(36) “securitisation” means a transaction or scheme, whereby the credit risk associated with an exposure or pool of exposures is tranched, having the following characteristics:

(a)     payments in the transaction or scheme are dependent upon the performance of the exposure or pool of exposures;

(b)     the subordination of tranches determines the distribution of losses during the ongoing life of the transaction or scheme;

(37) “traditional securitisation” means a securitisation involving the economic transfer of the exposures being securitised to a securitisation special purpose entity which issues securities. This shall be accomplished by the transfer of ownership of the securitised exposures from the originator credit institution or through sub-participation. The securities issued do not represent payment obligations of the originator credit institution;

(38) “synthetic securitisation” means a securitisation where the tranching is achieved by the use of credit derivatives or guarantees, and the pool of exposures is not removed from the balance sheet of the originator credit institution;

(39) “tranche” means a contractually established segment of the credit risk associated with an exposure or number of exposures, where a position in the segment entails a risk of credit loss greater than or less than a position of the same amount in each other such segment, without taking account of credit protection provided by third parties directly to the holders of positions in the segment or in other segments;

(40) “securitisation position” shall mean an exposure to a securitisation;

(41) “originator” means either of the following:

(a)     an entity which, either itself or through related entities, directly or indirectly, was involved in the original agreement which created the obligations or potential obligations of the debtor or potential debtor giving rise to exposure being securitised;

(b)     an entity which purchases a third party’s exposures onto its balance sheet and then securitises them;

(42) “sponsor” means a credit institution other than an originator credit institution that establishes and manages an asset-backed commercial paper programme or other securitisation scheme that purchases exposures from third party entities;

(43) “credit enhancement” means a contractual arrangement whereby the credit quality of a position in a securitisation is improved in relation to what it would have been if the enhancement had not been provided, including the enhancement provided by more junior tranches in the securitisation and other types of credit protection;

(44) “securitisation special purpose entity (SSPE)” means a corporation trust or other entity, other than a credit institution, organised for carrying on a securitisation or securitisations, the activities of which are limited to those appropriate to accomplishing that objective, the structure of which is intended to isolate the obligations of the SSPE from those of the originator credit institution, and the holders of the beneficial interests in which have the right to pledge or exchange those interests without restriction;

ê 2000/12/EC Article 1(25) to (27) (adapted)

(45) «group of connected clients» shall mean Ö means Õ :

(a)     two or more natural or legal persons who, unless it is shown otherwise, constitute a single risk because one of them, directly or indirectly, has control over the other or others; or

(b)     two or more natural or legal persons between whom there is no relationship of control as defined Ö set out Õ in the first indent but who are to be regarded as constituting a single risk because they are so interconnected that, if one of them were to experience financial problems, the other or all of the others would be likely to encounter repayment difficulties;

(46) «close links» shall mean Ö means Õ a situation in which two or more natural or legal persons are linked by Ö in any of the following ways Õ :

(a)     participation , which shall mean the Ö in the form of Õ ownership, direct or by way of control, of 20% or more of the voting rights or capital of an undertaking, or;

(b)     control, which shall mean the relationship between a parent undertaking and a subsidiary, in all the cases referred to in Article 1(1) and (2) of Directive 83/349/EEC, or a similar relationship between any natural or legal person and an undertaking; any subsidiary undertaking of a subsidiary undertaking shall also be considered a subsidiary of the parent undertaking which is at the head of those undertakings.;

(c)     A situation in which two or more natural or legal persons are permanently linked Ö the fact that both or all are permanently linked Õ to one and the same Ö third Õ person by a control relationship shall also be regarded as constituting a close link between such persons;

(47) «recognised exchanges» shall mean Ö means Õ exchanges Ö which are Õ recognised Ö as such Õ by the competent authorities Ö and Õ which Ö meet the following conditions:Õ

(a)     Öthey Õ function regularly;

(b)     Öthey Õhave rules, issued or approved by the appropriate authorities of the home country of the exchange, which define Ö defining Õthe conditions for the operation of the exchange, the conditions of access to the exchange as well as the conditions that must be satisfied by a contract before it can effectively be dealt on the exchange;

(c)     Öthey Õhave a clearing mechanism that provides for Ö whereby Õ contracts listed in Annex IV to be Ö are Õ subject to daily margin requirements providing an appropriate protection Ö which, Õ in the opinion of the competent authorities Ö, provide appropriate protection Õ in the opinion of the competent authorities.

ê 2000/12/EC Art. 3 (adapted)

Article 5

Prohibition for undertakings other than credit institutions from carrying on the business of taking deposits or other repayable funds from the public

The Member States shall prohibit persons or undertakings that are not credit institutions from carrying on the business of taking deposits or other repayable funds from the public.

Ö The first paragraph Õ This prohibition shall not apply to the taking of deposits or other funds repayable by a Member State or by a Member State's regional or local authorities or by public international bodies of which one or more Member States are members or to cases expressly covered by national or Community legislation, provided that those activities are subject to regulations and controls intended to protect depositors and investors and applicable to those cases.

ê 2000/12/EC

TITLE II

REQUIREMENTS FOR ACCESS TO THE TAKING UP AND PURSUIT OF THE BUSINESS OF CREDIT INSTITUTIONS

ê 2000/12/EC Art. 4 (adapted)

è1 Directive 2004/xx/EC Art. 3

Article 6

Authorisation

Member States shall require credit institutions to obtain authorisation before commencing their activities. Ö Without prejudice to Articles 7 to 9, 11 and 12Õ Tthey shall lay down the requirements for such authorisation subject to Articles 5 to 9, and notify them to è1 the Commission ç .

ê 2000/12/EC Art. 8 (adapted)

Article 7

Programme of operations and structural organisation

Member States shall require applications for authorisation to be accompanied by a programme of operations setting out, inter alia, the types of business envisaged and the structural organisation of the institution.

ê 2000/12/EC Article 9 (adapted)

Article 8

Economic needs

Member States may not require the application for authorisation to be examined in terms of the economic needs of the market.

ê 2000/12/EC Art. 5(1) (adapted)

Article 9

Initial capital

1.           Without prejudice to other general conditions laid down by national law, the competent authorities shall not grant authorisation when the credit institution does not possess separate own funds or in cases where initial capital is less than EUR 5 million.

ê 2000/12/EC Art. 1 (11) (adapted)

«Initial capital» shall mean Ö comprise Õ capital Ö and reserves as referred to Õ as defined in Article 34 Ö 57(a) and (b) Õ (2)(1) and (2).

ê 2000/12/EC Article 5(1) and (2) (adapted)

Member States may decide that credit institutions which do not fulfil the requirement of separate own funds and which were in existence on 15 December 1979 may continue to carry on their business. They may exempt such credit institutions from complying with the requirement contained in the first subparagraph of Article Ö 11 Õ 6(1).

2.           The Member States Ö may, subject to the following conditions, grant Õ shall, however, have the option of grantingauthorisation to particular categories of credit institutions the initial capital of which is less than that Ö specified Õ prescribed in paragraph 1. In such cases:

(a)     the initial capital Ö must Õ shall not be less than EUR 1 million;

(b)     the Member States concerned must notify the Commission of their reasons for Ö exercising Õ using Ö this option Õmaking use of the option provided for in this paragraph,

(c)     when the list referred to in Article 11 is published, the name of each credit institution that does not have the minimum capital Ö specified Õ prescribed in paragraph 1 Ö must Õ shall be annotated to that effect Ö in the list referred to in Article 14. Õ

ê 2000/12/EC Art. 5(3) to (7) (adapted)

Article 10

1.         A credit institution's own funds may not fall below the amount of initial capital required by Ö under Article 9 Õ paragraphs 1 and 2 at the time of its authorisation.

2.         The Member States may decide that credit institutions already in existence on 1 January 1993, the own funds of which do not attain the levels specified for initial capital in Ö Article 9 Õ paragraphs 1 and 2, may continue to carry on their activities. In that event, their own funds may not fall below the highest level reached with effect from 22 December 1989.

3.         If control of a credit institution falling within the category referred to in paragraph Ö 2 Õ 4 is taken by a natural or legal person other than the person who controlled the institution previously, the own funds of that Ö credit Õ institution must attain at least the level Ö specified Õ prescribed for initial capital in Ö Article 9 Õ paragraphs 1 and 2.

4.         In certain specific circumstances and with the consent of the competent authorities, where there is a merger of two or more credit institutions falling within the category referred to in paragraph 4 Ö 2 Õ , the own funds of the Ö credit Õ institution resulting from the merger may not fall below the total own funds of the merged Ö credit Õ institutions at the time of the merger, as long as the appropriate levels Ö specified in Õ pursuant to Ö Article 9 Õ paragraphs 1 and 2 have not been attained.

5.         If, in the cases referred to in paragraphs Ö 1, 2 and 4 Õ 3, 4 and 6, the own funds should be reduced, the competent authorities may, where the circumstances justify it, allow an Ö credit Õ institution a limited period in which to rectify its situation or cease its activities.

ê 2000/12/EC Article 6 (adapted)

Article 11

Management body and place of the head office of credit institutions

1.           The competent authorities shall grant an authorisation to the credit institution only when there are at least two persons who effectively direct the business of the credit institution.

Ö They Õ Moreover, the authorities concerned shall not grant authorisation if these persons are not of sufficiently good repute or lack sufficient experience to perform such duties.

2.           Each Member State shall require that:

(a)     any credit institution which is a legal person and which, under its national law, has a registered office Ö shall Õ have its head office in the same Member State as its registered office;

(b)     any other credit institution Ö shall Õ have its head office in the Member State which issued its authorisation and in which it actually carries on its business.

ê 2000/12/EC Art. 7 (adapted)

Article 12

Shareholders and members

1.           The competent authorities shall not grant authorisation for the taking-up of the business of credit institutions Ö unless Õ before they have been informed of the identities of the shareholders or members, whether direct or indirect, natural or legal persons, that have qualifying holdings, and of the amounts of those holdings.

Ö In determining a Õ For the purpose of the definition of qualifying holding in the context of this Article, the voting rights referred to in Article 7 Ö 92 Õ of CouncilDirective 88/627/EEC[24] Ö 2001/34/EC of the European Parliament and of the Council[25] Õ shall be taken into consideration.

2.           The competent authorities shall refuse authorisation if, taking into account the need to ensure the sound and prudent management of a credit institution, they are not satisfied as to the suitability of the abovementioned shareholders or members.

3.           Where close links exist between the credit institution and other natural or legal persons, the competent authorities shall grant authorisation only if those links do not prevent the effective exercise of their supervisory functions.

The competent authorities shall also refuse authorisation if the laws, regulations or administrative provisions of a Ö third Õ non-member country governing one or more natural or legal persons with which the credit institution has close links, or difficulties involved in their enforcement Ö of those laws, regulations or administrative provisions Õ , prevent the effective exercise of their supervisory functions.

The competent authorities shall require credit institutions to provide them with the information they require to monitor compliance with the conditions referred to in this paragraph on a continuous basis.

ê 2000/12/EC Articles 8 & 9 (adapted)

Article 8

Programme of operations and structural organisation

Member States shall require applications for authorisation to be accompanied by a programme of operations setting out, inter alia, the types of business envisaged and the structural organisation of the institution.

Article 9

Economic needs

Member States may not require the application for authorisation to be examined in terms of the economic needs of the market.

ê 2000/12/EC Article 10 (adapted)

Article 13

Authorisation refusal

Reasons shall be given whenever an authorisation is refused and the applicant shall be notified thereof within six months of receipt of the application or, should the latter be incomplete, within six months of the applicant's sending the information required for the decision. A decision shall, in any case, be taken within 12 months of the receipt of the application.

ê 2000/12/EC Article 11 (adapted)

Article 14

Notification of the authorisation to the Commission

Every authorisation shall be notified to the Commission.

Ö The name of e Õ Each credit institution Ö to Õ shall be entered in a list Ö which authorisation has been granted shall be entered in a list Õ. which t Ö The Õ the Commission shall publish Ö that list Õ in the Official Journal of the European Ö Union Õ Communities and shall keep Ö it Õ up to date.

ê 2000/12/EC Art. 12 (adapted)

Article 15

Prior consultation with the competent authorities of other Member States

1.         Ö The competent authority shall, before granting authorisation to a credit institution, Õ There must be prior consultation with Ö consult Õ the competent authorities of the other Member State involved on the authorisation of a credit institution Ö in the following cases Õ which is:

Ö (a)  the credit institution concerned is Õ a subsidiary of a credit institution authorised in another Member State, or

Ö (b) the credit institution concerned is Õ a subsidiary of the parent undertaking of a credit institution authorised in another Member State, or;

Ö (c)  the credit institution concerned is Õ controlled by the same persons, whether natural or legal, as control a credit institution authorised in another Member State.

ê 2002/87/EC Art. 29.2 (adapted)

2.         The competent authority Ö shall, before granting authorisation to a credit institution, consult the competent authority Õ of a Member State involved, responsible for the supervision of insurance undertakings or investment firms, shall be consulted prior to the granting of an authorisation to a credit institution which is: Ö in the following cases: Õ

(a)     Ö the credit institution concerned is Õ a subsidiary of an insurance undertaking or investment firm authorised in the Community, or;

(b)     Ö the credit institution concerned is Õ a subsidiary of the parent undertaking of an insurance undertaking or investment firm authorised in the Community;or

(c)     Ö the credit institution concerned is Õ controlled by the same person, whether natural or legal, Ö as Õ who controls an insurance undertaking or investment firm authorised in the Community.

3.         The relevant competent authorities referred to in the first and second paragraphs Ö 1 and 2 Õ shall in particular consult each other when assessing the suitability of the shareholders and the reputation and experience of directors involved in the management of another entity of the same group. They shall Ö exchange Õ inform each other of any information regarding the suitability of shareholders and the reputation and experience of directors which is of relevance to the other competent authorities involved for the granting of an authorisation as well as for the ongoing assessment of compliance with operating conditions.

ê 2000/12/EC Article 13 (adapted)

Article 16

Branches of credit institutions authorised in another Member State

Host Member States may not require authorisation or endowment capital for branches of credit institutions authorised in other Member States. The establishment and supervision of such branches shall be effected Ö in accordance with Articles 22, 25, 26(1) to (3), 29 to 37 and 40Õ as prescribed in Articles 17, 20(l) to (6) and Articles 22 and 26.

ê 2000/12/EC Art. 14 (adapted)

Article 17

Withdrawal of authorisation

1.           The competent authorities may withdraw the authorisation issued to a credit institution only where such an institution:

(a)     does not make use of the authorisation within 12 months, expressly renounces the authorisation or has ceased to engage in business for more than six months, if the Member State concerned has made no provision for the authorisation to lapse in such cases;

(b)     has obtained the authorisation through false statements or any other irregular means;

(c)     no longer fulfils the conditions under which authorisation was granted;

(d)     no longer possesses sufficient own funds or can no longer be relied on to fulfil its obligations towards its creditors, and in particular no longer provides security for the assets entrusted to it;

(e)     falls within one of the other cases where national law provides for withdrawal of authorisation.

2.           Reasons Ö shall Õ must be given for any withdrawal of authorisation and those concerned informed thereof;. Ssuch withdrawal shall be notified to the Commission.

ê 2000/12/EC Article 15 (adapted)

Article 18

Name

For the purposes of exercising their activities, credit institutions may, notwithstanding any provisions Ö in the host Member State Õ concerning the use of the words «bank», «savings bank» or other banking names which may exist in the host Member State, use throughout the territory of the Community the same name as they use in the Member State in which their head office is situated. In the event of there being any danger of confusion, the host Member State may, for the purposes of clarification, require that the name be accompanied by certain explanatory particulars.

ê 2000/12/EC Art. 16 (1) (adapted)

Article 19

Qualifiying holding in a credit institution

1.           The Member States shall require any natural or legal person who proposes to hold, directly or indirectly, a qualifying holding in a credit institution first to inform the competent authorities, telling them of the size of the intended holding.

Such a person must likewise inform the competent authorities if he proposes to increase his qualifying holding so that the proportion of the voting rights or of the capital held by him would reach or exceed 20%, 33% or 50% or so that the credit institution would become his subsidiary.

Without prejudice to the provisions of paragraph 2, the competent authorities shall have a maximum of three months from the date of the notification provided for in the first Ö and second subparagraphs Õ subparagraph to oppose such a plan if, in view of the need to ensure sound and prudent management of the credit institution, they are not satisfied as to the suitability of the person Ö concerned Õ referred to in the first subparagraph. If they do not oppose the plan referred to in the first subparagraph, they may fix a maximum period for its implementation.

ê 2002/87/EC Art. 29.3 (adapted)

2.           If the Ö person proposing to acquire Õ acquirer of the holdings referred to in paragraph 1 is a credit institution, insurance undertaking or investment firm authorised in another Member State or the parent undertaking of a credit institution, insurance undertaking or investment firm authorised in another Member State or a natural or legal person controlling a credit institution, insurance undertaking or investment firm authorised in another Member State, and if, as a result of that acquisition, the Ö credit Õ institution in which the acquirer proposes to hold a holding would become a subsidiary or subject to the control of the acquirer, the assessment of the acquisition Ö shall Õ must be subject to the prior consultation Ö provided for Õ referred to in Article Ö 15 Õ 12.

ê 2000/12/EC Article 16(3)

Article 20

3. The Member States shall require any natural or legal person who proposes to dispose, directly or indirectly, of a qualifying holding in a credit institution first to inform the competent authorities, telling them of the size of his intended holding. Such a person must likewise inform the competent authorities if he proposes to reduce his qualifying holding so that the proportion of the voting rights or of the capital held by him would fall below 20%, 33% or 50% or so that the credit institution would cease to be his subsidiary.

ê 2000/12/EC Art. 16 (4) to (6) (adapted)

Article 21

14.         On becoming aware of them, c Ö Credit Õ credit institutions shall Ö , on becoming aware Õ inform the competent authorities of any acquisitions or disposals of holdings in their capital that cause holdings to exceed or fall below one of the thresholds referred to in Ö Article 19(1) and Article 20 Õ paragraphs 1 and 3 Ö , inform the competent authorities of those acquisitions or disposals. Õ

They shall also, at least once a year, inform Ö the competent authorities Õ them of the names of shareholders and members possessing qualifying holdings and the sizes of such holdings as shown, for example, by the information received at the annual general meetings of shareholders and members or as a result of compliance with the regulations relating to companies listed on stock exchanges.

25.         The Member States shall require that, where the influence exercised by the persons referred to in Ö Article 19(1) Õ paragraph 1 is likely to operate to the detriment of the prudent and sound management of the institution, the competent authorities shall take appropriate measures to put an end to that situation. Such measures may consist for example in injunctions, sanctions against directors and managers, or the suspension of the exercise of the voting rights attaching to the shares held by the shareholders or members in question.

Similar measures shall apply to natural or legal persons Ö who fail Õ failing to comply with the obligation to provide prior information, as laid down in Ö Article 19 (1). Õ paragraph 1. If a holding is acquired despite the opposition of the competent authorities, the Member States shall, regardless of any other sanctions to be adopted, provide either for exercise of the corresponding voting rights to be suspended, or for the nullity of votes cast or for the possibility of their annulment.

36.         Ö In determining a Õ For the purposes of the definition of qualifying holding and other levels of holding Ö referred to Õ set out in this Article, the voting rights referred to in Article 7 Ö 92 Õ of Council Directive 88/627/EEC Ö Directive 2001/34/EC Õ shall be taken into consideration.

ê 2000/12/EC Article 17 (adapted)

ð new

Article 22

Procedures and internal control mechanisms

1.           Home Member State competent authorities shall require that every credit institution have sound administrative and accounting procedures and adequate internal control mechanisms. ð have robust governance arrangements, which include a clear organisational structure with well defined, transparent and consistent lines of responsibility, effective processes to identify, manage, monitor and report the risks it is or might be exposed to, and adequate internal control mechanisms, including sound administrative and accounting procedures. ï

2.           The arrangements, processes and mechanisms referred to in paragraph 1 shall be comprehensive and proportionate to the nature, scale and complexity of the credit institution’s activities. The technical criteria laid down in Annex V shall be taken into account.

ê 2000/12/EC

TITLE III

PROVISIONS CONCERNING THE FREEDOM OF ESTABLISHMENT AND THE FREEDOM TO PROVIDE SERVICES

ê 2000/12/EC (adapted)

Ö Section 1 Credit institutions Õ

ê 2000/12/EC Art. 18 (adapted)

Article 23

Credit institutions

The Member States shall provide that the activities listed in Annex I may be carried on within their territories, in accordance with Articles Ö 25, 26(1) to (3), 28(1) and (2) and 29 to 37 Õ 20(1) to (6), 21(1) and (2), and 22, either by the establishment of a branch or by way of the provision of services, by any credit institution authorised and supervised by the competent authorities of another Member State, provided that such activities are covered by the authorisation.

ê 2000/12/EC (adapted)

Ö Section 2 Financial institutions Õ

ê 2000/12/EC Article 19 1st & 3rd paragraphs (adapted)

Article 24

Financial institutions

1.           The Member States shall also provide that the activities listed in Annex I may be carried on within their territories, in accordance with Articles Ö 25, 26(1) to (3), 28(1) and (2) and 29 to 37 Õ 20(1) to (6), 21(1) and (2), and 22, either by the establishment of a branch or by way of the provision of services, by any financial institution from another Member State, whether a subsidiary of a credit institution or the jointly-owned subsidiary of two or more credit institutions, the memorandum and aArticles of association of which permit the carrying on of those activities and which fulfils each of the following conditions:

(a)     the parent undertaking or undertakings must be authorised as credit institutions in the Member State by the law of which the Ö financial institution Õ subsidiary is governed.;

(b)     the activities in question must actually be carried on within the territory of the same Member State.;

(c)     the parent undertaking or undertakings must hold 90% or more of the voting rights attaching to shares in the capital of the Ö financial institution; Õ subsidiary.

(d)     the parent undertaking or undertakings must satisfy the competent authorities regarding the prudent management of the Ö financial institution Õ subsidiary and must have declared, with the consent of the relevant home Member State competent authorities, that they jointly and severally guarantee the commitments entered into by the Ö financial institution; Õ subsidiary,

(e)     the Ö financial institution Õ subsidiary must be effectively included, for the activities in question in particular, in the consolidated supervision of the parent undertaking, or of each of the parent undertakings, in accordance with Articles 52 to 56 Ö Title V, Chapter 4, Section 1 Õ , in particular for the calculation of the solvency ratio, for the control of large exposures and for purposes of the limitation of holdings provided for in Article Ö 120 Õ 50.

Compliance with these conditions Ö shall Õ must be verified by the competent authorities of the home Member State and the latter Ö shall Õ must supply the Ö financial institution Õ subsidiary with a certificate of compliance which must form part of the notification referred to in Articles Ö 25 and 28 Õ 20(1) to (6), and 21(1) and (2).

The competent authorities of the home Member State shall ensure the supervision of the Ö financial institution Õ subsidiary in accordance with Articles Ö10 (1), 19 to 22, 40, 42 to 52 and 54 Õ 5(3), 16, 17, 26, 28, 29, 30, and 32.

ê 2000/12/EC Art. 19 (sixth paragraph) (adapted)

2.           If a financial institution Ö as referred to in the first subparagraph of paragraph 1 Õ eligible under this Article should ceases to fulfil any of the conditions imposed, the home Member State shall notify the competent authorities of the host Member State and the activities carried on by that Ö financial Õ institution in the host Member State shall become subject to the legislation of the host Member State.

ê 2000/12/EC Art. 19 fourth paragraph (adapted)

3.           The provisions mentioned in Ö paragraphs 1 and 2 Õ this Article shall apply mutatis mutandis to subsidiaries Öof a financial institution as referred to in the first subparagraph of paragraph 1 Õsubject to the necessary modifications. In particular, the words «credit institution» should be read as «financial institution fulfilling the conditions laid down in Article 19» and the word «authorisation» as «memorandum and Articles of association».

ê 2000/12/EC Art. (19) 5th & 6th paragraphs (adapted)

The second subparagraph of Article 20(3) shall read:

«The home Member State competent authorities shall also communicate the amount of own funds of the subsidiary financial institution and the consolidated solvency ratio of the credit institution which is its parent undertaking».

If a financial institution eligible under this Article should cease to fulfil any of the conditions imposed, the home Member State shall notify the competent authorities of the host Member State and the activities carried on by that institution in the host Member State become subject to the legislation of the host Member State.

ê 2000/12/EC (adapted)

Ö Section 3 Exercise of the right of establishmentÕ

ê 2000/12/EC Art. 20 (1) (2) & (3) 1st & 2nd subparagraphs (adapted)

Article 25

Exercise of the right of establishment

1.           A credit institution wishing to establish a branch within the territory of another Member State shall notify the competent authorities of its Ö home Õ Member State.

2.           TheMember States State shall require every credit institution wishing to establish a branch in another Member State to provide the following information when effecting the notification referred to in paragraph 1:

(a)     the Member State within the territory of which it plans to establish a branch;

(b)     a programme of operations setting out, inter alia, the types of business envisaged and the structural organisation of the branch;

(c)     the address in the host Member State from which documents may be obtained;

(d)     the names of those Ö to be Õ responsible for the management of the branch.

3.           Unless the competent authorities of the home Member State have reason to doubt the adequacy of the administrative structure or the financial situation of the credit institution, taking into account the activities envisaged, they shall within three months of receipt of the information referred to in paragraph 2 communicate that information to the competent authorities of the host Member State and shall inform the Ö credit Õ institution accordingly.

The home Member State competent authorities shall also communicate the amount of own funds and the solvency ratio of the credit institution.

ê 2000/12/EC Art. 19 5th subparagraph (adapted)

Ö By way of derogation from the second subparagraph, in the case referred to in Article 24,Õ “The the home Member State competent authorities shall also communicate the amount of own funds of the subsidiary the financial institution and the consolidated solvency ratio of the credit institution which is its parent undertaking.”

ê 2000/12/EC Art. 20 (3) 3rd subparagraph (adapted)

4.           Where the competent authorities of the home Member State refuse to communicate the information referred to in paragraph 2 to the competent authorities of the host Member State, they shall give reasons for their refusal to the Ö credit Õ institution concerned within three months of receipt of all the information.

That refusal, or a failure to reply, shall be subject to a right to apply to the courts in the home Member State.

ê 2000/12/EC Art. 20(4) to (7) (adapted)

Article 26

14.         Before the branch of a credit institution commences its activities the competent authorities of the host Member State shall, within two months of receiving the information Ö referred to Õ mentioned in Ö Article 25 Õ (paragraph3), prepare for the supervision of the credit institution in accordance with Ö Section 5 Õ Article 22 and if necessary indicate the conditions under which, in the interest of the general good, those activities must be carried on in the host Member State.

25.         On receipt of a communication from the competent authorities of the host Member State, or in the event of the expiry of the period provided for in paragraph 14 without receipt of any communication from the latter, the branch may be established and Ö may Õ commence its activities.

36.         In the event of a change in any of the particulars communicated pursuant to Ö points (b), (c) or (d) of Article 25 Õ (paragraph2) (b), (c) or (d), a credit institution shall give written notice of the change in question to the competent authorities of the home and host Member States at least one month before making the change so as to enable the competent authorities of the home Member State to take a decision pursuant to Ö Article 25 Õ(paragraph3) and the competent authorities of the host Member State to take a decision on the change pursuant to paragraph 14 Ö of this Article. Õ 4.

47.         Branches which have commenced their activities, in accordance with the provisions in force in their host Member States, before 1 January 1993, shall be presumed to have been subject to the procedure laid down in Ö Article 25 and in Õ paragraphs 1 Ö and 2 Õ to 5 Ö of this Article. Õ They shall be governed, from Ö that Õ the abovementioned date, by paragraph 6 Ö 3 of this Article Õ , and by Ö Article 23, Sections 2 and 5 and Article 43 Õ Articles 18, 19, 22 and 29.

ê 2000/12/EC Art. 1 (3) final clause

Article 27

Any any number of places of business set up in the same Member State by a credit institution with headquarters in another Member State shall be regarded as a single branch;.

ê 2000/12/EC (adapted)

Ö Section 4 Exercise of the freedom to provide services Õ

ê 2000/12/EC Art. 21 (adapted)

Article 28

Exercise of the freedom to provide services

1.           Any credit institution wishing to exercise the freedom to provide services by carrying on its activities within the territory of another Member State for the first time shall notify the competent authorities of the home Member State, of the activities on the list in Annex I which it intends to carry on.

2.           The competent authorities of the home Member State shall, within one month of receipt of the notification Ö provided for Õ mentioned in paragraph 1, send that notification to the competent authorities of the host Member State.

3.           This Article shall not affect rights acquired by credit institutions providing services before 1 January 1993.

ê 2000/12/EC (adapted)

Ö Section 5 Powers of the competent authorities of the host Member State Õ

ê 2000/12/EC Art. 22(1) (adapted)

Article 29

Power of the competent authorities of the host Member State

1.Host Member States may, for statistical purposes, require that all credit institutions having branches within their territories shall report periodically on their activities in those host Member States to the competent authorities of those host Member States.

In discharging the responsibilities imposed on them in Article Ö 41 Õ 27, host Member States may require that branches of credit institutions from other Member States provide the same information as they require from national credit institutions for that purpose.

ê 2000/12/EC Art. 22(2) to (4) (adapted)

Article 30

12.         Where the competent authorities of a host Member State ascertain Ö that Õ than an Ö credit Õ institution having a branch or providing services within its territory is not complying with the legal provisions adopted in that State pursuant to the provisions of this Directive involving powers of the host Member State's competent authorities, those authorities shall require the Ö credit Õ institution concerned to put an end to that irregular situation.

23.         If the Ö credit Õ institution concerned fails to take the necessary steps, the competent authorities of the host Member State shall inform the competent authorities of the home Member State accordingly.

The competent authorities of the home Member State shall, at the earliest opportunity, take all appropriate measures to ensure that the Ö credit Õ institution concerned puts an end to that irregular situation. The nature of those measures shall be communicated to the competent authorities of the host Member State.

34.         If, despite the measures taken by the home Member State or because such measures prove inadequate or are not available in the Member State in question, the Ö credit Õ institution persists in violating the legal rules referred to in paragraph 2 Ö 1 Õ in force in the host Member State, the latter State may, after informing the competent authorities of the home Member State, take appropriate measures to prevent or to punish further irregularities and, in so far as is necessary, to prevent that Ö credit Õ institution from initiating further transactions within its territory. The Member States shall ensure that within their territories it is possible to serve the legal documents necessary for these measures on credit institutions.

ê 2000/12/EC Art. 22(5) (adapted)

Article 31

5.The provisions of Ö Articles 29 and 30 Õ paragraph 1 to 4 shall not affect the power of host Member States to take appropriate measures to prevent or to punish irregularities committed within their territories which are contrary to the legal rules they have adopted in the interests of the general good. This shall include the possibility of preventing offending Ö credit Õ institutions from initiating any further transactions within their territories.

ê 2000/12/EC Art. 22(6) (adapted)

Article 32

6. Any measure adopted pursuant to paragraph (2) Ö Article 30(2) and (3), or Article 31 Õ paragraph 3, 4 and 5 involving penalties or restrictions on the exercise of the freedom to provide services must be properly justified and communicated to the Ö credit Õ institution concerned. Every such measure shall be subject to a right of appeal to the courts in the Member State the authorities of which adopted it.

ê 2000/12/EC Art. 22(7) (adapted)

Article 33

7. Before following the procedure provided for in Ö Article 30 Õ paragraph 2, 3 and 4, the competent authorities of the host Member State may, in emergencies, take any precautionary measures necessary to protect the interests of depositors, investors and others to whom services are provided. The Commission and the competent authorities of the other Member States concerned must be informed of such measures at the earliest opportunity.

The Commission may, after consulting the competent authorities of the Member States concerned, decide that the Member State in question must amend or abolish those measures.

ê 2000/12/EC Art. 22 (8) (adapted)

Article 34

8.Host Member States may exercise the powers conferred on them under this Directive by taking appropriate measures to prevent or to punish irregularities committed within their territories. This shall include the possibility of preventing Ö credit Õ institutions from initiating further transactions within their territories.

ê 2000/12/EC Art. 22(9) (adapted)

Article 35

9.In the event of the withdrawal of authorisation, the competent authorities of the host Member State shall be informed and shall take appropriate measures to prevent the Ö credit Õ institution concerned from initiating further transactions within its territory and to safeguard the interests of depositors.

ê 2000/12/EC Art. 22 (10) (adapted)

Article 36

10.The Member States shall inform the Commission of the number and type of cases in which there has been a refusal pursuant to Article Ö 25 and 26 Õ 20(1) to (6) or in which measures have been taken in accordance with paragraph 4 of this Article Ö Article 30(3) Õ paragraph 4 of this Article.

ê 2000/12/EC Art. 22(11) (adapted)

Article 37

11.Ö This Section shall not Õ Nothing in this Article shall prevent credit institutions with head offices in other Member States from advertising their services through all available means of communication in the host Member State, subject to any rules governing the form and the content of such advertising adopted in the interests of the general good.

ê 2000/12/EC

TITLE IV

RELATIONS WITH THIRD COUNTRIES

ê 2000/12/EC (adapted)

Ö Section 1 Notification in relation to third countries' undertakings and conditions of access to the markets of these countries Õ

ê 2000/12/EC Art. 23 (adapted)

Notification of the subsidiaries of third countries' undertakings and conditions of access to the markets of these countries

1.           The competent authorities of the Member States shall inform the Commission 1 and the competent authorities of the other Member States :

(a) of any authorisation of a direct or indirect subsidiary one or more parent undertakings of which are governed by the laws of a third country;

(b) whenever such a parent undertaking acquires a holding in a Community credit institution such that the latter would become its subsidiary.

When authorisation is granted to the direct or indirect subsidiary of one or more parent undertakings governed by the law of third countries, the structure of the group shall be specified in the notification which the competent authorities shall address to the Commission in accordance with Article 11.

2.           The Member States shall inform the Commission of any general difficulties encountered by their credit institutions in establishing themselves or carrying on banking activities in a third country.

3.           The Commission shall periodically draw up a report examining the treatment accorded to Community credit institutions in third countries, in the terms referred to in paragraphs 4 and 5, as regards establishment and the carrying-on of banking activities, and the acquisition of holdings in third-country credit institutions. The Commission shall submit those reports to the Council, together with any appropriate proposals.

4.           Whenever it appears to the Commission, either on the basis of the reports referred to in paragraph 3 or on the basis of other information, that a third country is not granting Community credit institutions effective market access comparable to that granted by the Community to credit institutions from that third country, the Commission may submit proposals to the Council for the appropriate mandate for negotiation with a view to obtaining comparable competitive opportunities for Community credit institutions. The Council shall decide by a qualified majority.

5.           Whenever it appears to the Commission, either on the basis of the reports referred to in paragraph 1 or on the basis of other information that Community credit institutions in a third country do not receive national treatment offering the same competitive opportunities as are available to domestic credit institutions and the conditions of effective market access are not fulfilled, the Commission may initiate negotiations in order to remedy the situation.

6.           In the circumstances described in the first subparagraph, it may also be decided at any time, and in addition to initiating negotiations, in accordance with the procedure laid down in Article 60 (2), that the competent authorities of the Member States must limit or suspend their decisions regarding requests pending at the moment of the decision or future requests for authorisations and the acquisition of holdings by direct or indirect parent undertakings governed by the laws of the third country in question. The duration of the measures referred to may not exceed three months.

Before the end of that three-month period, and in the light of the results of the negotiations, the Council may, acting on a proposal from the Commission, decide by a qualified majority whether the measures shall be continued.

6.           Whenever it appears to the Commission that one of the situations described in paragraphs 4 and 5 of Article 39 obtains, the Member States shall inform it at its request:

(a)      of any request for the authorisation of a direct or indirect subsidiary one or more parent undertakings of which are governed by the laws of the third country in question;

(b)     whenever they are informed in accordance with Article 16 that such an undertaking proposes to acquire a holding in a Community credit institution such that the latter would become its subsidiary.

This obligation to provide information shall lapse whenever an agreement is reached with the third country referred to in paragraph 4 or 5or when the measures referred to in the second and third subparagraphs of paragraph 5 cease to apply.

7.           Measures taken pursuant to this Article comply with the Community's obligations under any international agreements, bilateral or multilateral, governing the taking-up and pursuit of the business of credit institutions.

ê 2000/12/EC Art. 24 (adapted)

è1 Directive 2004/xx/EC Art. 3.7

Article 38

Branches of credit institutions having their head offices outside the Community

1.         Member States shall not apply to branches of credit institutions having their head office outside the Community, when commencing or carrying on their business, provisions which result in more favourable treatment than that accorded to branches of credit institutions having their head office in the Community.

2.         The competent authorities shall notify the Commission and the è1 European Banking Committee ç of all authorisations for branches granted to credit institutions having their head office outside the Community.

3.         Without prejudice to paragraph 1, the Community may, through agreements concluded in accordance with the Treaty with one or more third countries, agree to apply provisions which, on the basis of the principle of reciprocity, accord to branches of a credit institution having its head office outside the Community identical treatment throughout the territory of the Community.

ò new

Section 2

Cooperation with third countries' competent authorities regarding supervision on a consolidated basis

ê 2000/12/EC Art. 25 (adapted)

Article 39

1.           The Commission may submit proposals to the Council, either at the request of a Member State or on its own initiative, for the negotiation of agreements with one or more third countries regarding the means of exercising supervision on a consolidated basis over Ö the following Õ:

(a)     credit institutions the parent undertakings of which have their head offices situated in a third country; and

(b)     credit institutions situated in third countries the parent undertakings of which, whether credit institutions or financial holding companies, have their head offices in the Community.

2.           The agreements referred to in paragraph 1 shall, in particular, seek to ensure Ö the following Õ both:

(a)     that the competent authorities of the Member States are able to obtain the information necessary for the supervision, on the basis of their consolidated financial situations, of credit institutions or financial holding companies situated in the Community and which have as subsidiaries credit institutions or financial institutions situated outside the Community, or holding participation in such institutions;

(b)     that the competent authorities of third countries are able to obtain the information necessary for the supervision of parent undertakings the head offices of which are situated within their territories and which have as subsidiaries credit institutions or financial institutions situated in one or more Member States or holding participation in such institutions.

ê Directive 2004/xx/EC Art. 3.8

3.           Without prejudice to Article 300(1) and (2) of the Treaty establishing the European Community, the Commission shall, with the assistance of the European Banking Committee, examine the outcome of the negotiations referred to in paragraph 1 and the resulting situation.

ê 2000/12/EC

TITLE V

ê 2000/12/EC

ð new

PRINCIPLES AND TECHNICAL INSTRUMENTS FOR PRUDENTIAL SUPERVISION ð AND DISCLOSURE ï

ê 2000/12/EC

CHAPTER 1

PRINCIPLES OF PRUDENTIAL SUPERVISION

ò new

Section 1

Competence of home and host Member State

ê 2000/12/EC Art. 26 (adapted)

Article 40

Competence of control of the home Member State

1.           The prudential supervision of a credit institution, including that of the activities it carries on accordance with Articles 18 and 19 Ö 23 and 24 Õ , shall be the responsibility of the competent authorities of the home Member State, without prejudice to those provisions of this Directive which give responsibility to the authorities of the host Member State.

2.           Paragraph 1 shall not prevent supervision on a consolidated basis pursuant to this Directive.

ê 2000/12/EC Art 27 (adapted)

Article 41

Competence of the host Member State

Host Member States shall Ö , pending further coordination, Õ retain responsibility in cooperation with the competent authorities of the home Member State for the supervision of the liquidity of the branches of credit institutions pending further coordination.

Without prejudice to the measures necessary for the reinforcement of the European Monetary System, host Member States shall retain complete responsibility for the measures resulting from the implementation of their monetary policies.

Such measures may not provide for discriminatory or restrictive treatment based on the fact that a credit institution is authorised in another Member State.

ê 2000/12/EC Art 28 (adapted)

Article 42

Collaboration concerning supervision

The competent authorities of the Member States concerned shall collaborate closely in order to supervise the activities of credit institutions operating, in particular by having established branches there, in one or more Member States other than that in which their head offices are situated. They shall supply one another with all information concerning the management and ownership of such credit institutions that is likely to facilitate their supervision and the examination of the conditions for their authorisation, and all information likely to facilitate the monitoring of such institutions, in particular with regard to liquidity, solvency, deposit guarantees, the limiting of large exposures, administrative and accounting procedures and internal control mechanisms.

ê 2000/12/EC Art. 29 (adapted)

Article 43

On-the-spot verification of branches established in another Member State

1.           Host Member States shall provide that, where a credit institution authorised in another Member State carries on its activities through a branch, the competent authorities of the home Member State may, after having first informed the competent authorities of the host Member State, carry out themselves or through the intermediary of persons they appoint for that purpose on-the-spot verification of the information referred to in Article Ö 42 Õ 28.

2.           The competent authorities of the home Member State may also, for purposes of the verification of branches, have recourse to one of the other procedures laid down in Article Ö 141 Õ 55(7).

3.           This Article Ö Paragraphs 1 and 2 Õ shall not affect the right of the competent authorities of the host Member State to carry out, in the discharge of their responsibilities under this Directive, on-the-spot verifications of branches established within their territory.

ê 2000/12/EC (adapted)

Ö Section 2 Exchange of information and professional secrecy Õ

ê 2000/12/EC Art. 30 (1) to (3) (adapted)

Article 44

Exchange of information and professional secrecy

1.           TheMember States shall provide that all persons working Ö for Õ or who have worked for the competent authorities, as well as auditors or experts acting on behalf of the competent authorities, shall be bound by the obligation of professional secrecy.

Ö No Õ This means that no confidential information which they may receive in the course of their duties may be divulged to any person or authority whatsoever, except in summary or collective form, such that individual Ö credit Õ institutions cannot be identified, without prejudice to cases covered by criminal law.

Nevertheless, where a credit institution has been declared bankrupt or is being compulsorily wound up, confidential information which does not concern third parties involved in attempts to rescue that credit institution may be divulged in civil or commercial proceedings.

2.           Paragraph 1 shall not prevent the competent authorities of the various Member States from exchanging information in accordance with this Directive and with other Directives applicable to credit institutions. That information shall be subject to the conditions of professional secrecy indicated in paragraph 1.

ê 2000/12/EC Art. 30 (4) (adapted)

Article 45

4.Competent authorities receiving confidential information under Ö Article 44 Õ paragraphs 1 or 2 may use it only in the course of their duties Ö and only for the following purposes Õ:

(a)        to check that the conditions governing the taking-up of the business of credit institutions are met and to facilitate monitoring, on a non-consolidated or consolidated basis, of the conduct of such business, especially with regard to the monitoring of liquidity, solvency, large exposures, and administrative and accounting procedures and internal control mechanisms;, or

(b)        to impose sanctions;, or

(c)        in an administrative appeal against a decision of the competent authority;, or

(d)       in court proceedings initiated pursuant to Article 33 Ö 55 Õ or to special provisions provided for in this in other Directives adopted in the field of credit institutions.

ê 2000/12/EC Art. 30 (3) (adapted)

Article 46

3.         Member States may conclude cooperation agreements, providing for exchanges of information, with the competent authorities of third countries or with authorities or bodies of third countries as defined in paragraphs 5 and 6 Ö Articles 47 and 48(1) Õ only if the information disclosed is subject to guarantees of professional secrecy at least equivalent to those referred to in this Article. Such exchange of information must be for the purpose of performing the supervisory task of the authorities or bodies mentioned.

Where the information originates in another Member State, it may not be disclosed without the express agreement of the competent authorities which have disclosed it and, where appropriate, solely for the purposes for which those authorities gave their agreement.

ê 2000/12/EC Art 30 (5) (adapted)

Article 47

5. Paragraphs 1 and 4 Ö Articles 44(1) and 45 Õ shall not preclude the exchange of information within a Member State, where there are two or more competent authorities in the same Member State, or between Member States, between competent authorities and Ö the followingÕ:

(a)        authorities entrusted with the public duty of supervising other financial organisations and insurance companies and the authorities responsible for the supervision of financial markets.;

(b)        bodies involved in the liquidation and bankruptcy of credit institutions and in other similar procedures.;

(c)        persons responsible for carrying out statutory audits of the accounts of credit institutions and other financial institutions.,

in the discharge of their supervisory functions., and

Ö Nor shall they preclude Õ the disclosure to bodies which administer deposit-guarantee schemes of information necessary to the exercise of their functions.

Ö In both cases, the Õ The information received shall be subject to the conditions of professional secrecy Ö specified Õ indicated in paragraph 1Ö Article 44(1) Õ.

ê 2000/12/EC Art. 30 (6) & (7) (adapted)

Article 48

16.         Notwithstanding Ö Articles 44 to 46 Õ paragraphs 1 to 4, Member States may authorise the exchanges of information between the competent authorities and Ö the followingÕ:

(a)     the authorities responsible for overseeing the bodies, involved in the liquidation and bankruptcy of credit institutions and other similar procedures; , or

(b)     the authorities responsible for overseeing persons charged with carrying out statutory audits of the accounts of insurance undertakings, credit institutions, investment firms and other financial institutions.

Ö In such cases, Õ Member States which have recourse to the provisions of the first subparagraph shall require Ö fulfilment of Õ at least that the following conditions are met:

(a)      the information Ö must Õ shall be for the purpose of performing the supervisory task referred to in the first subparagraph.;

(b)     information received in this context Ö must Õ shall be subject to the conditions of professional secrecy imposed in Ö Article 44(1) Õ paragraph1).;

(c)     where the information originates in another Member State, it may not be disclosed without the express agreement of the competent authorities which have disclosed it and, where appropriate, solely for the purposes for which those authorities gave their agreement.

Member States shall communicate to the Commission and to the other Member States the names of the authorities which may receive information pursuant to this paragraph.

27.         Notwithstanding Ö Articles 44 to 46 Õ paragraphs 1 to 4, Member States may, with the aim of strengthening the stability, including integrity, of the financial system, authorise the exchange of information between the competent authorities and the authorities or bodies responsible under law for the detection and investigation of breaches of company law.

Ö In such cases Õ Member States which have recourse to the provision in the first subparagraph shall require Ö fulfilment of Õ at least that the following conditions are met:

(a)     the information is for the purpose of performing the task referred to in the first subparagraph.;

(b)     information received in this context Ö is Õ shall be subject to the conditions of professional secrecy imposed in Ö Article 44(1) Õ (paragraph1).;

(c)     where the information originates in another Member State, it may not be disclosed without the express agreement of the competent authorities which have disclosed it and, where appropriate, solely for the purposes for which those authorities gave their agreement.

Where, in a Member State, the authorities or bodies referred to in the first subparagraph perform their task of detection or investigation with the aid, in view of their specific competence, of persons appointed for that purpose and not employed in the public sector, the possibility of exchanging information provided for in the first subparagraph may be extended to such persons under the conditions Ö specified Õ stipulated in the second subparagraph.

In order to implement the third indent of the second subparagraph, the authorities or bodies referred to in the first subparagraph shall communicate to the competent authorities which have disclosed the information, the names and precise responsibilities of the persons to whom it is to be sent.

Member States shall communicate to the Commission and to the other Member States the names of the authorities or bodies which may receive information pursuant to this Ö Article Õ paragraph.

Before 31 December 2000, t The Commission shall draw up a report on the application of the provisions of this Ö Article Õ paragraph.

ê 2000/12/EC Art 30 (8) (adapted)

Article 49

8.This Ö Section Õ Article shall not prevent a competent authority from transmitting Ö information to the following for the purposes of their tasks Õ:

(a)        central banks and other bodies with a similar function in their capacity as monetary authorities.;

(b)        where appropriate, to other public authorities responsible for overseeing payment systems.

information intended for the performance of their task, nor Ö Nor Õ shall it prevent such authorities or bodies from communicating to the competent authorities such information as they may need for the purposes of Ö Article 45Õ paragraph 4.

Information received in this context shall be subject to the conditions of professional secrecy Ö set out Õ imposed in this Article Ö 44(1) Õ.

ê 2000/12/EC Art. 30 (9) 1st and 2nd paragraphs (adapted)

Article 50

9. In addition, nNotwithstanding the provisions referred to in Ö Articles 44(1) and 45Õ paragraph 1 and 4, the Member States may, by virtue of provisions laid down by law, authorise the disclosure of certain information to other departments of their central government administrations responsible for legislation on the supervision of credit institutions, financial institutions, investment services and insurance companies and to inspectors acting on behalf of those departments.

However, such disclosures may be made only where necessary for reasons of prudential control.

ê 2000/12/EC Art 30 (9) 3rd paragraph (adapted)

Article 51

However, tThe Member States shall provide that information received under Ö Articles 44(2) and 47 Õ paragraph 2 and 5 and Ö information Õ that obtained by means of the on-the-spot verification referred to in Article Ö 43 Õ 29(1) and (2) may never be disclosed in the cases referred to in this Ö Article Õ paragraph except with the express consent of the competent authorities which disclosed the information or of the competent authorities of the Member State in which on-the-spot verification was carried out.

ê 2000/12/EC Art. 30 (10) (adapted)

Article 52

10.Ö This Section Õ Article shall not prevent the competent authorities Ö of a Member State Õ from communicating the information referred to in Ö Articles 44 to 46Õ paragraph 1 to 4 to a clearing house or other similar body recognised under national law for the provision of clearing or settlement services for one of their Member States' markets if they consider that it is necessary to communicate the information in order to ensure the proper functioning of those bodies in relation to defaults or potential defaults by market participants. The information received in this context shall be subject to the conditions of professional secrecy Ö laid down Õ imposed in Ö Article 44(1) Õ paragraph 1.

The Member States shall, however, ensure that information received under paragraph 2 Ö Article 44(2) Õ may not be disclosed in the circumstances referred to in this Ö Article Õ paragraph without the express consent of the competent authorities which disclosed it.

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Section 3

Duty of persons responsible for the legal control of annual and consolidated accounts

ê 2000/12/EC Art. 31 (adapted)

Article 53

Duty of persons responsible for the legal control of annual and consolidated accounts

1.           Member States shall provide at least that: (a) any person authorised within the meaning of Ö eight Õ Council Directive 84/253/EEC[26], performing in a credit institution the task described in Article 51 of Ö fourth Õ Council Directive 78/660/EEC[27], or Article 37 of Council Directive 83/349/EEC, or Article 31 of Ö Council Õ Directive 85/611/EEC[28], or any other statutory task, shall have a duty to report promptly to the competent authorities any fact or decision concerning that Ö credit Õ institution of which he has become aware while carrying out that task which is liable to:

(a)     constitute a material breach of the laws, regulations or administrative provisions which lay down the conditions governing authorisation or which specifically govern pursuit of the activities of credit institutions, or;

(b)     affect the continuous functioning of the credit institution, or;

(c)     lead to refusal to certify the accounts or to the expression of reservations.

Ö Member States shall provide at least that Õ (b) that person shall likewise have a duty to report any fact Ö or Õ and decision of which he becomes aware in the course of carrying out a task as described in Ö the first sub-paragraph Õ (a) in an undertaking having close links resulting from a control relationship with the credit institution within which he is carrying out Ö that Õ the abovementioned task.

2.           The disclosure in good faith to the competent authorities, by persons authorised within the meaning of Directive 84/253/EEC, of any fact or decision referred to in paragraph 1 shall not constitute a breach of any restriction on disclosure of information imposed by contract or by any legislative, regulatory or administrative provision and shall not involve such persons in liability of any kind.

ê 2000/12/EC (adapted)

ÖSection 4 Power of sanction and right to apply to the courts Õ

ê 2000/12/EC Art. 32 (adapted)

Article 54

Power of sanction of the competent authorities

Without prejudice to the procedures for the withdrawal of authorisations and the provisions of criminal law, the Member States shall provide that their respective competent authorities may, as against credit institutions, or those who effectively control the business of credit institutions, which breach laws, regulations or administrative provisions concerning the supervision or pursuit of their activities, adopt or impose in respect of them penalties or measures aimed specifically at ending Ö the Õ observed breaches or the causes of such breaches.

ê 2000/12/EC Art. 33 (adapted)

Article 55

Right to apply to the courts

Member States shall ensure that decisions taken in respect of a credit institution in pursuance of laws, regulations and administrative provisions adopted in accordance with this Directive may be subject to the right to apply to the courts. The same shall apply where no decision is taken, within six months of its submission, in respect of an application for authorisation which contains all the information required under the provisions in force.

ê 2000/28/EC 1.2 (adapted)

Article 33a

Article 3 of Directive 2000/46/EC shall apply to credit institutions

ê 2000/12/EC

CHAPTER 2

TECHNICAL INSTRUMENTS OF PRUDENTIAL SUPERVISION

Section 1

Own funds

ê 2000/12/EC Art. 34 (1) (adapted)

Article 56

General principles

1.Wherever a Member State lays down by law, regulation or administrative action a provision in implementation of Community legislation concerning the prudential supervision of an operative credit institution which uses the term or refers to the concept of own funds, it shall bring this term or concept into line with the definition given in Ö Articles 57 to 61 and Articles 63 to 66Õparagraph 2, 3 and 4 and Articles 35 to 38.

ê 2000/12/EC Art. 34 (2) 1st paragraph (adapted)

ð new

Article 57

Subject to the limits imposed in Article 38 Ö 66 Õ , the unconsolidated own funds of credit institutions shall consist of the following items:

(1a)   capital within the meaning of Article 22 of Directive 86/635/EEC, in so far as it has been paid up, plus share premium accounts but excluding cumulative preferential shares;

(2b)   reserves within the meaning of Article 23 of Directive 86/635/EEC and profits and losses brought forward as a result of the application of the final profit or loss;.. The Member States may permit inclusion of interim profits before a formal decision has been taken only if these profits have been verified by persons responsible for the auditing of the accounts and if it is proved to the satisfaction of the competent authorities that the amount thereof has been evaluated in accordance with the principles set out in Directive 86/635/EEC and is net of any foreseeable charge or dividend;

(3c)   funds for general banking risks within the meaning of Article 38 of Directive 86/635/EEC;

(4d)   revaluation reserves within the meaning of Article 33 of Directive 78/660/EEC;

(5e)   value adjustments within the meaning of Article 37(2) of Directive 86/635/EEC;

(6f)   other items within the meaning of Article 35 Ö 63 Õ ;

(7g)   the commitments of the members of credit institutions set up as cooperative societies and the joint and several commitments of the borrowers of certain institutions organised as funds, as referred to in Article 36 Ö 64 Õ (1);

(8h)   fixed-term cumulative preferential shares and subordinated loan capital as referred to in Article 36 Ö 64 Õ (3).

The following items shall be deducted in accordance with Article 38 Ö 66 Õ :

(9i)    own shares at book value held by a credit institution;

(10j)  intangible assets within the meaning of Article 4(9) («Assets») of Directive 86/635/EEC;

(k11) material losses of the current financial year;

ê 2002/87/EC Art. 29.4(a) (adapted)

(l12)  holdings in other credit and financial institutions amounting to more than 10 % of their capital;

(m13)            subordinated claims and instruments referred to in Article 35 Ö 63 Õ and Article 36 Ö 64 Õ (3) which a credit institution holds in respect of credit and financial institutions in which it has holdings exceeding 10 % of the capital in each case;

(n14) holdings in other credit and financial institutions of up to 10 % of their capital, the subordinated claims and the instruments referred to in Article 35 Ö 63 Õ and Article 36 Ö 64 Õ (3) which a credit institution holds in respect of credit and financial institutions other than those referred to in points 12 and 13 of this subparagraph in respect of the amount of the total of such holdings, subordinated claims and instruments which exceed 10 % of that credit institution's own funds calculated before the deduction of items in points Ö (l) to (p) Õ 12 to 16 of this subparagraph;

(o15) participations within the meaning of Article Ö 4(10) Õ 1(9) which a credit institution holds in:

(i)      insurance undertakings within the meaning of Article 6 of Ö First Council Õ Directive 73/239/EEC Ö [29] Õ , Article 6 of Ö First Council Õ Directive 79/267/EEC Ö [30] Õ or Article 1(b) of Directive 98/78/EC of the European Parliament and of the Council[31];

(ii)     reinsurance undertakings within the meaning of Article 1(c) of Directive 98/78/EC;

(iii)    insurance holding companies within the meaning of Article 1(i) of Directive 98/78/EC;

(p16) each of the following items which the credit institution holds in respect of the entities defined in point (15o) in which it holds a participation:

(i)      instruments referred to in Article 16(3) of Directive 73/239/EEC,

(ii)     instruments referred to in Article 18(3) of Directive 79/267/EEC.

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(q)     For credit institutions calculating risk-weighted exposure amounts under Section 3, Subsection 2, negative amounts resulting from the calculation in Annex VII, Part 1, paragraph 34 and expected loss amounts calculated in accordance with Annex VII, Part 1 paragraphs 30 and 31;

(r)      The exposure amount of securitisation positions which receive a risk weight of 1250% under Annex IX, Part 4, calculated in the manner there specified.

ê 2000/12/EC Art. 34 (2) point 2, final sentence (adapted)

ð new

Ö For the purposes of point (b), the Õ The Member States may permit inclusion of interim profits before a formal decision has been taken only if these profits have been verified by persons responsible for the auditing of the accounts and if it is proved to the satisfaction of the competent authorities that the amount thereof has been evaluated in accordance with the principles set out in Directive 86/635/EEC and is net of any foreseeable charge or dividend;.

ð In the case of a credit institution which is the originator of a securitisation, net gains arising from the capitalisation of future income from the securitised assets and providing credit enhancement to positions in the securitisation shall be excluded from the item specified in point (b).ï

ê 2002/87/EC Art. 29.4(b) (adapted)

Article 58

Where shares in another credit institution, financial institution, insurance or reinsurance undertaking or insurance holding company are held temporarily for the purposes of a financial assistance operation designed to reorganise and save that entity, the competent authority may waive the provisions on deduction referred to in points Ö (l) to (p) Õ12 to 16.

Article 59

As an alternative to the deduction of the items referred to in points Ö (o) to (p) Õ 15 and 16, Member States may allow their credit institutions to apply mutatis mutandis methods 1, 2, or 3 of Annex I to Directive 2002/87/EC. Method 1 (Accounting consolidation) Ö may Õ shall only be applied Ö only Õ if the competent authority is confident about the level of integrated management and internal control regarding the entities which would be included in the scope of consolidation. The method chosen shall be applied in a consistent manner over time.

Article 60

Member States may provide that for the calculation of own funds on a stand-alone basis, credit institutions subject to supervision on a consolidated basis in accordance with Chapter Ö 4, Section 1 Õ 3, or to supplementary supervision in accordance with Directive 2002/87/EC, need not deduct the items referred to in points Ö (l) to (p) Õ12 to 16 which are held in credit institutions, financial institutions, insurance or reinsurance undertakings or insurance holding companies, which are included in the scope of consolidated or supplementary supervision.

This provision shall apply to all the prudential rules harmonised by Community acts.

ê 2000/12/EC Art 34 (3) (adapted)

Article 61

3.The concept of own funds as defined in points Ö (a) to (h) Õ (1) to (8) of paragraph 2 Ö Article 57 Õ embodies a maximum number of items and amounts. The use of those items and the fixing of lower ceilings, and the deduction of items other than those listed in points (9) to (13) Ö (i) to (r) Õ of Ö Article 57 Õ paragraph 2 shall be left to the discretion of the Member States. Member States shall nevertheless be obliged to consider increased convergence with a view to a common definition of own funds.

To that end, the Commission shall, by 1 January 1996 at the latest, submit a report to the European Parliament and to the Council on the application of this Article and Articles 35 to 39, accompanied, where appropriate, by such proposals for amendment as it shall deem necessary. Not later than 1 January 1998, the European Parliament and the Council shall, acting in accordance with the procedure laid down in Article 251 of the Treaty and after consultation of the Economic and Social Committee, examine the definition of own funds with a view to the uniform application of the common definition.

ê 2000/12/EC Art 34 (4) (adapted)

4The items listed in points Ö (a) to (e) Õ (1) to (5) of Ö Article 57 Õ paragraph 2 must be available to a credit institution for unrestricted and immediate use to cover risks or losses as soon as these occur. The amount must be net of any foreseeable tax charge at the moment of its calculation or be suitably adjusted in so far as such tax charges reduce the amount up to which these items may be applied to cover risks or losses.

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Article 62

Member States will report to the Commission on the progress achieved in convergence with a view to a common definition of own funds. On the basis of these reports the Commission shall, if appropriate, by 1 January 2009 at the latest, submit a proposal to the European Parliament and to the Council for amendment of this Article and Articles 35 to 39.

ê 2000/12/EC Art 35 (adapted)

Article 63

Other items

1.           The concept of own funds used by a Member State may include other items provided that, whatever their legal or accounting designations might be, they have the following characteristics:

(a)     they are freely available to the credit institution to cover normal banking risks where revenue or capital losses have not yet been identified;

(b)     their existence is disclosed in internal accounting records;

(c)     their amount is determined by the management of the credit institution, verified by independent auditors, made known to the competent authorities and placed under the supervision of the latter.

2.           Securities of indeterminate duration and other instruments that fulfil the following conditions may also be accepted as other items:

(a)     they may not be reimbursed on the bearer's initiative or without the prior agreement of the competent authority;

(b)     the debt agreement must provide for the credit institution to have the option of deferring the payment of interest on the debt;

(c)     the lender's claims on the credit institution must be wholly subordinated to those of all non-subordinated creditors;

(d)     the documents governing the issue of the securities must provide for debt and unpaid interest to be such as to absorb losses, whilst leaving the credit institution in a position to continue trading;

(e)     only fully paid-up amounts shall be taken into account.

To these may be added cumulative preferential shares other than those referred to in point Ö (h) Õ 8 of Article 34 Ö 57 Õ (2).

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3.           For credit institutions calculating risk-weighted exposure amounts under Section 3, Subsection 2, positive amounts resulting from the calculation in Annex VII, Part 1, paragraph 34, may, up to 0.6% of risk weighted exposure amounts calculated under Subsection 2, be accepted as other items. For these credit institutions value adjustments and provisions included in the calculation referred to in Annex VII, Section 3, Part 1, paragraph 34 and value adjustments and provisions for exposures referred to in point (e) of Article 57 shall not be included in own funds other than in accordance with this provision. For these purposes, risk-weighted exposure amounts shall not include those calculated in respect of securitisation positions which have a risk weight of 1250%.

ê2000/12/EC Art 36 (adapted)

Article 64

Other provisions concerning own funds

1.           The commitments of the members of credit institutions set up as cooperative societies referred to in point Ö (g) Õ 7 of Article 34(2)Ö57Õ, shall comprise those societies' uncalled capital; together with the legal commitments of the members of those cooperative societies to make additional non-refundable payments should the credit institution incur a loss, in which case it must be possible to demand those payments without delay.

The joint and several commitments of borrowers in the case of credit institutions organised as funds shall be treated in the same way as the preceding items.

All such items may be included in own funds in so far as they are counted as the own funds of institutions of this category under national law.

2.           Member States shall not include in the own funds of public credit institutions guarantees which they or their local authorities extend to such entities.

3.           Member States or the competent authorities may include fixed-term cumulative preferential shares referred to in point Ö (h) Õ (8) of Article 34(2)Ö57Õ and subordinated loan capital referred to in that provision in own funds, if binding agreements exist under which, in the event of the bankruptcy or liquidation of the credit institution, they rank after the claims of all other creditors and are not to be repaid until all other debts outstanding at the time have been settled.

Subordinated loan capital must also fulfil the following additional criteria:

(a)     only fully paid-up funds may be taken into account;

(b)     the loans involved must have an original maturity of at least five years, after which they may be repaid; if the maturity of the debt is not fixed, they shall be repayable only subject to five years' notice unless the loans are no longer considered as own funds or unless the prior consent of the competent authorities is specifically required for early repayment. The competent authorities may grant permission for the early repayment of such loans provided the request is made at the initiative of the issuer and the solvency of the credit institution in question is not affected;

(c)     the extent to which they may rank as own funds must be gradually reduced during at least the last five years before the repayment date;

(d)     the loan agreement must not include any clause providing that in specified circumstances, other than the winding-up of the credit institution, the debt will become repayable before the agreed repayment date.

ê 2000/12/EC Art. 36(3)(b), excluding first 19 words

ð new

ð For the purposes of point (b) of the second subparagraph, ï if the maturity of the debt is not fixed, they shall be repayable only subject to five years' notice unless the loans are no longer considered as own funds or unless the prior consent of the competent authorities is specifically required for early repayment. The competent authorities may grant permission for the early repayment of such loans provided the request is made at the initiative of the issuer and the solvency of the credit institution in question is not affected;

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4.           Credit institutions shall not include in own funds either the fair value reserves related to gains or losses on cash flow hedges of financial instruments measured at amortised cost, or any gains or losses on their liabilities valued at fair value that are due to changes in the credit institutions’ own credit standing.

ê2000/12/EC Art 37 (adapted)

Article 65

Calculation of own funds on a consolidated basis

1.           Where the calculation is to be made on a consolidated basis, the consolidated amounts relating to the items listed under Article 34 Ö57Õ(2) shall be used in accordance with the rules laid down in Articles 52 to 56ÖChapter 4, Section 1Õ. Moreover, the following may, when they are credit («negative») items, be regarded as consolidated reserves for the calculation of own funds:

(a)     any minority interests within the meaning of Article 21 of Directive 83/349/EEC, where the global integration method is used;

(b)     the first consolidation difference within the meaning of Articles 19, 30 and 31 of Directive 83/349/EEC;

(c)     the translation differences included in consolidated reserves in accordance with Article 39(6) of Directive 86/635/EEC;

(d)     any difference resulting from the inclusion of certain participating interests in accordance with the method prescribed in Article 33 of Directive 83/349/EEC.

2.           Where the above debit (“positive”) items, they must be deducted in the calculation of consolidated own funds Ö Where the items referred to in points (a) to (d) of paragraph 1 are debit («positive») items, they shall be deducted in the calculation of consolidated own funds. Õ

ê 2000/12/EC Art 38 (1) (adapted)

ð new

Article 66

Deductions and limits

1. The items referred to in points Ö (d) to (h) Õ (4) to (8) of Article 34(2)Ö57Õ, shall be subject to the following limits:

(a)     the total of the items in points Ö (d) to (h) Õ (4) to (8) may not exceed a maximum of 100% of the items in points Ö (a) plus (b) and (c) Õ (1) plus (2) and (3) minus Ö (i) to (k) Õ (9), (10) (11) ð and 50% of the amounts in item (q) ï;

(b)     the total of the items in points Ö (g) to (h) Õ (7) and (8) may not exceed a maximum of 50% of the items in points Ö (a) plus (b) and (c) Õ (1) plus (2) and (3) minus (i) to (k) (9), (10) and (11) ð and 50% of the amounts in item (q) ï ;

(c)     the total of the items in points (l) (12) and (13) ð to (q)ï shall be deducted from the total of the items.

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2.           The items referred to in point (r) of Article 57 shall be deducted from the total of the items specified in points (a) to (h) of that Article, unless the credit institution includes the former items in its calculation of risk-weighted exposure amounts for the purposes of Article 75 as specified in Annex IX, Part 4.

ê 2000/12/EC Art 38 (2)

23.         The competent authorities may authorise credit institutions to exceed the limit laid down in paragraph 1 in temporary and exceptional circumstances.

ê 2000/12/EC Art 39 (adapted)

Article 67

Provision of proof to the competent authorities

Compliance with the conditions laid down in Ö this Section Õ Article 34 (2), (3) and (4) and Articles 35 to 38 must be proved to the satisfaction of the competent authorities.

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Section 2

Provision against risks

Subsection 1 - Level of application

Article 68

1.           Credit institutions shall comply with the obligations laid down in Articles 22 and 75 and Section 5 on an individual basis.

2.           Every credit institution which is neither a subsidiary in the Member State where it is authorised and supervised, nor a parent undertaking, and every credit institution not included in the consolidation pursuant to Article 73, shall comply with the obligations laid down in Articles 120 and 123 on an individual basis.

3.           Every credit institution which is neither a parent undertaking, nor a subsidiary, and every the credit institution not included in the consolidation pursuant to Article73, shall comply with the obligations laid down in Chapter 5 on an individual basis.

Article 69

1.           The Member States may choose not to apply Article 68(1) to any subsidiary of a credit institution, where both the subsidiary and the credit institution are subject to authorisation and supervision by the Member State concerned, and the subsidiary is included in the supervision on a consolidated basis of the credit institution which is the parent undertaking, and all of the following conditions are satisfied, in order to ensure that own funds are distributed adequately among the parent undertaking and the subsidiaries:

(a)     there is no current or foreseen material or legal impediment to the prompt transfer of own funds or repayment of liabilities by its parent undertaking;

(b)     its parent undertaking is committed to an unconditional, explicit and irrevocable obligation to transfer own funds to the subsidiary and meet its liabilities, or the risks in the subsidiaries are of negligible interest;

(c)     the risk evaluation, measurement and control procedures of the parent undertaking cover the subsidiary;

(d)     the parent undertaking has the right to appoint or remove a majority the members of the management body of the subsidiary.

2.           The Member States may exercise the option provided for in paragraph 1 where the parent undertaking is a financial holding company set up in the same Member State as the credit institution, provided that it is subject to the same supervision as that exercised over credit institutions, and in particular to the standards laid down in Article 71(1).

Article 70

The competent authorities may allow on a case by case basis parent credit institutions in a Member State to incorporate in the calculation of their requirement under Article 68(1) subsidiaries in the Community which meet the conditions laid down in the points (a), (c) and (d) of Article 69(1), and whose material exposures or material liabilities are to that parent credit institution in a Member State.

Article 71

1.           Without prejudice to Articles 68 to 70, parent credit institutions in a Member State shall comply, to the extent and in the manner prescribed in Article 133, with the obligations laid down in Articles 75, 120, 123 and Section 5 on the basis of their consolidated financial situation.

2.           Without prejudice to Articles 68 to 70, credit institutions controlled by a parent financial holding company in a Member State shall comply, to the extent and in the manner prescribed in Article 133, with the obligations laid down in Articles 75, 120, 123 and Section 5 on the basis of the consolidated financial situation of that financial holding company.

Where more than one credit institution is controlled by a parent financial holding company in a Member State, the first subparagraph shall apply only to the credit institution to which supervision on a consolidated basis applies in accordance with Articles 125 and 126.

Article 72

1.           EU parent credit institutions shall comply with the obligations laid down in Chapter 5 on the basis of their consolidated financial situation.

However, in respect of their significant subsidiaries, they shall disclose the information specified in Annex XII, Part 1, paragraph 5, on an individual or sub-consolidated basis.

2.           Credit institutions controlled by an EU parent financial holding company shall comply with the obligations laid down in Chapter 5 on the basis of the consolidated financial situation of that financial holding company.

However, in respect of their significant subsidiaries, they shall disclose the information specified in Annex XII, Part 1, paragraph 5, on an individual or sub-consolidated basis.

3.           The competent authorities responsible for exercising supervision on a consolidated basis pursuant to Articles 125 to 131 may decide not to apply in full or in part paragraphs 1 and 2 to the credit institutions which are included within comparable disclosures provided on a consolidated basis by a parent undertaking established in a third country.

ê 2000/12/EC Art. 52 (3) (adapted)

Article 73

61.         The Member States or the competent authorities responsible for exercising supervision on a consolidated basis pursuant to Article 53 Ö 125 to 131 Õ may decide in the Ö following Õ cases listed below that a credit institution, financial institution or ancillary banking services undertaking which is a subsidiary or in which a participation is held need not be included in the consolidation:

(a)     where if the undertaking Ö concerned Õ that should be included is situated in a third country where there are legal impediments to the transfer of the necessary information.;

(b)     where if, in the opinion of the competent authorities, the undertaking Ö concerned Õ that should be included is of negligible interest only with respect to the objectives of monitoring credit institutions and in Ö any event whereÕ all cases the balance-sheet total of the undertaking Ö concerned Õ that should be included is less than the smaller of the following two amounts:

(i)      EUR 10 million;

(ii)     or1% of the balance-sheet total of the parent undertaking or the undertaking that holds the participation.

If several undertakings meet the above criteria, they must nevertheless be included in the consolidation where collectively they are of non-negligible interest with respect to the aforementioned objectives, or

(c)     where if, in the opinion of the competent authorities responsible for exercising supervision on a consolidated basis, the consolidation of the financial situation of the undertaking Ö concerned Õ that should be included would be inappropriate or misleading as far as the objectives of the supervision of credit institutions are concerned.

ê 2000/12/EC Art. 52 (3) 2nd indent, final sentence (adapted)

If Ö , in the cases referred to in point (b) of the first subparagraph Õ , several undertakings meet the above criteria Ö set out therein Õ , they must nevertheless be included in the consolidation where collectively they are of non-negligible interest with respect to the specified aforementioned objectives, or.

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2.           Competent authorities shall require subsidiary credit institutions to apply the requirements laid down in Articles 75, 120, 123 and Section 5 on a sub-consolidated basis if those credit institutions, or the parent undertaking where it is a financial holding company, have a credit institution or a financial institution or an asset management company as defined in Article 2(5) of Directive 2002/87/EC as a subsidiary in a third country, or hold a participation in such an undertaking.

3.           The competent authorities shall require the parent undertakings and subsidiaries subject to this Directive to meet the obligations laid down in Article 22 on a consolidated or sub-consolidated basis, to ensure that their arrangements, processes and mechanisms are consistent and well-integrated and that any data and information relevant to the purpose of supervision can be produced.

Subsection 2 - Calculation of requirements

Article 74

1.           Save where otherwise provided, the valuation of assets and off-balance-sheet items shall be effected in accordance with the accounting framework to which the credit institution is subject under Regulation (EC) No 1606/2002 and Directive 86/635/EEC.

2.           Notwithstanding the requirements laid down in Articles 68 to 72, the competent authorities shall ensure that the calculations to verify the compliance of credit institutions with the obligations laid down in Article 75 are carried out not less than twice each year.

The calculations shall be carried out either by the credit institutions themselves, in which case they shall communicate the results and any component data required to the competent authorities, or by the competent authorities, using data supplied by the credit institutions.

Subsection 3 - Minimum Level of Own Funds

Article 75

Without prejudice to Article 136, Member States shall require credit institutions to provide own funds which are at all times more than or equal to the sum of the following capital requirements:

(a)        for credit risk and dilution risk in respect of all of their business activities with the exception of their trading book business and illiquid assets if deducted from own funds under [Directive 93/6/EEC, Article 13(2)(d) ], 8 per cent of the total of their risk-weighted exposure amounts calculated in accordance with Section 3;

(b)        in respect of their trading-book business, for position risk, settlement and counter-party risk and, in so far as the limits laid down in Articles 111 to 117 are authorised to be exceeded, for large exposures exceeding such limits, the capital requirements determined in accordance with [Directive 93/6/EEC, Chapter V, Section 4];

(c)        in respect of all of their business activities, for foreign-exchange risk and for commodities risk, the capital requirements determined according to [Article 18 of Directive 93/6/EEC];

(d)       in respect of all of their business activities, for operational risk, the capital requirements determined in accordance with Section 4.

ê 2000/12/EC

Section 2

Solvency ratio

Article 40

General principles

1. The solvency ratio expresses own funds, as defined in Article 41, as a proportion of total assets and off-balance-sheet items, risk-adjusted in accordance with Article 42.

2. The solvency ratios of credit institutions which are neither parent undertakings as defined in Article 1 of Directive 83/349/EEC, nor subsidiaries of such undertakings shall be calculated on an individual basis.

3. The solvency ratios of credit institutions which are parent undertakings shall be calculated on a consolidated basis in accordance with the methods laid down in this Directive and in Directive 86/635/EEC.

4. The competent authorities responsible for authorising and supervising a parent undertaking which is a credit institution may also require the calculation of a subconsolidated or unconsolidated ratio in respect of that parent undertaking and of any of its subsidiaries which are subject to authorisation and supervision by them. Where such monitoring of the satisfactory allocation of capital within a banking group is not carried out, other measures must be taken to attain that end.

5. Without prejudice to credit institutions' compliance with the requirements of paragraphs 2, 3 and 4, and of Article 52(8) and (9), the competent authorities shall ensure that ratios are calculated not less than twice each year, either by credit institutions themselves, which shall communicate the results and any component data required to the competent authorities, or by the competent authorities, using data supplied by the credit institutions.

6. The valuation of assets and off-balance-sheet items shall be effected in accordance with Directive 86/635/EEC.

Article 41

The numerator: own funds

Own funds as defined in this Directive shall form the numerator of the solvency ratio.

Article 42

The denominator: risk-adjusted assets and off-balance-sheet items

1. Degrees of credit risk, expressed as percentage weightings, shall be assigned to asset items in accordance with Articles 43 and 44, and exceptionally Articles 45, 62 and 63. The balance-sheet value of each asset shall then be multiplied by the relevant weighting to produce a risk-adjusted value.

2. In the case of the off-balance-sheet items listed in Annex II, a two-stage calculation as prescribed in Article 43(2) shall be used.

3. In the case of the off-balance-sheet items referred to in Article 43(3), the potential costs of replacing contracts in the event of counterparty default shall be calculated by means of one of the two methods set out in Annex III. Those costs shall be multiplied by the relevant counterparty weightings in Article 43(1), except the 100% weightings as provided for there shall be replaced by 50% weightings to produce risk-adjusted values.

4. The total of the risk-adjusted values of the assets and off-balance-sheet items mentioned in paragraphs 2 and 3 shall be the denominator of the solvency ratio.

Article 43

Risk weightings

1. The following weightings shall be applied to the various categories of asset items, although the competent authorities may fix higher weightings as they see fit:

(a)        Zero weighting

(1)     cash in hand and equivalent items;

(2)     asset items constituting claims on Zone A central governments and central banks;

(3)     asset items constituting claims on the European Communities;

(4)     asset items constituting claims carrying the explicit guarantees of Zone A central governments and central banks or of the European Communities;

(5)     asset items constituting claims on Zone B central governments and central banks denominated and funded in the national currencies of the borrowers;

(6)     asset items constituting claims carrying the explicit guarantees of Zone B central governments and central banks denominated and funded in the national currency common to the guarantor and the borrower;

(7)     asset items secured to the satisfaction of the competent authorities, by collateral in the form of Zone A central government or central bank securities or securities issued by the European Communities or by cash deposits placed with the lending institution or by certificates of deposit or similar instruments issued by and lodged with the latter;

(b)        20% weighting

(1)     asset items constituting claims on the EIB;

(2)     asset items constituting claims on multilateral development banks;

(3)     asset items constituting claims carrying the explicit guarantee of the EIB;

(4)     asset items constituting claims carrying the explicit guarantees of multilateral development banks;

(5)     asset items constituting claims on Zone A regional governments or local authorities, subject to Article 44;

(6)     asset items constituting claims carrying the explicit guarantees of Zone A regional governments or local authorities, subject to Article 44;

(7)     asset items constituting claims on Zone A credit institutions but not constituting such institutions' own funds;

(8)     asset items constituting claims with a maturity of one year or less, on Zone B credit institutions, other than securities issued by such institutions which are recognised as components of their own funds;

(9)     asset items carrying the explicit guarantees of Zone A credit institutions;

(10)   asset items constituting claims with a maturity of one year or less carrying the explicit guarantees of Zone B credit institutions;

(11)   asset items secured, to the satisfaction of the competent authorities, by collateral in the form of securities issued by the EIB or by multilateral development banks;

(12)   cash items in the process of collection;

(c)        50% weighting

(1)     loans fully and completely secured, to the satisfaction of the competent authorities, by mortgages on residential property which is or will be occupied or let by the borrower, and loans fully and completely secured, to the satisfaction of the competent authorities, by shares in Finnish residential housing companies, operating in accordance with the Finnish Housing Company Act of 1991 or subsequent equivalent legislation, in respect of residential property which is or will be occupied or let by the borrower;

         «mortgage-backed securities» which may be treated as loans referred to in the first subparagraph or in Article 62(1), if the competent authorities consider, having regard to the legal framework in force in each Member State, that they are equivalent in the light of the credit risk. Without prejudice to the types of securities which may be included in and are capable of fulfilling the conditions in this point 1, «mortgage-backed securities» may include instruments within the meaning of Section B(1)(a) and (b) of the Annex to Council Directive 93/22/EEC[32]. The competent authorities must in particular be satisfied that:

(i)      such securities are fully and directly backed by a pool of mortgages which are of the same nature as those defined in the first subparagraph or in Article 62(1) and are fully performing when the mortgage-backed securities are created;

(ii)     an acceptable high-priority charge on the underlying mortgage-asset items is held either directly by investors in mortgage-backed securities or on their behalf by a trustee or mandated representative in the same proportion to the securities which they hold;

(2)     prepayments and accrued income: these assets shall be subject to the weighting corresponding to the counterparty where a credit institution is able to determine it in accordance with Directive 86/635/EEC. Otherwise, where it is unable to determine the counterparty, it shall apply a flat-rate weighting of 50%;

(d)       100% weighting

(1)     asset items constituting claims on Zone B central governments and central banks except where denominated and funded in the national currency of the borrower;

(2)     asset items constituting claims on Zone B regional governments or local authorities;

(3)     asset items constituting claims with a maturity of more than one year on Zone B credit institutions;

(4)     asset items constituting claims on the Zone A and Zone B non-bank sectors;

(5)     tangible «Assets» within the meaning of Article 4(10) of Directive 86/635/EEC;

(6)     holdings of shares, participation and other components of the own funds of other credit institutions which are not deducted from the own funds of the lending institutions;

(7)     all other assets except where deducted from own funds.

2. The following treatment shall apply to off-balance-sheet items other than those covered in paragraph 3. They shall first be grouped according to the risk groupings set out in Annex II. The full value of the full-risk items shall be taken into account, 50% of the value of the medium-risk items and 20% of the medium/low-risk items, while the value of low-risk items shall be set at zero. The second stage shall be to multiply the off-balance-sheet values, adjusted as described above, by the weightings attributable to the relevant counterparties in accordance with the treatment of asset items prescribed in paragraph 1 and Article 44. In the case of asset sale and repurchase agreements and outright forward purchases, the weightings shall be those attaching to the assets in question and not to the counterparties to the transactions. The portion of unpaid capital subscribed to the European Investment Fund may be weighted at 20%.

3. The methods set out in Annex III shall be applied to the off-balance-sheet items listed in Annex IV except for:

– contracts traded on recognised exchanges,

– foreign-exchange contracts (except contracts concerning gold) with an original maturity of 14 calendar days or less.

Until 31 December 2006, the competent authorities of Member States may exempt from the application of the methods set out in Annex III over-the-counter (OTC) contracts cleared by a clearing house where the latter acts as the legal counterparty and all participants fully collateralise on a daily basis the exposure they present to the clearing house, thereby providing a protection covering both the current exposure and the potential future exposure. The competent authorities must be satisfied that the posted collateral gives the same level of protection as collateral which complies with paragraph 1(a)(7) and that the risk of a build-up of the clearing house's exposures beyond the market value of posted collateral is eliminated. Member States shall inform the Commission of the use they make of this option.

4. Where off-balance-sheet items carry explicit guarantees, they shall be weighted as if they had been incurred on behalf of the guarantor rather than the counterparty. Where the potential exposure arising from off-balance-sheet transactions is fully and completely secured, to the satisfaction of the competent authorities, by any of the asset items recognised as collateral in paragraph 1(a)(7) and (b)(11), weightings of 0% or 20% shall apply depending on the collateral in question.

The Member States may apply a 50% weighting to off-balance-sheet items which are sureties or guarantees having the character of credit substitutes and which are fully guaranteed, to the satisfaction of the competent authorities, by mortgages meeting the conditions set out in paragraph 1(c)(1), subject to the guarantor having a direct right to such collateral.

5. Where asset and off-balance-sheet items are given a lower weighting because of the existence of explicit guarantees or collateral acceptable to the competent authorities, the lower weighting shall apply only to that part which is guaranteed or which is fully covered by the collateral.

Article 44

Weighting of claims for regional governments or local authorities of the Member States

1. Notwithstanding the requirements of Article 43(1)(b), the Member States may fix a weighting of 0% for their own regional governments and local authorities if there is no difference in risk between claims on the latter and claims on their central governments because of the revenue-raising powers of the regional governments and local authorities and the existence of specific institutional arrangements the effect of which is to reduce the chances of default by the latter. A zero-weighting fixed in accordance with these criteria shall apply to claims on and off-balance-sheet items incurred on behalf of the regional governments and local authorities in question and claims on others and off-balance-sheet items incurred on behalf of others and guaranteed by those regional governments and local authorities or secured, to the satisfaction of the competent authorities concerned, by collateral in the form of securities issued by those regional governments or local authorities.

2. The Member States shall notify the Commission if they believe a zero-weighting to be justified according to the criteria laid down in paragraph 1. The Commission shall circulate that information. Other Member States may offer the credit institutions under the supervision of their competent authorities the possibility of applying a zero-weighting where they undertake business with the regional governments or local authorities in question or where they hold claims guaranteed by the latter, including collateral in the form of securities.

Article 45

Other weighting

1. Without prejudice to Article 44(1) the Member States may apply a weighting of 20% to asset items which are secured, to the satisfaction of the competent authorities concerned, by collateral in the form of securities issued by Zone A regional governments or local authorities, by deposits placed with Zone A credit institutions other than the lending institution, or by certificates of deposit or similar instruments issued by such credit institutions.

2. The Member States may apply a weighting of 10% to claims on institutions specialising in the inter-bank and public-debt markets in their home Member States and subject to close supervision by the competent authorities where those asset items are fully and completely secured, to the satisfaction of the competent authorities of the home Member States, by a combination of asset items mentioned in Article 43(1)(a) and (b) recognised by the latter as constituting adequate collateral.

3. The Member States shall notify the Commission of any provisions adopted pursuant to paragraphs 1 and 2 and of the grounds for such provisions. The Commission shall forward that information to the Member States. The Commission shall periodically examine the implications of those provisions in order to ensure that they do not result in any distortions of competition.

Article 46

Administrative bodies and non-commercial undertakings

For the purposes of Article 43 (1)(b), the competent authorities may include within the concept of regional governments and local authorities non-commercial administrative bodies responsible to regional governments or local authorities or authorities which, in the view of the competent authorities, exercise the same responsibilities as regional and local authorities.

The competent authorities may also include within the concept of regional governments and local authorities, churches and religious communities constituted in the form of a legal person under public law, in so far as they raise taxes in accordance with legislation conferring on them the right to do so. However, in this case the option set out in Article 44 shall not apply.

Article 47

Solvency ratio level

1. Credit institutions shall be required permanently to maintain the ratio defined in Article 40 at a level of at least 8%.

2. Notwithstanding paragraph 1, the competent authorities may prescribe higher minimum ratios as they consider appropriate.

3. If the ratio falls below 8% the competent authorities shall ensure that the credit institution in question takes appropriate measures to restore the ratio to the agreed minimum as quickly as possible.

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SECTION 3

Minimum own funds requirements for credit risk

Article 76

Credit institutions shall apply either the Standardised Approach provided for in Articles 78 to 83 or, if permitted by the competent authorities in accordance with Article 84, the Internal Ratings Based Approach provided for in Articles 84 to 89 to calculate their risk-weighted exposure amounts for the purposes of Article 75(a).

Article 77

“Exposure” for the purposes of this Section means an asset or off-balance sheet item.

Subsection 1 – Standardised approach

Article 78

1. Subject to paragraph 2, the exposure value of an asset item shall be its balance-sheet value and the exposure value of an off-balance sheet item listed in Annex II shall be the following percentage of its value: 100% if it is a full-risk item, 50% if it is a medium-risk item, 20% if it is a medium/low-risk item, 0% if its is a low-risk item. The off-balance sheet items referred to in the first sentence of this paragraph shall be assigned to risk categories as indicated in Annex II.

2. The exposure value of a derivative instrument listed in Annex IV shall be determined in accordance with one of the two methods set out in Annex III with the effects of contracts of novation and other netting agreements taken into account for the purposes of those methods in accordance with Annex III.

3. Where an exposure is subject to funded credit protection, the exposure value applicable to that item may be modified in accordance with Subsection 3.

4. In the case of a credit institution using the Financial Collateral Comprehensive Method under Annex VIII, Part 3, where an exposure takes the form of securities or commodities sold, posted or lent under a repurchase transaction or under a securities or commodities lending or borrowing transaction, the exposure value shall be the value of the securities or commodities determined in accordance with Article 74(1) and shall be increased by the volatility adjustment appropriate to such securities or commodities as prescribed in Annex VIII, Part 3, paragraphs 35 to 60.

Article 79

1.           Each exposure shall be assigned to one of the following exposure classes:

(a)     claims or contingent claims on central governments or central banks;

(b)     claims or contingent claims on regional governments or local authorities;

(c)     claims or contingent claims on administrative bodies and non-commercial undertakings;

(d)     claims or contingent claims on multilateral development banks;

(e)     claims or contingent claims on international organisations;

(f)     claims or contingent claims on institutions;

(g)     claims or contingent claims on corporates;

(h)     retail claims or contingent retail claims;

(i)      claims or contingent claims secured on real estate property;

(j)      past due items;

(k)     items belonging to regulatory high-risk categories;

(l)      claims in the form of covered bonds;

(m)    securitisation positions;

(n)     short-term claims on institutions and corporate;

(o)     claims in the form of collective investment undertakings (CIU);

(p)     other items.

2.           To be eligible for the retail exposure class referred to in point (h) of paragraph 1, an exposure shall meet the following conditions:

(a)     the exposure must be either to an individual person or persons, or to a small or medium sized entity;

(b)     the exposure must be one of a significant number of exposures with similar characteristics such that the risks associated with such lending are substantially reduced;

(c)     the total amount owed to the credit institution and any parent undertaking and its subsidiaries, including any past due exposure, by the obligor client or group of connected clients must not, to the knowledge of the credit institution, exceed EUR 1 million. The credit institution must take reasonable steps to acquire this knowledge.

Securities shall not be eligible for the retail exposure class.

Article 80

1.           To calculate risk-weighted exposure amounts, risk weights shall be applied to all exposures, unless deducted from own funds, in accordance with the provisions of Annex VI, Part 1. The application of risk weights shall be based on the exposure class to which the exposure is assigned and, to the extent specified in Annex VI, Part 1, its credit quality. Credit quality may be determined by reference to the credit assessments of External Credit Assessment Institutions (‘ECAIs’) in accordance with the provisions of Articles 81 to 83 or the credit assessments of Export Credit Agencies as described in Annex VI, Part 1.

2.           For the purposes of applying a risk weight, as referred to in paragraph 1, the exposure value shall be multiplied by the risk weight specified or determined in accordance with this Subsection.

3.           For the purposes of calculating risk-weighted exposure amounts for exposures to institutions, competent authorities shall decide whether to adopt the method based on the credit quality of the central government of the jurisdiction in which the credit institution is incorporated or the method based on the credit quality of the counterparty institution in accordance with Annex VI.

4.           Notwithstanding paragraph 1, where an exposure is subject to credit protection the risk weight applicable to that item may be modified in accordance with Subsection 3.

5.           Risk-weighted exposure amounts for securitised exposures shall be calculated in accordance with Subsection 4.

6.           Exposures the calculation of risk-weighted exposure amounts for which is not otherwise provided for under this Subsection shall be assigned a risk-weight of 100%.

7.           With the exception of exposures giving rise to liabilities in the form of the items referred to in points (1) to (8) of Article 57(1), competent authorities may exempt from the requirements of paragraph 1 of this Article the exposures of a credit institution to a counterparty which is its parent undertaking, its subsidiary or a subsidiary of its parent undertaking, provided that the following conditions are met:

(a)     the counterparty is an institution or a financial holding company, financial institution, asset management company or ancillary services undertaking subject to appropriate prudential requirements;

(b)     the counterparty is included in the same consolidation as the credit institution on a full basis;

(c)     the counterparty is subject to the same risk evaluation, measurement and control procedures as the credit institution;

(d)     the counterparty is established in the same Member State as the credit institution;

(e)     there is no current or foreseen material or legal impediment to the prompt transfer of own funds or repayment of liabilities from the counterparty to the credit institution.

In such a case, a risk weight of 0% shall be applied.

Article 81

1.           An external credit assessment may be used to determine the risk weight of an exposure in accordance with Article 80 only if the ECAI which provides it has been recognised as eligible for those purposes by the competent authorities, hereinafter “an eligible ECAI’.

2.           Competent authorities shall recognise an ECAI as eligible for the purposes of Article 80 only if they are satisfied that its assessment methodology complies with the requirements of objectivity, independence, ongoing review and transparency, and that the resulting credit assessments meet the requirements of credibility and transparency. For those purposes; the competent authorities shall take into account the technical criteria set out in Annex VI, Part 2.

3.           If an ECAI has been recognised as eligible by the competent authorities of a Member State, the competent authorities of other Member States may recognise that ECAI as eligible without carrying out their own evaluation process.

4.           Competent authorities shall make publicly available an explanation of the recognition process, and a list of eligible ECAIs.

Article 82

1.           The competent authorities shall determine, taking into account the technical criteria set out in Annex VI, Part 2, with which of the credit quality steps set out in Part 1 of that Annex the relevant credit assessments of an eligible ECAI are to be associated. Those determinations shall be objective and consistent.

2.           When the competent authorities of a Member State have made a determination under paragraph 1, the competent authorities of other Member States may recognise that determination without carrying out their own determination process.

Article 83

1.           The use of ECAI credit assessments for the calculation of a credit institution’s risk-weighted exposure amounts shall be consistent and in accordance with Annex VI, Part 3. Credit assessments shall not be used selectively.

2.           Credit institutions shall use solicited credit assessments. However, with the permission of the relevant competent authority, they may use unsolicited assessments.

Subsection 2 - Internal Ratings Based Approach

Article 84

1.           In accordance with this Subsection, the competent authorities may permit credit institutions to calculate their risk-weighted exposure amounts using the Internal Ratings Based Approach (IRB Approach). Explicit permission shall be required in the case of each credit institution.

2.           Permission shall be given only if the competent authority is satisfied that the credit institution's systems for the management and rating of credit risk exposures are sound and implemented with integrity and, in particular, that they meet the following standards in accordance with Annex VII, Part 4:

(a)     the credit institution’s rating systems provide for a meaningful assessment of obligor and transaction characteristics, a meaningful differentiation of risk and accurate and consistent quantitative estimates of risk;

(b)     internal ratings and default and loss estimates used in the calculation of capital requirements and associated systems and processes play an essential role in the risk management and decision-making process, and in the credit approval, internal capital allocation and corporate governance functions of the credit institution;

(c)     the credit institution has a credit risk control unit responsible for its rating systems that is appropriately independent and free from undue influence;

(d)     the credit institution collects and stores all relevant data to provide effective support to its credit risk measurement and management process;

(e)     the credit institution documents its rating systems, the rationale for their design and validates its rating systems.

Where an EU parent credit institution and its subsidiaries or an EU parent financial institution and its subsidiaries use the IRB Approach on a unified basis for the parent and its subsidiaries, the competent authorities may allow minimum requirements of Annex VII, Part 4 to be met by the parent and its subsidiaries considered together.

3.           A credit institution applying for the use of the IRB Approach shall demonstrate that it has been using for the IRB exposure classes in question rating systems that were broadly in line with the minimum requirements set out in this Annex for internal risk measurement and management purposes for at least three years prior to its qualification to use the IRB Approach. This requirement shall apply from the 31 December 2010 onwards.

4.           A credit institution applying for the use of own estimates of LGDs and/or conversion factors shall demonstrate that it has been estimating and employing own estimates of LGDs and/or conversion factors in a manner that was broadly consistent with the minimum requirements for use of own estimates of those parameters set out in this Annex for at least three years prior to qualification to use own estimates of LGDs and/or conversion factors. This requirement shall apply from the 31 December 2010 onwards.

5.           If a credit institution ceases to comply with the requirements set out in this Subsection, it shall either present to the competent authority a plan for a timely return to compliance or demonstrate that the effect of non-compliance is immaterial.

6.           When the IRB Approach is intended to be used by the EU parent credit institution and its subsidiaries, or by the EU parent financial holding company and its subsidiaries, the competent authorities of the different legal entities shall co-operate closely as provided for in Articles 129 to 132.

Article 85

1.           Without prejudice to Article 89, credit institutions and any parent undertaking and its subsidiaries shall implement the IRB Approach for all exposures.

Subject to the approval of the competent authorities, implementation may be carried out sequentially across the different exposure classes, referred to in Article 86, within the same business unit, across different business units in the same group or for the use of own estimates of LGDs or conversion factors for the calculation of risk weights for exposures to corporates, institutions, and central governments and central banks.

In the case of the retail exposure class referred to in Article 86, implementation may be carried out sequentially across the categories of exposures to which the different correlations in Annex VII, Part 1, paragraphs 9, 10 and 11 correspond.

2.           Implementation as referred to in paragraph 1 shall be carried out within a reasonable period of time to be agreed with the competent authorities. The implementation shall be carried out subject to strict conditions determined by the competent authorities. Those conditions shall be designed to ensure that the flexibility under paragraph 1 is not used selectively with the purpose of achieving reduced minimum capital requirements in respect of those exposure classes or business units that are yet to be included in the IRB Approach or in the use of own estimates of LGDs and conversion factors.

3.           Credit institutions using the IRB Approach for any exposure class shall at the same time use the IRB Approach for the equity exposure class.

4.           Subject to paragraphs 1 to 3 and Article 89, credit institutions which have obtained permission under Article 84 to use the IRB Approach shall not revert to the use of Subsection 1 for the calculation of risk-weighted exposure amounts except for demonstrated good cause and subject to the approval of the competent authorities.

5.           Subject to paragraphs 1 and 2 and Article 89, credit institutions which have obtained permission under Article 87(9) to use own estimates of LGDs and conversion factors, shall not revert to the use of LGD values and conversion factors referred to in Article 87(8) except for demonstrated good cause and subject to the approval of the competent authorities.

Article 86

1.         Each exposure shall be assigned to one of the following exposure classes:

(a)     claims or contingent claims on central governments and central banks;

(b)     claims or contingent claims on institutions;

(c)     claims or contingent claims on corporates;

(d)     retail claims or contingent retail claims;

(e)     equity claims;

(f)     securitisation positions;

(g)     other non credit-obligation assets.

2.         The following exposures shall be treated as exposures to central governments and central banks:

(a)     exposures to regional governments and local authorities which are treated as exposures to central governments under Subsection 1;

(b)     exposures to Multilateral Development Banks and International Organisations which attract a risk weight of 0% under Subsection 1.

3.         The following exposures shall be treated as exposures to institutions:

(a)     exposures to regional governments and local authorities which are not treated as exposures to central governments under Subsection 1;

(b)     exposures to Public Sector Entities which are treated as exposures to institutions under the Subsection 1;

(c)     exposures to Multilateral Development Banks which do not attract a 0% risk weight under Subsection 1.

4.         To be eligible for the retail exposure class referred to in point (d) of paragraph 1, exposures shall meet the following criteria:

(a)     they shall be either to an individual person or persons, or to a small or medium sized entity, provided in the latter case that the total amount owed to the credit institution and to any parent undertaking and its subsidiaries by the obligor client or group of connected clients does not, to the knowledge of the credit institution, which must have taken reasonable steps to confirm the situation, exceed EUR 1 million;

(b)     they are treated by the credit institution in its risk management consistently over time and in a similar manner;

(c)     they are not managed individually in a way comparable to exposures in the corporate exposure class;

(d)     they each represent one of a significant number of similarly managed exposures.

5.         The following exposures shall be classed as equity exposures:

(a)     non-debt exposures conveying a subordinated, residual claim on the assets or income of the issuer;

(b)     debt exposures the economic substance of which is similar to the exposures specified in point (a).

6.         Within the corporate exposure class, credit institutions shall separately identify as specialised lending exposures, exposures which possess the following characteristics:

(a)     the exposure is to an entity which was created specifically to finance and/or operate physical assets;

(b)     the contractual arrangements give the lender a substantial degree of control over the assets and the income that they generate;

(c)     the primary source of repayment of the obligation is the income generated by the assets being financed, rather than the independent capacity of a broader commercial enterprise.

7.         Any credit obligation not assigned to the exposure classes referred to in points (a), (b) and (d) to (f) of paragraph 1 shall be assigned to the exposure class referred to in point (c) of that paragraph.

8.         The exposure class referred to in point (g) of paragraph 1 shall include the residual value of leased properties, if not covered elsewhere in this Directive.

9.         The methodology used by the credit institution for assigning exposures to different exposure classes shall be appropriate and consistent over time.

Article 87

1.         The risk-weighted exposure amounts for credit risk for exposures belonging to one of the exposure classes referred to in points (a) to (e) or (g) of Article 86(1) shall, unless deducted from own funds, be calculated in accordance with Annex VII, Part 1, paragraphs 1 to 25.

2.         The risk-weighted exposure amounts for dilution risk for purchased receivables shall be calculated according to Annex VII, Part 1, paragraph 26.

3.         The calculation of risk-weighted exposure amounts for credit risk and dilution risk shall be based on the relevant parameters associated with the exposure in question. These shall include probability of default (PD), loss given default (LGD), maturity (M) and the exposure value of the exposure. PD and LGD may be considered separately or jointly, in accordance with Annex VII, Part 2.

4.         Notwithstanding paragraph 3, the calculation of risk-weighted exposure amounts for credit risk for all exposures belonging to the exposure class referred to in point (e) of Article 86(1) shall be calculated in accordance with Annex VII, Part 1, paragraphs 15 to 24 subject to approval of competent authorities. Competent authorities shall only allow a credit institution to use the approach set out in Annex VII, Part 1, paragraphs 24 to 25, if the credit institution meets the minimum requirements Annex VII, Part 4, paragraphs 114 to 122.

5.         Notwithstanding paragraph 3, the calculation of risk weighted exposure amounts for credit risk for specialised lending exposures may be calculated in accordance with Annex VII, Part 1, paragraph 5. Competent authorities shall publish guidance on how institutions should assign risk weights to specialised lending exposures under Annex VII, Part 1, paragraph 5 and shall approve institutions assignment methodologies.

6.         For exposures belonging to the exposure classes referred to in points (a) to (d) of Article 86(1), credit institutions shall provide their own estimates of PDs in accordance with Article 84 and Annex VII, Part 4.

7.         For exposures belonging to the exposure class referred to in point (d) of Article 86(1), credit institutions shall provide own estimates of LGDs and conversion factors in accordance with Article 84 and Annex VII, Part 4.

8.         For exposures belonging to the exposure classes referred to in points (a) to (c) of Article 86(1), credit institutions shall apply the LGD values set out in Annex VII, Part 2, paragraph 8, and the conversion factors set out in Annex VII, Part 3, paragraph 11 points (a) to (c).

9.         Notwithstanding paragraph 8, for all exposures belonging to the exposure classes referred to in points (a) to (c) of Article 86(1), competent authorities may permit credit institutions to use own estimates of LGDs and conversion factors in accordance with Article 84 and Annex VII, Part 4.

10.       The risk-weighted exposure amounts for securitised exposures and for exposures belonging to the exposure class referred to in point (f) of Article 86(1) shall be calculated in accordance with Subsection 4.

11.       Where exposures to a collective investment undertaking (CIU) meet the criteria set out in Annex VI, Part 1, paragraphs 74 to 75 and the credit institution is aware of all of the underlying exposures of the CIU, the credit institution shall look through to those underlying exposures in order to calculate risk-weighted exposure amounts and expected loss amounts in accordance with the methods set out in this Subsection.

Where the credit institution does not meet the conditions for using the methods set out in this Subsection, risk weighted exposure amounts and expected loss amounts shall be calculated in accordance with the following approaches:

(a)     for exposures belonging to the exposure class referred to in point (e) of Article 86(1), the approach set out in Annex VII, Part 1, paragraphs 17 to 19. If, for those purposes; the credit institution is unable to differentiate between private equity, exchange-traded and other equity exposures, it shall treat the exposures concerned as other equity exposures.

(b)     for all other underlying exposures, the approach set out in Subsection 1, subject to the following modifications:

(i)      the exposures are assigned to the appropriate exposure class and attributed the risk weight of the credit quality step immediately above the credit quality step that would normally be assigned to the exposure;

(ii)     exposures assigned to the higher credit quality steps, to which a risk weight of 150% would normally be attributed, are assigned a risk weight of 200%.

12.       Where exposures to a CIU do not meet the criteria set out in Annex VI, Part 1, paragraphs 74 to 75, or the credit institution is not aware of all of the underlying exposures of the CIU, the credit institution shall look through to the underlying exposures and calculate risk-weighted exposure amounts and expected loss amounts in accordance with the approach set out in Annex VII, Part 1, paragraphs 17 to 19. If, for those purposes, the credit institution is unable to differentiate between private equity, exchange-traded and other equity exposures, it shall treat the exposures concerned as other equity exposures. For these purposes, non-equity exposures are assigned to one of the classes (private equity, exchange traded equity or other equity) set out in Annex VII, Part 1, paragraph 17 and unknown exposures are assigned to other equity class.

Alternatively to the method described above, credit institutions may rely on a third party to calculate and report the average risk weighted exposure amounts based on the CIUs underling exposures and calculated in accordance with the following approaches, provided that the correctness of the calculation and the report is adequately ensured:

(a)     for exposures belonging to the exposure class referred to in point (e) of Article 86(1), the approach set out in Annex VII, Part 1, paragraphs 17 to 19. If, for those purposes, the credit institution is unable to differentiate between private equity, exchange-traded and other equity exposures, it shall treat the exposures concerned as other equity exposures.

(b)     for all other underlying exposures, the approach set out in Subsection 1, subject to the following modifications:

(i)      the exposures are assigned to the appropriate exposure class and attributed the risk weight of the credit quality step immediately above the credit quality step that would normally be assigned to the exposure;

(ii)     exposures assigned to the higher credit quality steps, to which a risk weight of 150% would normally be attributed, are assigned a risk weight of 200%.

Article 88

1.         The expected loss amounts for exposures belonging to one of the exposure classes referred to in points (a) to (e) of Article 86(1) shall be calculated in accordance with the methods set out in Annex VII, Part 1, paragraphs 27 to 33.

2.         The calculation of expected loss amounts in accordance with Annex VII, Part 1, paragraphs 27 to 33 shall be based on the same input figures of PD, LGD and the exposure value for each exposure as being used for the calculation of risk-weighted exposure amounts in accordance with Article 87.

3.         The expected loss amounts for securitised exposures shall be calculated in accordance with Subsection 4.

4.         The expected loss amount for exposures belonging to the exposure class referred to in point (g) of Article 86(1) shall be zero.

5.         The expected loss amounts for dilution risk of purchased receivables shall be calculated in accordance with the methods set out in Annex VII, Part 1, paragraph 33.

6.         The expected loss amounts for exposures referred to in Article 87(11) and (12) shall be calculated in accordance with the methods set out in Annex VII, Part 1, paragraphs 27 to 33.

Article 89

1.         Subject to the approval of the competent authorities, credit institutions permitted to use the IRB Approach in the calculation of risk-weighted exposure amounts and expected loss amounts for one or more exposure classes may apply Subsection 1 for the following:

(a)     the exposure class referred to in point (a) of Article 86(1), where the number of material counterparties is limited and it would be unduly burdensome for the credit institution to implement a rating system for these counterparties;

(b)     the exposure class referred to in point (b) of Article 86(1), where the number of material counterparties is limited and it would be unduly burdensome for the credit institution to implement a rating system for these counterparties;

(c)     exposures in non-significant business units as well as exposure classes that are immaterial in terms of size and perceived risk profile;

(d)     exposures to central governments of the home Member State and to their regional governments, local authorities and administrative bodies, provided that:

(i)      there is no difference in risk between the exposures to that central government and those other exposures because of specific public arrangements;

(ii)     exposures to the central government are associated with credit quality assessment step 1 under Subsection 1.

(e)     exposures of a credit institution to a counterparty which is its parent undertaking, its subsidiary or a subsidiary of its parent undertaking provided that the counterparty is an institution or a financial holding company, financial institution, asset management company or ancillary services undertaking subject to appropriate prudential requirements.

f)       equity exposures to entities whose credit obligations qualify for a zero risk weight under Subsection 1 (including those publicly sponsored entities where a zero weight can be applied).

g)      equity exposures incurred under legislated programmes to promote specified sectors of the economy that provide significant subsidies for the investment to the credit institution and involve some form of government oversight and restrictions on the equity investments. This exclusion is limited to an aggregate of 10% of original own funds plus additional own funds.

This paragraph shall not prevent the competent authorities of other Member State to allow the application of the rules of Subsection 1 for equity exposures which have been allowed for this treatment in other Member States.

2.         For the purposes of point (c), the equity exposure class of a credit institution shall be considered material if their aggregate value, excluding equity exposures incurred under legislative programmes as referred to in point (g), exceeds, on average over the preceding year, 10% of the credit institution’s own funds. If the number of those equity exposures is less than 10 individual holdings, that threshold shall be 5% of the credit institution’s own funds.

Subsection 3 - Credit risk mitigation

Article 90

For the purposes of this Subsection, ‘lending credit institution’ shall mean the credit institution which has the exposure in question, whether or not deriving from a loan.

Article 91

Credit institutions using the Standardised Approach under Articles 78 to 83 or using the IRB Approach under Articles 84 to 89, but not using their own estimates of LGD and conversion factors under Articles 87 and 88, may recognise credit risk mitigation in accordance with this Subsection in the calculation of risk-weighted exposure amounts for the purposes of Article 75 point (a) or as relevant expected loss amounts for the purposes of the calculation referred to in point (q) of Article 57, and Article 63(3).

Article 92

1.           The technique used to provide the credit protection together with the actions and steps taken and procedures and policies implemented by the lending credit institution shall be such as to result in credit protection arrangements which are legally effective and enforceable in all relevant jurisdictions.

2.           The lending credit institution shall take all appropriate steps to ensure the effectiveness of the credit protection arrangement and to address related risks.

3.           In the case of funded credit protection, to be eligible for recognition the assets relied upon must be sufficiently liquid and their value over time sufficiently stable to provide appropriate certainty as to the credit protection achieved having regard to the approach used to calculate risk-weighted exposure amounts and to the degree of recognition allowed. Eligibility shall be limited to the assets set out in Annex VIII, Part 1.

4.           In the case of funded credit protection, the lending credit institution shall have the right to liquidate or retain, in a timely manner, the assets from which the protection derives in the event of the default, insolvency or bankruptcy - or other credit event set out in the transaction documentation - and, where applicable, of the custodian holding the collateral. The degree of correlation between the value of the assets relied upon for protection and the credit quality of the borrower must not be undue.

5.           In the case of unfunded credit protection, to be eligible for recognition the party giving the undertaking must be sufficiently reliable, and the protection agreement legally effective in the relevant jurisdictions, to provide appropriate certainty as to the credit protection achieved having regard to the approach used to calculate risk-weighted exposure amounts and to the degree of recognition allowed. Eligibility shall be limited to the protection providers and types of protection agreement set out in Annex VIII, Part 1.

6.           The minimum requirements set out in Annex VIII, Part 2 shall be complied with.

Article 93

1.           Where the requirements of Article 92 are met the calculation of risk-weighted exposure amounts, and, as relevant, expected loss amounts, may be modified in accordance with Annex VIII, Parts 3 to 6.

2.           No exposure in respect of which credit risk mitigation is obtained shall produce a higher risk-weighted exposure amount or expected loss amount than an otherwise identical exposure in respect of which there is no credit risk mitigation.

3.           Where the risk-weighted exposure amount already takes account of credit protection under Articles 78 to 83 or Articles 84 to 93, as relevant, the calculation of the credit protection shall not be further recognised under this Subsection.

Subsection 4 - Securitisation

Article 94

Where a credit institution uses the Standardised Approach set out in Subsection 1 for the calculation of risk-weighted exposure amounts for the exposure class to which the securitised exposures would be assigned under Article 79, it shall calculate the risk-weighted exposure amount for a securitisation position in accordance with Annex IX, Part 4, paragraphs 6 to 35.

In all other cases, it shall calculate the risk-weighted exposure amount in accordance with Annex IX, Part 4, paragraphs 36 to 74.

Article 95

1.         Where significant credit risk associated with securitised exposures has been transferred from the originator credit institution in accordance with the terms of Annex IX, Part 2, that credit institution may:

(a)     in the case of a traditional securitisation, exclude from its calculation of risk-weighted exposure amounts, and, as relevant, expected loss amounts, the exposures which it has securitised;

(b)     in the case of a synthetic securitisation, calculate risk-weighted exposure amounts, and, as relevant, expected loss amounts, in respect of the securitised exposures in accordance with Annex IX, part 2.

2.         Where paragraph 1 applies, the originator credit institution shall calculate the risk-weighted exposure amounts prescribed in Annex IX for the positions that it may hold in the securitisation.

Where the originator credit institution fails to transfer significant credit risk in accordance with paragraph 1, it need not calculate risk-weighted exposure amounts for any positions it may have in the securitisation in question.

Article 96

1.         To calculate the risk-weighted exposure amount of a securitisation position, risk weights shall be applied to the exposure value of the position in accordance with Annex IX, based on the credit quality of the position, which may be determined by reference to an ECAI credit assessment or otherwise, as set out in Annex IX.

2.         Where there is an exposure to different tranches in a securitisation, the exposure to each tranche shall be considered a separate securitisation position. The providers of credit protection to securitisation positions shall be considered to hold positions in the securitisation. Securitisation positions shall include exposures to a securitisation arising from interest rate or currency derivative contracts.

3.         Where a securitisation position is subject to funded or unfunded credit protection the risk-weight to be applied to that position may be modified in accordance with Articles 90 to 93, read in conjunction with Annex IX.

4.         Subject to point (r) of Article 57 and Article 66(2), the risk-weighted exposure amount shall be included in the credit institution’s total of risk-weighted exposure amounts for the purposes of Article 75(a).

Article 97

1.         An ECAI credit assessment may be used to determine the risk weight of a securitisation position in accordance with Article 96 only if the ECAI has been recognised as eligible by the competent authorities for this purpose, hereinafter “an eligible ECAI”.

2.         The competent authorities shall recognise an ECAI as eligible for the purposes of paragraph 1 only if they are satisfied as to its compliance with the requirements laid down in Article 81, taking into account the technical criteria in Annex VI, Part 2, and that it has a demonstrated ability in the area of securitisation, which may be evidenced by a strong market acceptance.

3.         If an ECAI has been recognised as eligible by the competent authorities of a Member State for the purposes of paragraph 1, the competent authorities of other Member States may recognise that ECAI as eligible for those purposes without carrying out their own evaluation process.

4.         The competent authorities shall make publicly available an explanation of the recognition process and a list of eligible ECAIs.

5.         To be used for this purpose a credit assessment of an eligible ECAI shall comply with the principles of credibility and transparency as elaborated in Annex IX, Part 3.

Article 98

1.         For the purposes of applying risk weights to securitisation positions, the competent authorities shall determine with which of the credit quality steps set out in Annex IX the relevant credit assessments of an eligible ECAI are to be associated. Those determinations shall be objective and consistent.

2.         When the competent authorities of a Member State have made a determination under paragraph 1, the competent authorities of other Member States may recognise that determination without carrying out their own determination process.

Article 99

The use of ECAI credit assessments for the calculation of a credit institution’s risk-weighted exposure amounts under Article 96 shall be consistent and in accordance with Annex IX, Part 3. Credit assessments shall not be used selectively.

Article 100

1.           Where there is a securitisation of revolving exposures subject to an early amortisation provision, the originator credit institution or sponsor credit institution shall calculate, in accordance with Annex IX, an additional risk-weighted exposure amount in respect of the risk that the levels of credit risk to which it is exposed may increase following the operation of the early amortisation provision.

2.           For those purposes, a revolving exposure shall be an exposure whereby a customer may vary the amount drawn within an agreed limit, and an early amortisation provision shall be a contractual clause which requires, on the occurrence of defined events, investors’ positions to be redeemed before the originally stated maturity of the securities issued.

3.           In the case of securitisations subjects to an early amortisation provision of retail exposures which are uncommitted and unconditionally cancellable without prior notice, where the early amortisation is triggered by a quantitative value in respect of something other than the three months average excess spread, the competent authorities may apply a treatment which approximates closely to that prescribed in Annex IX, Part 4, paragraphs 27 to 30 for determining the conversion figure indicated.

4.           Where a competent authority intends to apply a treatment in accordance with paragraph 3 in respect of a particular securitisation, it shall first of all inform the relevant competent authorities of all the other Member States. Before the application of such a treatment becomes part of the general policy approach of the competent authority to securitisations containing early amortisation clauses of the type in question, the competent authority shall consult the relevant competent authorities of all the other member States and take into consideration the views expressed. The views expressed in such consultation and the treatment adopted shall be publicly disclosed by the competent authority in question.

Article 101

1.         An originator credit institution or sponsor credit institution shall not, with a view to reducing potential or actual losses to investors, provide support to the securitisation beyond its contractual obligations.

2.         If an originator credit institution or a sponsor credit institution fails to comply with paragraph 1 in respect of a securitisation, the competent authority shall require it at a minimum, to hold capital against all of the securitised exposures as if they had not been securitised. The credit institution shall disclose publicly that it has provided non-contractual support and the regulatory capital impact of having done so.

Section 4

Minimum own funds requirements for operational risk

Article 102

1.         Competent authorities shall require credit institutions to hold own funds against operational risk in accordance with the approaches set out in Articles 103, 104 and 105.

2.         Without prejudice to paragraph 4, credit institutions that use the approach set out in Article 104 shall not revert to the use of the approach set out in Article 103, except for demonstrated good cause and subject to approval by the competent authorities.

3.         Without prejudice to paragraph 4, credit institutions that use the approach set out in Article 105 shall not revert to the use of the approaches set out in Articles 103 or 104 except for demonstrated good cause and subject to approval by the competent authorities.

4.         Competent authorities may allow credit institutions to use a combination of approaches in accordance with Annex X, Part 4.

Article 103

The capital requirement for operational risk under the Basic Indicator Approach shall be a certain percentage of a relevant indicator, in accordance with the parameters set out in Annex X, Part 1.

Article 104

1.           Under the Standardised Approach, credit institutions shall divide their activities into a number of business lines as set out in Annex X, Part 2.

2.           For each business line, credit institutions shall calculate a capital requirement for operational risk as a certain percentage of a relevant indicator, in accordance with the parameters set out in Annex X, Part 2.

3.           For certain business lines, the competent authorities may under certain conditions authorise a credit institution to use an alternative indicator for determining its capital requirement for operational risk.

4.           The capital requirement for operational risk under the Standardised Approach shall be the sum of the capital requirements for operational risk across all individual business lines.

5.           The parameters for the Standardised Approach are in Annex X, Part 2.

6.           To qualify for use of the Standardised Approach, credit institutions shall meet the criteria set out in Annex X, Part 2.

Article 105

1.         Credit institutions may use Advanced Measurement Approaches based on their own internal risk measurement systems, provided that the competent authority expressly approves the use of the models concerned for calculating the own funds requirement.

2.         Credit institutions must satisfy their competent authorities that they meet the qualifying criteria set out in Annex X, Part 3.

3.         When an Advanced Measurement Approach is intended to be used by an EU parent credit institution and its subsidiaries or by the subsidiaries of an EU parent financial holding company, the competent authorities of the different legal entities shall cooperate closely as provided for in Articles 128 to 132. The application shall include the elements listed in Annex X, Part 3.

4.         Where an EU parent credit institution and its subsidiaries or an EU parent financial institution and its subsidiaries use an Advanced Measurement Approach on a unified basis for the parent and its subsidiaries, the competent authorities may allow the qualifying criteria set out in Annex X, Part 3 to be met by the parent and its subsidiaries considered together.

ê 2000/12/EC

Section 35

Large exposures

ê 2000/12/EC Art 1(24) (adapted)

ð new

Article 106

1.           «eExposures», for the purposes of applying Articles 48, 49 and 50 Ö this Section Õ , shall mean the assets Ö any asset Õ or off-balance-sheet items referred to in Article 43 and in Annexes II and IV thereto Ö Section 3, Subsection 1 Õ , without application of the Ö risk Õ weightings or degrees of risk there provided for;.

the risks Ö Exposures arising from the items Õ referred to in Annex IV must Ö shall Õ be calculated in accordance with one of the methods set out in Annex III;.

without application of the weightings for counterparty risk; all Ö All Õ elements entirely covered by own funds may, with the agreement of the competent authorities, be excluded from the determination of exposures, provided that such own funds are not included in the ð credit institution’s own funds ï calculation of the solvency ratio ð for the purposes of Article 75ï or ð in the calculation ï of other monitoring ratios provided for in this Directive and in other Community acts.;

2.           eExposures shall not include either of the following:

(a)     in the case of foreign exchange transactions, exposures incurred in the ordinary course of settlement during the 48 hours following payment, or Ö ; Õ

(b)     in the case of transactions for the purchase or sale of securities, exposures incurred in the ordinary course of settlement during the five working days following payment or delivery of the securities, whichever is the earlier;.

ê 2000/12/EC Art. 1(1) 3rd subparagraph (adapted)

Article 107

For the purposes of applying the supervision and control of large exposures Ö this Section Õ , shall be considered as a credit institution, Ö the term “credit institution” shall cover the following: Õ

(a)          a credit institution according to the first paragraph, including Ö its Õ branches of a credit institution in third countries; and

(b)          any private or public undertaking, including its branches, which corresponds to Ö meets Õ the definition in the first paragraph of “credit institution” and which has been authorised in a third country;.

ê 2000/12/EC Art. 48(1) (adapted)

ð new

Article 108

Reporting of large exposures

1.         A credit institution's exposure to a client or group of connected clients shall be considered a large exposure where its value is equal to or exceeds 10% of its own funds.

ð For those purposes, Section 1 may be read without the inclusion of point (q) of Article 57 and Article 63(3) and shall be read without the inclusion of Article 66(2). ï

ê 2000/12/EC Art 48 (4) 1st paragraph (adapted)

Article 109

The competent authorities shall require that every credit institution have sound administrative and accounting procedures and adequate internal control mechanisms for the purposes of identifying and recording all large exposures and subsequent changes to them, Ö in accordance with Õ as defined and required by this Directive, and for that of monitoring those exposures in the light of each credit institution's own exposure policies.

ê 2000/12/EC Art. 48(2) (adapted)

Article 110

Reporting of large exposures

21.       A credit institution shall report every large exposure within the meaning of paragraph 1to the competent authorities.

Member States shall provide that reporting is to be carried out, at their discretion, in accordance with one of the following two methods:

(a)          reporting of all large exposures at least once a year, combined with reporting during the year of all new large exposures and any increases in existing large exposures of at least 20% with respect to the previous communication;

(b)          reporting of all large exposures at least four times a year.

ê 2000/12/EC Art. 48.3 (adapted)

ð new

3.2 ð Except in the case of credit institutions relying on Article 114 for the recognition of collateral in calculating the value of exposures for the purposes of paragraphs 1, 2 and 3 of Article 111, ï eExposures exempted under Article 49 Ö 111 Õ (7)ð (3) ï(a), (b), (c), (d), (f), (g) and (h) need not, however, be reported as laid down in paragraph ð 1 ï 2 and the reporting frequency laid down in ð point (b) of ï the second indent to paragraph ð 1 ï 2 may be reduced to twice a year for the exposures referred to in Article 49 Ö 111 Õ (7)ð (3) ï(e) and (i), and also in paragraphs 8, 9 and 10 ðArticles 115 and 116 ï.

ê 2000/12/EC Art. 48(4) 2nd subparagraph (adapted)

Where a credit institution invokes paragraph Ö 2 Õ 3, it shall keep a record of the grounds advanced for at least one year after the event giving rise to the dispensation, so that the competent authorities may establish whether it is justified.

ò new

3. Member States may require the reporting of concentrated exposures to the issuers of collateral taken by the credit institution.

ê 2000/12/EC Art 49(1) to (5) (adapted)

è1 2004/xx/EC Art. 3.7

ð new

Article 111

Limits on large exposures

1.           A credit institution may not incur an exposure to a client or group of connected clients the value of which exceed 25% of its own funds ð . For these purposes and the purposes of the other provisions of this Article, Section 1 may be read without taking into account point (q) of Article 57 and Article 63(3) and shall be read without the inclusion of Article 66(2).ï

2.           Where that client or group of connected clients is the parent undertaking or subsidiary of the credit institution and/or one or more subsidiaries of that parent undertaking, the percentage laid down in paragraph 1 shall be reduced to 20%. Member States may, however, exempt the exposures incurred to such clients from the 20% limit if they provide for specific monitoring of such exposures by other measures or procedures. They shall inform the Commission and the è1 European Banking Committee ç of the content of such measures or procedures.

3.           A credit institution may not incur large exposures which in total exceed 800% of its own funds.

ê 2000/12/EC Art. 49.4 (adapted)

4. Member States may impose limits more stringent than those laid down in paragraphs 1, 2 and 3.

ê 2000/12/EC Art 49(1) to (5)

54.         A credit institution shall at all times comply with the limits laid down in paragraphs 1, 2 and 3 in respect of its exposures. If in an exceptional case exposures exceed those limits, that fact must be reported without delay to the competent authorities which may, where the circumstances warrant it, allow the credit institution a limited period of time in which to comply with the limits.

ò new

Article 112

1.           For the purposes of Articles 113 to 117, ‘guarantee’ shall include credit derivatives recognised under Articles 90 to 93 other than credit linked notes.

2.           Subject to paragraph 3, where, under Articles 113 to 117, the recognition of funded or unfunded credit protection may be permitted, this shall be subject to compliance with the eligibility requirements and other minimum requirements, set out under Articles 90 to 93 for the purposes of calculating risk-weighted exposure amounts under Articles 78 to 83.

3.           Where a credit institution relies upon Article 114(2), the recognition of credit protection shall be subject to the relevant requirements under Articles 84 to 89.

ê 2000/12/EC Art 49(4) & (6) adapted (adapted)

Article 113

1.         Member States may impose limits more stringent than those laid down in Article Ö 111 Õ 75 paragraphs 1, 2 and 3.

62.       Member States may fully or partially exempt from the application of Article Ö 111 Õ 75 paragraphs 1, 2 and 3 exposures incurred by a credit institution to its parent undertaking, to other subsidiaries of that parent undertaking or to its own subsidiaries, in so far as those undertakings are covered by the supervision on a consolidated basis to which the credit institution itself is subject, in accordance with this Directive or with equivalent standards in force in a third country.

ê 2000/12/EC Art 49(7) (adapted)

ð new

73. Member States may fully or partially exempt the following exposures from the application of paragraphs (1), (2) and (3) Ö Article 111 Õ:

(a) asset items constituting claims on Zone A central governments or central banks; ð central governments or central banks which would unsecured receive a 0% risk weighting under Articles 78 to 83; ï

(b) asset items constituting claims on the European Communitiesð international organisations or multilateral development banks which would unsecured receive a 0% risk weight under Articles 78 to 83; ï

(c) asset items constituting claims carrying the explicit guarantees of Zone A central governments or central banks or of the European Communities ð central governments, central banks, international organisations or multilateral development banks, where unsecured claims on the entity providing the guarantee would achieve a 0% risk weight under Articles 78 to 83; ï

(d) other exposures attributable to, or guaranteed by, Zone A central governments or central banks or the European Communities ð central governments, central banks, international organisations, or multilateral development banks where unsecured claims on the entity to which the exposure is attributable or by which it is guaranteed would receive a 0% risk weight under Articles 78 to 83ï;

(e) asset items constituting claims on and other exposures to Zone B central governments or central banks ð not mentioned in paragraph a) above ï which are denominated and, where applicable, funded in the national currencies of the borrowers;

(f) asset items and other exposures secured, to the satisfaction of the competent authorities, by collateral in the form of ð debt securities issued by ïZone A central governments or central banks, securities, or securities issued by the European Communities or by Member State regional or local authorities for which Article 44 lays down a zero weighting for solvency purposes ð international organisations, multilateral development banks or Member States’ regional governments or local authorities, which securities constitute claims on their issuer which would receive a 0% risk weighting under Articles 78 to 83ï;

(g) asset items and other exposures secured, to the satisfaction of the competent authorities, by collateral in the form of cash deposits placed with the lending Ö credit Õ institution or with a credit institution which is the parent undertaking or a subsidiary of the lending institution;

(h) asset items and other exposures secured, to the satisfaction of the competent authorities, by collateral in the form of certificates of deposit issued by the lending Ö credit Õ institution or by a credit institution which is the parent undertaking or a subsidiary of the lending Ö credit Õ institution and lodged with either of them;

(i) asset items constituting claims on and other exposures to credit institutions, with a maturity of one year or less, but not constituting such institutions' own funds;

(j) asset items constituting claims on and other exposures to those institutions which are not credit institutions but which fulfil the conditions referred to in Article 45(2)ð Annex VI, Part 1, paragraph 82 ï, with a maturity of one year or less, and secured in accordance with the same paragraph;

(k) bills of trade and other similar bills, with a maturity of one year or less, bearing the signatures of other credit institutions;

(l) debt securities as defined in Article 22(4) of Directive 85/611/EEC;ð covered bonds as defined in Articles 78 to 83;ï

ê 2000/12/EC (adapted)

(m) pending subsequent coordination, holdings in the insurance companies referred to in Article 51(3) Ö 122(1) Õ up to 40% of the own funds of the credit institution acquiring such a holding;

(n) asset items constituting claims on regional or central credit institutions with which the lending Ö credit Õ institution is associated in a network in accordance with legal or statutory provisions and which are responsible, under those provisions, for cash-clearing operations within the network;

ê 2000/12/EC

(o) exposures secured, to the satisfaction of the competent authorities, by collateral in the form of securities other than those referred to in (f); provided that those securities are not issued by the credit institution itself, its parent company or one of their subsidiaries, or by the client or group of connected clients in question. The securities used as collateral must be valued at market price, have a value that exceeds the exposures guaranteed and be either traded on a stock exchange or effectively negotiable and regularly quoted on a market operated under the auspices of recognised professional operators and allowing, to the satisfaction of the competent authorities of the Member State of origin of the credit institution, for the establishment of an objective price such that the excess value of the securities may be verified at any time. The excess value required shall be 100% it shall, however, be 150% in the case of shares and 50% in the case of debt securities issued by credit institutions, Member State regional or local authorities other than those referred to in Article 44, and in the case of debt securities issued by the EIB and multilateral development banks Securities used as collateral may not constitute credit institutions' own funds;

ê 2000/12/EC

(p) loans secured, to the satisfaction of the competent authorities, by mortgages on residential property or by shares in Finnish residential housing companies, operating in accordance with the Finnish Housing Company Act of 1991 or subsequent equivalent legislation and leasing transactions under which the lessor retains full ownership of the residential property leased for as long as the lessee has not exercised his option to purchase, in all cases up to 50% of the value of the residential property concerned; The value of the property shall be calculated, to the satisfaction of the competent authorities, on the basis of strict valuation standards laid down by law, regulation or administrative provisions. Valuation shall be carried out at least once a year. For the purposes of this point residential property shall mean a residence to be occupied or let by the borrower;

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(q) the following, where they would receive a 50% risk weight under Articles 78 to 83, and only up to 50% of the value of the property concerned:

(i)      exposures secured by mortgages on offices or other commercial premises, or by shares in Finnish housing companies, operating in accordance with the Finnish Housing Company Act of 1991 or subsequent equivalent legislation, in respect of offices or other commercial premises;

(ii)     exposures related to property leasing transactions concerning offices or other commercial premises;

For the purposes of point (ii), until 31 December 2011, the competent authorities of each Member State may allow credit institutions to recognise 100% of the value of the property concerned. At the end of this period, this treatment shall be reviewed. Member states shall inform the Commission of the use they make of this preferential treatment.

ê 2000/12/EC (adapted)

(qr)    50% of the medium/low-risk off-balance-sheet items referred to in Annex II;

(rs)     subject to the competent authorities' agreement, guarantees other than loan guarantees which have a legal or regulatory basis and are given for their members by mutual guarantee schemes possessing the status of credit institutions, subject to a weighting of 20% of their amount.

Member States shall inform the Commission of the use they make of this option in order to ensure that it does not result in distortions of competition;

(st)     the low-risk off-balance-sheet items referred to in Annex II, to the extent that an agreement has been concluded with the client or group of connected clients under which the exposure may be incurred only if it has been ascertained that it will not cause the limits applicable under Ö Article 111(1) to (3) Õ paragraphs 1, 2 and 3 to be exceeded.

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Cash received under a credit linked note issued by the credit institution and loans and deposits of a counterparty to or with the credit institution which are subject to an on-balance sheet netting agreement recognised under Articles 90 to 93 shall be deemed to fall under point (g).

ê 2000/12/EC Art 49(o) 2nd & 3rd sentences (adapted)

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Ö For the purposes of point (o), the Õ The securities used as collateral must be valued at market price, have a value that exceeds the exposures guaranteed and be either traded on a stock exchange or effectively negotiable and regularly quoted on a market operated under the auspices of recognised professional operators and allowing, to the satisfaction of the competent authorities of the Member State of origin of the credit institution, for the establishment of an objective price such that the excess value of the securities may be verified at any time. The excess value required shall be 100%. iIt shall, however, be 150% in the case of shares and 50% in the case of debt securities issued by credit institutions, Member State regional Ö governments Õ or local authorities other than those referred to in Article 44 Ö sub-point (f) Õ, and in the case of debt securities issued by the EIB and multilateral development banks ð other than those receiving a 0% risk weighting under the Standardised Approach. Where there is a mismatch between the maturity of the exposure and the maturity of the credit protection, the collateral shall not be recognised. ï Ö Securities used as collateral may not constitute credit institutions' own funds. Õ

Ö For the purposes of point (p) , the Õ The value of the property shall be calculated, to the satisfaction of the competent authorities, on the basis of strict valuation standards laid down by law, regulation or administrative provisions. Valuation shall be carried out at least once a year. For the purposes of this point Ö (p), Õ residential property shall mean a residence to be occupied or let by the borrower;.

Member States shall inform the Commission of any exemption granted Ö under point (s) Õ the use they make of this optionin order to ensure that it does not result in distortion of competition;.

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Article 114

1.         Subject to paragraph 3, for the purposes of calculating the value of exposures for the purposes of Article 111(1) to (3) Member States may, in respect of credit institutions using the Financial Collateral (Comprehensive Method) under Articles 90 to 93, in the alternative to availing of the full or partial exemptions permitted under points (f), (g), (h), and (o) of Article 113(3), permit such credit institutions to use a value lower than the value of the exposure, but no lower than the total of the fully-adjusted exposure values of their exposures to the client or group of connected clients.

For these purposes ‘fully adjusted exposure value’ means that calculated under Articles 90 to 93 taking into account the credit risk mitigation, volatility adjustments, and any maturity mismatch (E*).

Where this paragraph is applied to a credit institution, points (f), (g), (h), and (o) of Article 113(3) shall not apply to the credit institution in question.

2.         Subject to paragraph 3, a credit institution permitted to use own estimates of LGDs and conversion factors for an exposure class under Articles 84 to 89 may be permitted, where it is able to the satisfaction of the competent authorities to estimate the effects of financial collateral on their exposures separately from other LGD-relevant aspects, to recognise such effects in calculating the value of exposures for the purposes of Article 113(3).

Competent authorities shall be satisfied as to the suitability of the estimates produced by the credit institution for use for the reduction of the exposure value for the purposes of compliance with the provisions of Article 111.

Where a credit institution is permitted to use its own estimates of the effects of financial collateral, it must do so on a consistent basis to the satisfaction of the competent authorities. In particular, this approach must be adopted for all large exposures.

Credit institutions permitted to use own estimates of LGDs and conversion factors for an exposure class under Articles 84 to 89 which does not calculate the value of their exposures using the method referred to in the first subparagraph, may be permitted to use the approach set out in paragraph 9(1) above or the approach set out in point (o) of Article 113(3) above for calculating the value of exposures. A credit institution shall use only one of these two methods.

3.         A credit institution which is permitted to use the methods described in paragraphs 1 and 2 in calculating the value of exposures for the purposes of Article 111(1) to (3) shall conduct periodic stress tests of their credit risk concentrations including in relation to the realisable value of any collateral taken.

These shall address risks arising from potential changes in market conditions that could adversely impact the credit institutions’ adequacy of own funds and risks arising from the realisation of collateral in stressed situations.

The credit institution shall satisfy the competent authorities that the stress tests carried out are adequate and appropriate for the assessment of such risks.

In the event that such a stress test indicates a lower realisable value of collateral taken than would be permitted to be taken into account under paragraphs 2 and 3 as appropriate, the value of collateral permitted to be recognised in calculating the value of exposures for the purposes of Article 111(1) to (3) shall be reduced accordingly.

Such credit institutions shall include the following in their strategies to address concentration risk:

(a)          policies and procedures to address risks arising from maturity mismatches between exposures and any credit protection on those exposures;

(b)          policies and procedures relating to concentration risk arising from the application of credit risk mitigation techniques, and in particular large indirect credit exposures (e.g. to a single issuer of securities taken as collateral).

4.         Where the effects of collateral are recognised under the terms of paragraphs 1 or 2 above, Member States may treat any covered part of the exposure as having been incurred to the collateral issuer rather than to the client.

ê 2000/12/EC Art 49 (8) & (9) (adapted)

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Article 115

81.       For the purposes of Ö Article 111(1) to (3) Õparagraphs 1, 2 and 3, Member States may apply a weighting of 20% to asset items constituting claims on Member State regional Ö governments Õ and local authorities ð where those claims would receive a 20% risk weight under Article 78 to 83 and to other exposures to or guaranteed by such governments and authorities claims on which receive a 20% risk weight under Article 78 to 83. ïand to other exposures to or guaranteed by such authorities; subject to the conditions laid down in Article 44, however, Member States may reduce that rate to 0%.

ð However, Member States may reduce that rate to 0% in respect of to asset items constituting claims on Member States’ regional governments and local authorities where those claims would receive a 0% risk weight under Article 78 to 83 and to other exposures to or guaranteed by such governments and authorities claims on which receive a 0% risk weight under Article 78 to 83. ï

9.2.      For the purposes of Ö Article 111(1) to (3) Õ paragraphs 1, 2 and 3, Member States may apply a weighting of 20% to asset items constituting claims on and other exposures to credit institutions with a maturity of more than one but not more than three years and a weighting of 50% to asset items constituting claims on credit institutions with a maturity of more than three years, provided that the latter are represented by debt instruments that were issued by a credit institution and that those debt instruments are, in the opinion of the competent authorities, effectively negotiable on a market made up of professional operators and are subject to daily quotation on that market, or the issue of which was authorised by the competent authorities of the Member State of origin of the issuing credit institutions. In no case may any of these items constitute own funds.

ê 2000/12/EC Art 49 (10) (adapted)

Article 116

10.By way of derogation from paragraphs 7 (i) and 9 Ö Article 113(3)(i) and Article 115(2) Õ, Member States may apply a weighting of 20% to asset items constituting claims on and other exposures to credit institutions, regardless of their maturity.

ê 2000/12/EC Art. 49 (11) (adapted)

Article 117

111.       Where an exposure to a client is guaranteed by a third party, or by collateral in the form of securities issued by a third party under the conditions laid down in paragraph 7 Ö Article 113(3)Õ (o), Member States may:

(a)     treat the exposure as having been incurred to the Ö guarantor Õ third party rather than to the client, if the exposure is directly and unconditionally guaranteed by that third party, to the satisfaction of the competent authorities,;

(b)     treat the exposure as having been incurred to the third party rather than to the client, if the exposure defined in sub-paragraph 7 Ö Article 113(3) Õ (o) is guaranteed by collateral under the conditions there laid down.

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2.           Where Member States apply the treatment provided for in point (a) of paragraph 1:

(a)     where the guarantee is denominated in a currency different from that in which the exposure is denominated the amount of the exposure deemed to be covered will be calculated in accordance with the provisions on the treatment of currency mismatch for unfunded protection in Annex VIII;

(b)     a mismatch between the maturity of the exposure and the maturity of the protection will be treated in accordance with the provisions on the treatment of maturity mismatch in Annex VIII;

(c)     partial coverage may be recognised in accordance with the treatment set out in Annex VIII.

ê 2000/12/EC Art 49 (2) (adapted)

12. By 1 January 1999 at the latest, the Council shall, on the basis of a report from the Commission, examine the treatment of interbank exposures provided for in paragraphs 7(i), 9 and 10. The Council shall decide on any changes to be made on a proposal from the Commission.

ê 2000/12/EC Art 50 (adapted)

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Article 118

Supervision on a consolidated or unconsolidated basis of large exposures

1. If the credit institution is neither a parent undertaking nor a subsidiary, compliance with the obligations imposed in Articles 48 and 49 or in any other Community provision applicable to this area shall be monitored on an unconsolidated basis.

2. In the other cases, compliance with the obligations imposed in Articles 48 and 49 or in any other Community provision applicable to this area shall be monitored on a consolidated basis in accordance with Articles 52 to 56.

3. Member States may waive monitoring on an individual or subconsolidated basis of compliance with the obligations imposed in Articles 48 and 49 or in any other Community provision applicable to this area by a credit institution which, as a parent undertaking, is subject to monitoring on a consolidated basis and by any subsidiary of such a credit institution which is subject to their authorisation and supervision and is covered by monitoring on a consolidated basis.

Member States also waive such monitoring where the parent undertaking is a financial holding company established in the same Member State as the credit institution, provided that company is subject to the same monitoring as credit institutions.

In the cases referred to in the first and second subparagraphs.

ð Where compliance by a credit institution on an individual or sub-consolidated basis with the obligations imposed in this Section is disapplied under Article 69(1), or the provisions of Article 70 are applied in the case of parent credit institutions in a Member State, ï measures must be taken to ensure the satisfactory allocation of risks within the group.

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Article 119

By 31 December 2007, the Commission shall submit to the European Parliament and to the Council a report on the functioning of this Section, together with any appropriate proposals.

ê 2000/12/EC

Section 6

Qualifying holdings outside the financial sector

ê 2000/12/EC Art. 51 (1) & (2) (adapted)

Article 120

Limits to non-financial qualifying holdings

1.         No credit institution may have a qualifying holding the amount of which exceeds 15% of its own funds in an undertaking which is neither a credit institution, nor a financial institution, nor an undertaking carrying on an activity referred to in the second subparagraph of Article 43(2)(f) of Directive 86/635/EEC.

2.         The total amount of a credit institution's qualifying holdings in undertakings other than credit institutions, financial institutions or undertakings carrying on activities referred to in the second subparagraph of Article 43(2)(f) of Directive 86/635/EEC may not exceed 60% of its own funds.

ê 2002/87/EC Art. 29(5) (adapted)

5. The Member States need not apply the limits laid down in paragraphs 1 and 2 to holdings in insurance companies as defined in Directive 73/239/EEC and Directive 79/267/EEC, or in reinsurance companies as defined in Directive 98/78/EC.

ê 2000/12/EC Art. 51(4) (adapted)

4. Shares held temporarily during a financial reconstruction or rescue operation or during the normal course of underwriting or in an institution's own name on behalf of others shall not be counted as qualifying holdings for the purpose of calculating the limits laid down in paragraphs 1 and 2. Shares which are not financial fixed assets as defined in Article 35(2) of Directive 86/635/EEC shall not be included.

ê 2000/12/EC Art. 51 (5)

53.       The limits laid down in paragraphs 1 and 2 may be exceeded only in exceptional circumstances. In such cases, however, the competent authorities shall require a credit institution either to increase its own funds or to take other equivalent measures.

ê 2000/12/EC Art. 51 (6) (adapted)

6. The Member States may provide that the competent authorities shall not apply the limits laid down in paragraphs 1 and 2 if they provide that 100% of the amounts by which a credit institution's qualifying holdings exceed those limits must be covered by own funds and that the latter shall not be included in the calculation of the solvency ratio. If both the limits laid down in paragraphs 1 and 2 are exceeded, the amount to be covered by own funds shall be the greater of the excess amounts.

ê 2000/12/EC Art. 51 (4)

Article 121

4.Shares held temporarily during a financial reconstruction or rescue operation or during the normal course of underwriting or in an institution's own name on behalf of others shall not be counted as qualifying holdings for the purpose of calculating the limits laid down in paragraphs 1 and 2. Shares which are not financial fixed assets as defined in Article 35(2) of Directive 86/635/EEC shall not be included.

ê 2002/87/EC Art. 29(5)

Article 122

31.         The Member States need not apply the limits laid down in paragraphs 1 and 2 to holdings in insurance companies as defined in Directive 73/239/EEC and Directive 79/267/EEC, or in reinsurance companies as defined in Directive 98/78/EC.

ê 2000/12/EC Art. 51(6) (adapted)

62.         The Member States may provide that the competent authorities are not to apply the limits laid down in Ö Article 120(1) and (2) Õ paragraphs 1 and 2 if they provide that 100% of the amounts by which a credit institution's qualifying holdings exceed those limits must be covered by own funds and that the latter shall not be included in the calculation of the solvency ratio. If both the limits laid down in Ö Article 120(1) and (2) Õ paragraphs 1 and 2 are exceeded, the amount to be covered by own funds shall be the greater of the excess amounts.

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CHAPTER 3

CREDIT INSTITUTIONS' ASSESSMENT PROCESS

Article 123

Credit institutions shall have in place sound, effective and complete strategies and processes to assess and maintain on an ongoing basis the amounts, types and distribution of internal capital that they consider adequate to cover the nature and level of the risks to which they are or might be exposed.

These strategies and processes shall be subject to regular internal review to ensure that they remain comprehensive and proportionate to the nature, scale and complexity of the activities of the credit institution concerned.

ê 2000/12/EC (adapted)

CHAPTER 34

SUPERVISION Ö AND DISCLOSURE BY COMPETENT AUTHORITIES Õ ON A CONSOLIDATED BASIS

ê 2000/12/EC (new)

è1 2002/87/EC Art. 29.6

Article 52

Supervision on a consolidated basis of credit institutions

1. Every credit institution which has a credit institution or a financial institution as a subsidiary or which holds a participation in such institutions shall be subject, to the extent and in the manner prescribed in Article 54, to supervision on the basis of its consolidated financial situation. Such supervision shall be exercised at least in the areas referred to in paragraphs 5 and 6.

2. Every credit institution the parent undertaking of which is a financial holding company shall be subject, to the extent and in the manner prescribed in Article 54, to supervision on the basis of the consolidated financial situation of that financial holding company. Such supervision shall be exercised at least in the areas referred to in paragraphs 5 and 6. è1 Without prejudice to Article 54a, the consolidation of the financial situation of the financial holding company shall not in any way imply that the competent authorities are required to play a supervisory role in relation to the financial holding company on a stand-alone basis. ç

ê 2000/12/EC Art. 52.3

3. The Member States or the competent authorities responsible for exercising supervision on a consolidated basis pursuant to Article 53 may decide in the cases listed below that a credit institution, financial institution or auxiliary banking services undertaking which is a subsidiary or in which a participation is held need not be included in the consolidation:

– if the undertaking that should be included is situated in a third country where there are legal impediments to the transfer of the necessary information,

– if, in the opinion of the competent authorities, the undertaking that should be included is of negligible interest only with respect to the objectives of monitoring credit institutions and in all cases if the balance-sheet total of the undertaking that should be included is less than the smaller of the following two amounts: EUR 10 million or 1% of the balance-sheet total of the parent undertaking or the undertaking that holds the participation. If several undertakings meet the above criteria, they must nevertheless be included in the consolidation where collectively they are of non-negligible interest with respect to the aforementioned objectives, or

– if, in the opinion of the competent authorities responsible for exercising supervision on a consolidated basis, the consolidation of the financial situation of the undertaking that should be included would be inappropriate or misleading as far as the objectives of the supervision of credit institutions are concerned.

ê 2000/12/EC Art. 52 (5) to (8

5. Supervision of solvency, and of the adequacy of own funds to cover market risks and control of large exposures shall be exercised on a consolidated basis in accordance with this Article and Articles 53 to 56. Member States shall adopt any measures necessary, where appropriate, to include financial holding companies in consolidated supervision, in accordance with paragraph 2.

Compliance with the limits set in Article 51(1) and (2) shall be supervised and controlled on the basis of the consolidated or subconsolidated financial situation of the credit institution.

6. The competent authorities shall ensure that, in all the undertakings included in the scope of the supervision on a consolidated basis that is exercised over a credit institution in implementation of paragraphs 1 and 2, there are adequate internal control mechanisms for the production of any data and information which would be relevant for the purposes of supervision on a consolidated basis.

7. Without prejudice to specific provisions contained in other directives, Member States may waive application, on an individual or subconsolidated basis, of the rules laid down in paragraph 5 to a credit institution that, as a parent undertaking, is subject to supervision on a consolidated basis, and to any subsidiary of such a credit institution which is subject to their authorisation and supervision and is included in the supervision on a consolidated basis of the credit institution which is the parent company. The same exemption option shall be allowed where the parent undertaking is a financial holding company which has its head office in the same Member State as the credit institution, provided that it is subject to the same supervision as that exercised over credit institutions, and in particular the standards laid down in paragraph 5.

In both cases set out in the first subparagraph, steps must be taken to ensure that capital is distributed adequately within the banking group.

If the competent authorities apply those rules individually to such credit institutions, they may, for the purpose of calculating own funds, make use of the provision in the last subparagraph of Article 3(2).

8. Where a credit institution the parent of which is a credit institution has been authorised and is situated in another Member State, the competent authorities which granted that authorisation shall apply the rules laid down in paragraph 5 to that institution on an individual or, when appropriate, a subconsolidated basis.

ê 2000/12/EC Art. 52.9 (adapted)

è1 2004/xx/EC Art. 3.9

9. Notwithstanding the requirements of paragraph 8, the competent authorities responsible for authorising the subsidiary of a parent undertaking which is a credit institution may, by bilateral agreement, delegate their responsibility for supervision to the competent authorities which authorised and supervise the parent undertaking so that they assume responsibility for supervising the subsidiary in accordance with this Directive. The Commission must be kept informed of the existence and content of such agreements. è1 The competent authority concerned shall forward such information to the competent authorities of the other Member States. ç

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section 1 - supervision

Article 124

1.           Taking into account the technical criteria set out in Annex XI, the competent authorities shall review the arrangements, strategies, processes and mechanisms implemented by the credit institutions to comply with this Directive and evaluate the risks to which the credit institutions are or might be exposed.

2.           The scope of the review and evaluation referred to in paragraph 1 shall be that of the requirements of this Directive.

3.           On the basis of the review and evaluation referred to in paragraph 1, the competent authorities shall determine whether the arrangements, strategies, processes and mechanisms implemented by the credit institutions and the own funds held by these ensure a sound management and coverage of their risks.

4.           Competent authorities shall establish the frequency and intensity of the review and evaluation referred to in paragraph 1 having regard to the systemic importance, nature, scale and complexity of the activities of the credit institution concerned. The review and evaluation shall be updated at least on an annual basis.

5.           The review and evaluation performed by competent authorities shall include the exposure of credit institutions to the interest rate risk arising from non-trading activities. Measures shall be required in the case of institutions whose economic value declines by more than 20% of their own funds as a result of a sudden and unexpected change in interest rates the size of which shall be prescribed by the competent authorities and shall not differ between credit institutions.

ê 2000/12/EC Art 53(1) and (2) first sub-paragraph (adapted)

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Article 125

Competent authorities responsible for exercising

1.           Where a parent undertaking is a ð parent ï credit institution ð in a Member State or an EU parent credit institution ï, supervision on a consolidated basis shall be exercised by the competent authorities that authorised it under Article 4Ö 6 Õ.

2.           Where the parent of a credit institution is a ð parent ï financial holding company ð in a Member State or an EU parent financial holding company ï, supervision on a consolidated basis shall be exercised by the competent authorities which authorised that credit institution under Article 4Ö 6 Õ.

ê 2000/12/EC Art. 53 (2) second and third sub-paragraph and (3)

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Article 126

3.1.        However wWhere credit institutions authorised in two or more Member States have as their parent the same ð parent ï financial holding company ð in a Member State or the same EU parent financial holding company ï , supervision on a consolidated basis shall be exercised by the competent authorities of the credit institution authorised in the Member State in which the financial holding company was set up.

If no credit institution subsidiary has been authorised in the Member State in which the financial holding company was set up, the competent authorities of the Member States concerned (including those of the Member State in which the financial holding company was set up) shall seek to reach agreement as to who amongst them will exercise supervision on a consolidated basis. In the absence of such agreement, supervision on a consolidated basis shall be exercised by the competent authorities that authorised the credit institution with the greatest balance-sheet total; if that figure is the same, supervision on a consolidated basis shall be exercised by the competent authorities which first gave the authorisation referred to in Article 4.

3. The competent authorities concerned may by common agreement waive the rules laid down in the first and second subparagraph of paragraph 2.

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Where credit institutions authorised in two or more Member States have as their parents more than one financial holding company with head offices in different Member States and there is a credit institution in each of these States, supervision on a consolidated basis shall be exercised by the competent authority of the credit institution with the largest balance sheet total.

2.           Where more than one credit institution authorised in the Community has as its parent the same financial holding company and none of these credit institutions has been authorised in the Member State in which the financial holding company was set up, supervision on a consolidated basis shall be exercised by the competent authority that authorised the credit institution with the largest balance sheet total, which shall be considered, for the purposes of this Directive, as the credit institution controlled by an EU parent financial holding company.

ê 2000/12/EC Art 53(4)

4. The agreements referred to in the third subparagraph of paragraph 2 and in paragraph 3 shall provide for procedures for cooperation and for the transmission of information such that the objectives of supervision on a consolidated basis can be attained.

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3.           In particular cases, the competent authorities may by common agreement waive the criteria referred to in paragraphs 1 and 2 if their application would be inappropriate, taking into account the credit institutions and the relative importance of their activities in different countries, and appoint a different competent authority to exercise supervision on a consolidated basis. In these cases, before taking their decision, the competent authorities shall give the EU parent credit institution, or EU parent financial holding company, or credit institution with the largest balance sheet, as appropriate, an opportunity to state its opinion on that decision.

4.           The competent authorities shall notify the Commission of any agreement falling within paragraph 3

ê 2000/12/EC Art. 52(2) last sentence (adapted)

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Article 127

1.           ð Member States shall adopt any measures necessary, where appropriate, to include financial holding companies in consolidated supervision. Without prejudice to Article 135, ï the consolidation of the financial situation of the financial holding company shall not in any way imply that the competent authorities are required to play a supervisory role in relation to the financial holding company Ö on a stand-alone basis Õ standing alone.

ê 2000/12/EC Art. 52 (4) (adapted)

42.         When the competent authorities of a Member State do not include a credit institution subsidiary in supervision on a consolidated basis under one of the cases provided for in the second and third indents of paragraph 3 Ö points (b) and (c) of Article 73(1) Õ, the competent authorities of the Member State in which that credit institution subsidiary is situated may ask the parent undertaking for information which may facilitate their supervision of that credit institution.

ê 2000/12/EC Art. 52 (10) (adapted)

103.       Member States shall provide that their competent authorities responsible for exercising supervision on a consolidated basis may ask the subsidiaries of a credit institution or a financial holding company, which are not included within the scope of supervision on a consolidated basis for the information referred to in Article 55 Ö 137 Õ. In such a case, the procedures for transmitting and verifying the information laid down in that Article shall apply.

ê 2000/12/EC Art 53(5)

Article 128

5Where Member States have more than one competent authority for the prudential supervision of credit institutions and financial institutions, Member States shall take the requisite measures to organise coordination between such authorities.

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Article 129

1.           The competent authority responsible for the exercise of supervision on a consolidated basis of EU parent credit institutions and credit institutions controlled by EU parent financial holding companies shall carry out the following tasks:

(a)     supervisory overview and assessment of compliance with the requirements laid down in Articles 71, 72(1), 72(2) and 73(3);

(b)     coordination of the gathering and dissemination of relevant or essential information in going concern and emergency situations;

(c)     planning and coordination of supervisory activities in going concern as well as in emergency situations, including in relation to the activities in Article 124, in cooperation with the competent authorities involved, and in relation to Articles 43 and 141.

2.           In the case of applications for the permissions referred to in Articles 84(1), 87(9) and 105, respectively, submitted by an EU parent credit institution and its subsidiaries, or jointly by the subsidiaries of an EU parent financial holding company, the competent authorities shall work together, in full consultation, to determine whether or not to grant the permission sought and to determine the terms and conditions, if any, to which such permission should be subject.

An application as referred to in the first subparagraph shall be submitted only to the competent authority referred to in paragraph 1.

The competent authorities shall in a single document agree together, within no more than six months, their determination on the application. This document shall be provided to the applicant. In the absence of a determination within six months, the competent authority referred to in paragraph 1 shall make its own determination on the application.

Article 130

1.           Where an emergency situation arises, which potentially jeopardises the stability, including the integrity, of the financial system, the competent authorities responsible for the exercise of supervision on a consolidated basis shall alert as soon as is practicable, subject to Title V, Chapter 1, Section 2, the authorities referred to in Article 49(a) and Article 50. This obligation shall apply to all competent authorities identified under Articles 125 and 126 in relation to a particular group, and to the competent authority identified under paragraph 1 of Article 129.

2.           The competent authority responsible for supervision on a consolidated basis shall, when it needs information which has already been given to another competent authority, contact this authority whenever possible in order to prevent duplication of reporting to the various authorities involved in supervision.

Article 131

In order to facilitate and establish effective supervision, the competent authority responsible for supervision on a consolidated basis and the other competent authorities shall have written coordination and cooperation arrangements in place.

Under these arrangements additional tasks may be entrusted to the competent authority responsible for supervision on a consolidated basis and procedures for the decision-making process and for cooperation with other competent authorities, may be specified.

ê 2000/12/EC Art. 52 (9) (adapted)

Notwithstanding the requirements of paragraph 8, the Ö The Õ competent authorities responsible for authorising the subsidiary of a parent undertaking which is a credit institution may, by bilateral agreement, delegate their responsibility for supervision to the competent authorities which authorised and supervise the parent undertaking so that they assume responsibility for supervising the subsidiary in accordance with this Directive. The Commission must be kept informed of the existence and content of such agreements. It shall forward such information to the competent authorities of the other Member States and to the Banking Advisory Committee.

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Article 132

1.           The competent authorities shall cooperate closely with each other. They shall provide one another with any information which is essential or relevant for the exercise of the other authorities’ supervisory tasks under this Directive. In this regard, the competent authorities shall communicate on request all relevant information and shall communicate on their own initiative all essential information.

In particular, competent authorities responsible for consolidated supervision of EU companies shall ensure that relevant information is provided to competent authorities in other Member States who supervise subsidiaries of these parents. In determining the extent of relevant information, the importance of these subsidiaries within the financial system in those Member States shall be taken into account.

The essential information referred to in the first subparagraph shall include, in particular, the following items:

(a)     identification of the group structure of all major credit institutions in a group, as well as of the competent authorities of the credit institutions in the group;

(b)     procedures for the collection of information from the credit institutions in a group, and the verification of that information;

(c)     adverse developments in credit institutions or in other entities of a group, which could seriously affect the credit institutions;

(d)     major sanctions and exceptional measures taken by competent authorities in accordance with this Directive, including the imposition of an additional capital charge under Article 136 and the imposition of any limitation on the use of the Advanced Measurement Approach for the calculation of the own funds requirements under Article 105.

2.           The competent authorities responsible for the supervision of credit institutions controlled by an EU parent credit institution shall contact the competent authority referred to in Article 129(1) when they need information regarding the implementation of approaches and methodologies set out in this Directive that may already be available to that competent authority.

3.           The competent authorities concerned shall, prior to their decision, consult each other with regard to the following items, where these decisions are of importance for other competent authorities’ supervisory tasks:

(a)     changes in the shareholder, organisational or management structure of credit institutions in a group, which require the approval or authorisation of competent authorities;

(b)     major sanctions or exceptional measures taken by competent authorities, including the imposition of an additional capital charge under Article 136 and the imposition of any limitation on the use of the Advances Measurement Approaches for the calculation of the own funds requirements under Article 105.

For the purposes of point (b), the competent authority responsible for supervision on a consolidated basis shall always be consulted.

However, a competent authority may decide not to consult in cases of urgency or where such consultation may jeopardise the effectiveness of the decisions. In this case, the competent authority shall, without delay, inform the other competent authorities.

ê 2000/12/EC Art 54 (1) (adapted)

Article 133

Form and extent of consolidation

1.           The competent authorities responsible for exercising supervision on a consolidated basis Ö shall Õ must, for the purposes of supervision, require full consolidation of all the credit institutions and financial institutions which are subsidiaries of a parent undertaking.

However, Ö the competent authorities may require only Õproportional consolidation may be prescribed where, in Ö their Õ the opinion of the competent authorities, the liability of a parent undertaking holding a share of the capital is limited to that share of the capital Ö in view Õ because of the liability of the other shareholders or members whose solvency is satisfactory. The liability of the other shareholders and members must be clearly established, if necessary by means of formal signed commitments.

ê 2002/87/EC Art. 29(7)(a)

In the case where undertakings are linked by a relationship within the meaning of Article 12 (1) of Directive 83/349/EEC, the competent authorities shall determine how consolidation is to be carried out.

ê 2000/12/EC Art 54(2) & (3) (adapted)

2.           The competent authorities responsible for carrying out supervision on a consolidated basis Ö shall Õ must, in order to do so, require the proportional consolidation of participations in credit institutions and financial institutions managed by an undertaking included in the consolidation together with one or more undertakings not included in the consolidation, where those undertakings' liability is limited to the share of the capital they hold.

3.           In the case of participations or capital ties other than those referred to in paragraphs 1 and 2, the competent authorities shall determine whether and how consolidation is to be carried out. In particular, they may permit or require use of the equity method. That method shall not, however, constitute inclusion of the undertakings concerned in supervision on a consolidated basis.

ê 2000/12/EC Art. 54(4) 1st paragraph (adapted)

Article 134

41.       Without prejudice to Ö Article 133 Õ paragraphs 1, 2 and 3, the competent authorities shall determine whether and how consolidation is to be carried out in the following cases:

(a)     where, in the opinion of the competent authorities, a credit institution exercises a significant influence over one or more credit institutions or financial institutions, but without holding a participation or other capital ties in these institutions,;

(b)     where two or more credit institutions or financial institutions are placed under single management other than pursuant to a contract or clauses of their memoranda or articles of association.

ê 2002/87/EC Art. 29(7)(b)

---------

ê 2000/12/EC Art 54(4) 2nd paragraph

In particular, the competent authorities may permit, or require use of, the method provided for in Article 12 of Directive 83/349/EEC. That method shall not, however, constitute inclusion of the undertakings concerned in consolidated supervision.

ê 2000/12/EC Art 54(5) (adapted)

ð new

52        Where consolidated supervision is required pursuant to Article 52 (1) and (2) ÖArticles 125 and 126 Õ, ancillary banking services undertakings ð and asset management companies as defined in Directive 2002/87/EC ï shall be included in consolidations in the cases, and in accordance with the methods, laid down in Ö Article 133 and paragraphs 1 Õ to 4 of this Article.

ê 2002/87/EC Art. 29(8) (adapted)

Article 135

Management body of financial holding companies

The Member States shall require that persons who effectively direct the business of a financial holding company Ö be Õ of sufficiently good repute and have sufficient experience to perform those duties.

ò new

Article 136

1.         Competent authorities shall require any credit institution that does not meet the requirements of this Directive to take the necessary actions or steps at an early stage to address the situation.

For those purposes, the measures available to the competent authorities shall include the following:

(a)          obliging credit institutions to hold own funds in excess of the minimum level laid down in Article 75;

(b)          reinforcing the arrangements and strategies implemented to comply with Articles 22 and 123;

(c)          requiring credit institutions to apply a specific provisioning policy or treatment of assets in terms of own funds requirements;

(d)          restricting or limiting the business, operations or network of credit institutions;

(e)          reducing the risk inherent in activities, products and systems by credit institutions.

The adoption of these measures shall be subject to Title V, Chapter 1, Section 2.

2.         A specific own funds requirement in excess of the minimum level laid down in Article 75 shall be imposed by the competent authorities at least on the credit institutions which have in place inadequate arrangements, processes, mechanisms and strategies for the management and coverage of their risks, if the sole application of other measures is unlikely to reinforce those arrangements within an appropriate timeframe.

ê 2000/12/EC Art 55(1) (adapted)

Article 137

Information to be supplied by mixed-activity holding companies and their subsidiaries

1.           Pending further coordination of consolidation methods, Member States shall provide that, where the parent undertaking of one or more credit institutions is a mixed-activity holding company, the competent authorities responsible for the authorisation and supervision of those credit institutions shall, by approaching the mixed-activity holding company and its subsidiaries either directly or via credit institution subsidiaries, require them to supply any information which would be relevant for the purpose of supervising the credit institution subsidiaries.

ê 2000/12/EC Art. 55(2) (adapted)

2.           Member States shall provide that their competent authorities may carry out, or have carried out by external inspectors, on-the-spot inspections to verify information received from mixed-activity holding companies and their subsidiaries. If the mixed-activity holding company or one of its subsidiaries is an insurance undertaking, the procedure laid down in Article 56(4) Ö 140(1) Õ may also be used. If a mixed-activity holding company or one of its subsidiaries is situated in a Member State other than that in which the credit institution subsidiary is situated, on-the-spot verification of information shall be carried out in accordance with the procedure laid down in Article 56(7) Ö 140(1) Õ.

ê 2002/87/EC Art. 29(9) (adapted)

Article 138

Intra-group transactions with mixed-activity holding companies

1.         Without prejudice to the provisions ofTitle V, Chapter 2, Section 3 Ö 5 Õ, this Directive, Member States shall provide that, where the parent undertaking of one or more credit institutions is a mixed-activity holding company, the competent authorities responsible for the supervision of these credit institutions shall exercise general supervision over transactions between the credit institution and the mixed-activity holding company and its subsidiaries.

2.         Competent authorities shall require credit institutions to have in place adequate risk management processes and internal control mechanisms, including sound reporting and accounting procedures, in order to identify, measure, monitor and control transactions with their parent mixed-activity holding company and its subsidiaries appropriately. Competent authorities shall require the reporting by the credit institution of any significant transaction with these entities other than the one referred to in Article 48 Ö 110 Õ . These procedures and significant transactions shall be subject to overview by the competent authorities.

Where these intra-group transactions are a threat to a credit institution's financial position, the competent authority responsible for the supervision of the institution shall take appropriate measures.

ê 2000/12/EC Art. 56 (1) to (3) (adapted)

Article 139

Measures to facilitate supervision on a consolidated basis

1.         Member States shall take the necessary steps to ensure that there are no legal impediments preventing the Ö exchange, as between Õ undertakings included within the scope of supervision on a consolidated basis, mixed-activity holding companies and their subsidiaries, or subsidiaries of the kind covered in Article 52(10) Ö 127(3) Õ, Ö of Õ from exchanging amongst themselves any information which would be relevant for the purposes of supervision in accordance with Articles 52 to 55 Ö 124 to 138 Õ and this Article.

2.         Where a parent undertaking and any of its subsidiaries that are credit institutions are situated in different Member States, the competent authorities of each Member State shall communicate to each other all relevant information which may allow or aid the exercise of supervision on a consolidated basis.

Where the competent authorities of the Member State in which a parent undertaking is situated do not themselves exercise supervision on a consolidated basis pursuant to Article 53 Ö Articles 125 and 126 Õ , they may be invited by the competent authorities responsible for exercising such supervision to ask the parent undertaking for any information which would be relevant for the purposes of supervision on a consolidated basis and to transmit it to these authorities.

3.         Member States shall authorise the exchange between their competent authorities of the information referred to in paragraph 2, on the understanding that, in the case of financial holding companies, financial institutions or ancillary banking services undertakings, the collection or possession of information shall not in any way imply that the competent authorities are required to play a supervisory role in relation to those institutions or undertakings standing alone.

Similarly, Member States shall authorise their competent authorities to exchange the information referred to in Article 55 Ö 137 Õ on the understanding that the collection or possession of information does not in any way imply that the competent authorities play a supervisory role in relation to the mixed-activity holding company and those of its subsidiaries which are not credit institutions, or to subsidiaries of the kind covered in Article 52(10) Ö 127(3) Õ.

ê 2000/12/EC Art 56(4) to (6) adapted (adapted)

Article 140

41.       Where a credit institution, financial holding company or a mixed-activity holding company controls one or more subsidiaries which are insurance companies or other undertakings providing investment services which are subject to authorisation, the competent authorities and the authorities entrusted with the public task of supervising insurance undertakings or those other undertakings providing investment services shall cooperate closely. Without prejudice to their respective responsibilities, those authorities shall provide one another with any information likely to simplify their task and to allow supervision of the activity and overall financial situation of the undertakings they supervise.

52.       Information received, in the framework of supervision on a consolidated basis, and in particular any exchange of information between competent authorities which is provided for in this Directive, shall be subject to the obligation of professional secrecy defined in Ö Title V, Chapter 1, Section 2 Õ Article 30.

63.       The competent authorities responsible for supervision on a consolidated basis shall establish lists of the financial holding companies referred to in Article 52(2) Ö 71(2) Õ. Those lists shall be communicated to the competent authorities of the other Member States and to the Commission.

ê 2000/12/EC Art 56(7) (adapted)

è1 2002/87/EC Art. 29.10

Article 141

7.Where, in applying this Directive, the competent authorities of one Member State wish in specific cases to verify the information concerning a credit institution, a financial holding company, a financial institution, an ancillary banking services undertaking, a mixed-activity holding company, a subsidiary of the kind covered in Article 55 Ö 137 Õ or a subsidiary of the kind covered in Article 52(10) Ö 127(3) Õ, situated in another Member State, they Ö shall Õ must ask the competent authorities of that other Member State to have that verification carried out. The authorities which receive such a request must, within the framework of their competence, act upon it either by carrying out the verification themselves, by allowing the authorities who made the request to carry it out, or by allowing an auditor or expert to carry it out.è1 The competent authority which made the request may, if it so wishes, participate in the verification when it does not carry out the verification itself. ç

ê 2000/12/EC Art 56(8) (adapted)

Article 142

8.Without prejudice to their provisions of criminal law, Member States shall ensure that penalties or measures aimed at ending observed breaches or the causes of such breaches may be imposed on financial holding companies and mixed-activity holding companies, or their effective managers, that infringe laws, regulation or administrative provisions enacted to implement Articles 52 to 55 Ö 124 to 141 Õ and this Article. In certain cases, such measures may require the intervention of the courts.

The competent authorities shall cooperate closely to ensure that Ö those Õ the abovementioned penalties or measures produce the desired results, especially when the central administration or main establishment of a financial holding company or of a mixed-activity holding company is not located at its head office.

ê 2002/87/EC Art. 29(11) (adapted)

è1 2004/xx/EC Art. 3.10

Article 143

Third-country parent undertakings

1.         Where a credit institution, the parent undertaking of which is a credit institution or a financial holding company, the head office of which is Ö in a third country Õ outside the Community, is not subject to consolidated supervision under Article 52 ÖArticles 125 and 126 Õ, the competent authorities shall verify whether the credit institution is subject to consolidated supervision by a third-country competent authority which is equivalent to that governed by the principles laid down in Article 52 Ö this Directive Õ.

The verification shall be carried out by the competent authority which would be responsible for consolidated supervision if the fourth sub paragraph Ö 3 Õ were to apply, at the request of the parent undertaking or of any of the regulated entities authorised in the Community or on its own initiative. That competent authority shall consult the other competent authorities involved.

2.         è1 The Commission may request the European Banking Committee to ç give general guidance as to whether the consolidated supervision arrangements of competent authorities in third countries are likely to achieve the objectives of consolidated supervision as defined in this Chapter, in relation to credit institutions, the parent undertaking of which has its head office Ö in a third country Õ outside the Community. The Committee shall keep any such guidance under review and take into account any changes to the consolidated supervision arrangements applied by such competent authorities.

The competent authority carrying out the verification specified in the Ö first Õ second subparagraph Ö of paragraph 1 Õ shall take into account any such guidance. For this purpose the competent authority shall consult the Committee before taking a decision.

3.         In the absence of such equivalent supervision, Member States shall apply the provisions of Article 52 Ö this Directive Õ to the credit institution by analogy Ö or shall allow their competent authorities to apply other appropriate supervisory techniques which achieve the objectives of supervision on a consolidated basis of credit institutions Õ.

As an alternative, Member States shall allow their competent authorities to apply other appropriate supervisory techniques which achieve the objectives of the supervision on a consolidated basis of credit institutions.

Those Ö supervisory techniques Õ methods must Ö , after consultation with the other competent authorities involved, Õ be agreed upon by the competent authority which would be responsible for consolidated supervision, after consultation with the other competent authorities involved.

Competent authorities may in particular require the establishment of a financial holding company which has its head office in the Community, and apply the provisions on consolidated supervision to the consolidated position of that financial holding company.

The Ö supervisory techniques Õ methods must Ö be designed to Õ achieve the objectives of consolidated supervision as defined in this Chapter and must be notified to the other competent authorities involved and the Commission.

ò new

section 2

Disclosure by competent authorities

Article 144

1.         Competent authorities shall disclose the following information:

(a)          the texts of laws, regulations, administrative rules and general guidance adopted in their Member State in the field of prudential regulation;

(b)          the manner of exercise of the options and discretions available in Community legislation;

(c)          the general criteria and methodologies they use in the review and evaluation referred to in Article 124;

(d)          without prejudice to the provisions laid down in Title V, Chapter 1, Section 2, aggregate statistical data on key aspects of the implementation of the prudential framework in each Member State.

The disclosures provided for in the first subparagraph shall be sufficient to enable a meaningful comparison of the approaches adopted by the competent authorities of the different Member States.

CHAPTER 5

DISCLOSURE BY CREDIT INSTITUTIONS

Article 145

1.         For the purposes of this Directive, credit institutions shall publicly disclose the information laid down in Annex XII, Part 2, subject to the provisions laid down in Article 146.

2.         Recognition by the competent authorities under Chapter 2, Section 3, Subsections 2 and 3 and Article 105 of the instruments and methodologies referred to in Annex XII, Part 3 shall be subject to the public disclosure by credit institutions of the information laid down therein.

3.         Credit institutions shall adopt a formal policy to comply with the disclosure requirements laid down in paragraphs 1 and 2, and have policies for assessing the appropriateness of their disclosures, including their verification and frequency.

Article 146

1.         Notwithstanding Article 145, competent authorities shall permit credit institutions not to make one or more disclosures listed in Annex XII, Part 2 if the credit institution concerned considers that the information provided by such disclosures is not, in the light of the criterion specified in Annex XII, Part 1, paragraph 1, to be regarded as material.

2.         Notwithstanding Article 145, competent authorities shall permit credit institutions not to publish one or more items of information included in the disclosures listed in Annex XII, Parts 2 and 3 if the credit institution concerned considers that those items would include information which, in the light of the criteria specified in Annex XII, Part 1, paragraphs 2 and 3, is to be regarded as proprietary or confidential.

3.         In the exceptional cases referred to in paragraph 2, the credit institution concerned shall state in its disclosures the fact that the specific items of information are not disclosed, the reason for non-disclosure, and publish more general information about the subject matter of the disclosure requirement.

Article 147

1.         Credit institutions shall publish the disclosures required under Article 145 on an annual basis at a minimum. Disclosures shall be published as soon as practicable.

2.         Credit institutions shall also determine whether more frequent publication than is provided for in paragraph 1 is necessary in the light of the criteria set out in Annex XII, Part 1, paragraph 4.

Article 148

1.         Competent authorities shall permit credit institutions to determine the appropriate medium, location and means of verification to comply effectively with the disclosure requirements laid down in Article 145. To the degree feasible, all disclosures shall be provided in one medium or location.

2.         Equivalent disclosures made by credit institutions under accounting, listing or other requirements may be deemed to constitute compliance with Article 145. If disclosures are not included in the financial statements, credit institutions shall indicate where they can be found.

Article 149

Notwithstanding Articles 146 to 148, Member States shall empower the competent authorities to require credit institutions:

(a)          to make one or more of the disclosures referred to in Annex XII, Parts 2 and 3;

(b)          to publish one or more disclosures more frequently than annually, and to set deadlines for publication;

(c)          to use specific media and locations for disclosures other than the financial statements;

(d)          to use specific means of verification for the disclosures not covered by statutory audit.

ê 2004/xx/EC Art. 3.11

-----

ê 2000/12/EC

TITLE VI

POWERS OF EXECUTION

ê 2000/12/EC Art. 60 (adapted)

ð new

Article 150

Technical adaptations

1.           Without prejudice, regarding own funds, to the report referred to in the second subparagraph of Article 34(3) ð proposal that the Commission is to submit pursuant to Article 62 ï, the technical adaptations ð amendments ï in the following areas shall be adopted in accordance with the procedure Ö referred to Õ laid down in Ö Article 151 Õ paragraph 2:

(a)     clarification of the definitions in order to take account, in the application of this Directive, of developments on financial markets;

(b)     clarification of the definitions to ensure uniform application of this Directive in the Community;

(c)     the alignment of terminology on, and the framing of definitions in accordance with, subsequent acts on credit institutions and related matters;

the definition of «Zone A» in Article 1(14),

the definition of «multilateral development banks» in Article 1(19),

(d)     amendments to the list in Article 2

(e)     alteration of the amount of initial capital prescribed in Article Ö 9 Õ 5 to take account of developments in the economic and monetary field;

(f)      expansion of the content of the list referred to in Articles Ö 23 and 24 Õ 18 and 19 and set out in Annex I or adaptation of the terminology used in that list to take account of developments on financial markets;

(g)     the areas in which the competent authorities must exchange information as listed in Article Ö 42 Õ 28;

(h)     ð amendments to Article 56 to 67 in order to take into account developments in accounting standards or requirements set out in Community legislation set out Community legislation; ï

(i)      amendment of the Ö list Õ definitions of the assets Ö exposure classes Õ listed in Article 43 Ö Articles 79 and 86 Õ in order to take account of developments on financial markets;

(j)      ð the amount specified in Article 79(2)(c) and in Article 86(4)(a) to take into account the effects of inflation; ï

(k)     the list and classification of off-balance-sheet items in Annexes II and IV and their treatment in the calculation of the ratio as described in Articles 42, 43 and 44 and Annex III ð in the determination of exposure values for the purposes of Title V, Chapter 2, Section 3 ï;

(l)      ð adjustment of the provisions in Annexes V to XII in order to take account of developments on financial markets in particular new financial products, or in accounting standards or requirements set out in Community legislation; ï

Ö 2.     The Commission may adopt the following implementing measures in accordance with the procedure in Article 151. Õ

(a)     ðspecification of the size of sudden and unexpected changes in the interest rates referred to in Article 124(5); ï

(b)     a temporary reduction in the minimum ratio Ö level of own funds laid down Õ prescribed in Article 47 Ö 75 Õ the weighting Ö risk weights laid down Õ prescribed in Article 43 Ö Title V, Chapter 2, Section 3 Õ in order to take account of specific circumstances;

(c)     ð without prejudice to the report referred to in Article 119 ï, clarification of exemptions provided for in Article 49(5) to (10) Ö 111(4), 113, 115 and 116 Õ;

(d)     ð specification of the key aspects on which aggregate statistical data are to be disclosed under Article 144 (1) (d) ï;

(e)     ð specification of the format, structure, contents list and annual publication date of the disclosures provided for in Article 114; ï

ê 2004/xx/EC Art. 3.12 (adapted)

Article 151

1.           The Commission shall be assisted by the European Banking Committee instituted by Commission Decision 2004/10/EC (hereinafter referred to as "the Committee"), composed of representatives of the Member States and chaired by the representative of the Commission.

2.           Where reference is made to this paragraph Ö Article Õ, the "comitology" procedure laid down in Article 5 of Decision 1999/468/EC shall apply, in compliance with Article 7 (3) and Article 8 thereof.

The period provided for in Article 5(6) of Decision 1999/468/EC shall be three months.

ê 2000/12/EC

TITLE VII

TRANSITIONAL AND FINAL PROVISIONS

CHAPTER 1

TRANSITIONAL PROVISIONS

ê 2000/12/EC Art 60(2) (adapted)

Article 61

Transitional provisions regarding Article 36

Denmark may allow its mortgage credit institutions organised as cooperative societies or funds before 1 January 1990 and converted into public limited liability companies to continue to include joint and several commitments of members, or of borrowers as referred to in Article 36(1) claims on whom are treated in the same way as such joint and several commitments, in their own funds, subject to the following limits:

(a)        the basis for calculation of the part of joint and several commitments of borrowers shall be the total of the items referred to in Article 35 (2)(1) and (2), minus those referred to in Article 35(2)(9), (10) and (11);

b)         the basis for calculation on 1 January 1991 or, if converted at a later date, on the date on conversion, shall be the maximum basis for calculation. The basis for calculation may never exceed the maximum basis for calculation

c)         the maximum basis for calculation shall, from 1 January 1997, be reduced by half of the proceeds from any issue of new capital, as defined in Article 35(2)(1), made after that date; and

(d)       the maximum amount of joint and several commitments of borrowers to be included as own funds must never exceed:

            50% in 1991 and 1992,

            45% in 1993 and 1994,

            40% in 1995 and 1996,

            35% in 1997,

            30% in 1998,

            20% in 1999,

            10% in 2000, and

            0% after 1 January 2001, of the basis for calculation.

ê 2000/12/EC

Article 62

Transitional provisions regarding Article 43

1. Until 31 December 2006, the competent authorities of the Member States may authorise their credit institutions to apply a 50% risk weighting to loans fully and completely secured to their satisfaction by mortgages on offices or on multi-purpose commercial premises situated within the territory of those Member States that allow the 50% risk weighting, subject to the following conditions:

(i)         the 50% risk weighting applies to the part of the loan that does not exceed a limit calculated according to either (a) or (b):

(a)     50% of the market value of the property in question.

         The market value of the property must be calculated by two independent valuers making independent assessments at the time the loan is made. The loan must be based on the lower of the two valuations.

         The property shall be revalued at least once a year by one valuer. For loans not exceeding EUR 1 million and 5% of the own funds of the credit institution, the property shall be revalued at least every three years by one valuer;

(b)     50% of the market value of the property or 60% of the mortgage lending value, whichever is lower, in those Member States that have laid down rigorous criteria for the assessment of the mortgage lending value in statutory or regulatory provisions.

         The mortgage lending value shall means the value of the property as determined by a valuer making a prudent assessment of the future marketability of the property by taking into account long-term sustainable aspects of the property, the normal and local market conditions, the current use and alternative appropriate uses of the property. Speculative elements shall not be taken into account in the assessment of the mortgage lending value. The mortgage lending value shall be documented n a transparent and clear manner.

         At least every three years or if the market falls by more than 10% the mortgage lending value and in particular the underlying assumptions concerning the development of the relevant market, shall be reassessed.

            In both (a) and (b) «market value» shall mean the price at which the property could be sold under private contract between a willing seller and an arm's-length buyer on the date of valuation, it being assumed that the property is publicly exposed to the market, that market conditions permit orderly disposal and that a normal period, having regard to the nature of the property, is available for the negotiation of the sale;

(ii)        the 100% risk weighting applies to the part of the loan that exceeds the limits set out in (i);

(iii)       the property must be either used or let by the owner.

The first subparagraph shall not prevent the competent authorities of a Member State, which applies a higher risk weighting in its territory, from allowing, under the conditions defined above, the 50% risk weighting to apply for this type of lending in the territories of those Member States that allow the 50% risk weighting.

The competent authorities of the Member States may allow their credit institutions to apply a 50% risk weighting to the loans outstanding on 21 July 2000 provided that the conditions listed in this paragraph are fulfilled. In this case the property shall be valued according to the assessment criteria laid down above not later than 21 July 2003.

For loans granted before 31 December 2006, the 50% risk weighting remains applicable until their maturity, if the credit institution is bound to observe the contractual terms.

Until 31 December 2006, the competent authorities of the Member State may also authorise their credit institutions to apply a 50% risk weighting to the part of the loans fully and completely secured to their satisfaction by shares in Finnish housing companies operating in accordance with the Finnish Housing Company Act of 1991 or subsequent equivalent legislation, provided that the conditions laid down in this paragraph are fulfilled.

Member States shall inform the Commission of the use they make of this paragraph.

2. Member States may apply a 50% risk weighting to property leasing transactions concluded before 31 December 2006 and concerning assets for business use situated in the country of the head office and governed by statutory provisions whereby the lessor retains full ownership of the rented asset until the tenant exercises his option to purchase. Member States shall inform the Commission of the use they make of this paragraph.

3. Article 43(3) shall not affect the competent authorities' recognition of bilateral contracts for novation concluded concerning:

– Belgium, before 23 April 1996,

– Denmark, before 1 June 1996,

– Germany, before 30 October 1996,

– Greece, before 27 March 1997,

– Spain, before 7 January 1997,

– France, before 30 May 1996,

– Ireland, before 27 June 1996,

– Italy, before 30 July 1996,

– Luxembourg, before 29 May 1996,

– the Netherlands, before 1 July 1996,

– Austria, before 30 December 1996,

– Portugal, before 15 January 1997,

– Finland, before 21 August 1996,

– Sweden, before 1 June 1996, and

– United Kingdom, before 30 April 1996.

Article 63

Transitional provisions regarding Article 47

1. A credit institution, the minimum ratio of which has not reached the 8% prescribed in Article 47(1), by 1 January 1991, must gradually approach that level by successive stages. It may not allow the ratio to fall below the level reached before that objective has been attained. Any fluctuation should be temporary and the competent authorities should be apprised of the reasons for it.

ê 2000/12/EC, Art. 62 (2) and (3) (adapted)

2. For not more than five years after 1 January 1993, the Member States may fix a weighting of 10% for the bonds defined in Article 22(4) of Directive 85/611/EEC and maintain if for credit institutions when and if they consider it necessary, to avoid grave disturbances in the operation of their markets. Such exceptions shall be reported to the Commission.

3. For not more than seven years after 1 January 1993, Article 47(1) shall not apply to the Agricultural Bank of Greece. However, the latter must approach the level prescribed in Article 47(1) by successive stages according to the method described in paragraph 1 of this Article.

ê 2000/12/EC (adapted)

è1 2004/xx/EC Art. 3.13

Article 64

Transitional provisions regarding Article 49

1. If, on 5 February 1993, a credit institution had already incurred an exposure or exposures exceeding either the large exposure limit or the aggregate large exposure limit laid down in Article 49, the competent authorities shall require the credit institution concerned to take steps to have that exposure or those exposures brought within the limits laid down in Article 49.

2. The process of having such an exposure or exposures brought within authorised limits shall be devised, adopted, implemented and completed within the period which the competent authorities consider consistent with the principle of sound administration and fair competition. The competent authorities shall inform the Commission and the è1 European Banking Committee ç of the schedule for the general process adopted.

3. A credit institution may not take any measure which would cause the exposures referred to in paragraph 1 to exceed their level on 5 February 1993

4. The period applicable under paragraph 2 shall expire no later than 31 December 2001. Exposures with a longer maturity, for which the lending institution is bound to observe the contractual terms, may be continued until their maturity.

ê 2000/12/EC Art. 64 (5) to (7) (new)

è1 2004/xx/EC Art. 3.13

5. Until 31 December 1998, Member States may increase the limit laid down in Article 49(1) to 40% and the limit laid down in Article 49(2) to 30%. In such cases and subject to paragraphs 1 to 4, the time limit for bringing the exposures existing at the end of this period within the limit laid down in Article 49 shall expire on 31 December 2001.

6. In the case of credit institutions the own funds of which do not exceed EUR 7 million and only in the case of such institutions, Member States may extend the time limits laid down in paragraph 5 by five years. Member States that avail themselves of the option provided for in this paragraph shall take steps to prevent distortions of competition and shall inform the Commission and the è1 European Banking Committee ç thereof.

7. In the cases referred to in paragraphs 5 and 6, an exposure may be considered a large exposure if its value is equal to or exceeds 15% of own funds.

ê 2000/12/EC Art. 64 (8) (adapted)

8. Until 31 December 2001 Member States may substitute a frequency of at least twice a year for the frequency of notification of large exposures referred to in the second indent of Article 48(2).

ê 2000/12/EC Art. 64 (9)

9. Member States may fully or partially exempt from the application of Article 49(1), (2) and (3) exposures incurred by a credit institution consisting of mortgage loans as defined in Article 62(1) concluded before 1 January 2002 as well as property leasing transactions as defined in Article 62(2) concluded before 1 January 2002, in both cases up to 50% of the value of the property concerned.

The same treatment applies to loans secured, to the satisfaction of the competent authorities, by shares in Finnish residential housing companies, operating in accordance with the Finnish Housing Company Act of 1991 or subsequent equivalent legislation which are similar to the mortgage loans referred to in the first subparagraph.

ê 2000/12/EC Art. 65 (adapted)

Article 65

Transitional provisions regarding Article 51

Credit institutions which, on 1 January 1993, exceeded the limits laid down in Articles 51(1) and (2) shall have until 1 January 2003 to comply with them.

ò new

Article 152

1.         Credit institutions calculating risk-weighted exposure amounts in accordance with Articles 84 to 89 or using the Advanced Measurement Approaches as specified in Article 105 for the calculation of their capital requirements for operational risk shall during the first, second and third twelve-month periods after the date specified in Article 157 provide own funds which are at all times more than or equal to the amounts indicated in paragraphs 2, 3 and 4.

2.         For the first twelve-month period referred to in paragraph 1, the amount of own funds shall be 95% of the total minimum amount of own funds that would be required to be held during that period by the credit institution under Article 4 of Directive 93/6/EEC as that Directive and Directive 2000/12/EC stood prior to the date specified in Article 157 of this Directive.

3.         For the second twelve-month period referred to in paragraph 1, the amount of own funds shall be 90% of the total minimum amount of own funds that would be required to be held during that period by the credit institution under Article 4 of Directive 93/6/EEC as that Directive and Directive 2000/12/EC stood prior to the date specified in Article 157 this Directive.

4.         For the third twelve-month period referred to in paragraph 1, the amount of own funds shall be 80% of the total minimum amount of own funds that would be required to be held during that period by the credit institution under Article 4 of Directive 93/6/EEC as that Directive and Directive 2000/12/EC stood prior to the date specified in Article 157 of this Directive.

5.         Compliance with the requirements of paragraphs 1 to 4 shall be on the basis of amounts of own funds fully adjusted to reflect differences in the calculation of own funds under Directive 2000/12/EC and Directive 93/6/EEC as those Directives stood prior to the date specified in Article 157 of this Directive and the calculation of own funds under this Directive deriving from the separate treatments of expected loss and unexpected loss under Articles 84 to 89 of this Directive.-

6.         For the purposes of paragraphs 1 to 5 of this Article, Articles 68 to 73 shall apply.

7.         Until 31 December 2007 credit institutions may treat the articles constituting the Standardised Approach set out in Title V, Chapter 2, Section 3, Subsection 1 as being replaced by Articles 42 to 46 of Directive 2000/12/EC as those articles stood prior to the date referred to in Article 157.

8.         Where the discretion referred to in paragraph 7 is exercised the following shall apply concerning the provisions of Directive 2000/12/EC:

(a)     the provisions of that Directive referred to in Articles 42 to 46 shall apply as they stood prior to the date referred to in Article 157;

(b)     ‘risk-adjusted value’ as referred to in Article 42(1) of that Directive shall mean ‘risk-weighted exposure amount’;

(c)     the figures produced by Article 42(2) of that Directive shall be considered risk-weighted exposure amounts;

(d)     ‘credit derivatives’ shall be included in the list of ‘Full risk’ items in Annex II of that Directive;

(e)     the treatment set out in Article 43(3) of that Directive shall apply to derivative instruments listed in Annex IV of that Directive whether on- or off-balance sheet and the figures produced by the treatment set out in that Annex shall be considered risk-weighted exposure amounts;

9.         Where the discretion referred to in paragraph 7 is exercised the following shall apply in relation to the treatment of exposures for which the Standardised Approach is used:

(a)     Title V, Chapter 2, Section 3, Subsection 3 relating to the recognition of credit risk mitigation shall not apply;

(b)     Title V, Chapter 2, Section 3, Subsection 4 concerning the treatment of securitisation may be disapplied by competent authorities;

(b)     The following provisions of Annex XII setting out disclosure requirements for credit institutions shall not apply:

(i)      Part 2, paragraph 4(b),

(ii)     Part 2, paragraph 6,

(iii)    Part 2, paragraph 10.

10.       Where the discretion referred to in paragraph 7 is exercised the capital requirement for operational risk under Article 75(e) shall be reduced by the percentage representing the ratio of the value of the credit institution’s exposures for which risk-weighted exposure amounts are calculated in accordance with the discretion referred to in paragraph 7 to the total value of its exposures.

11.       Where a credit institution calculates risk-weighted exposure amounts for all of its exposures in accordance with the discretion referred to in paragraph 7, Articles 48 to 50 of Directive 2000/12/EC relating to large exposures may apply as they stood prior to the date referred to in Article 157;

12.         Where the discretion referred to in paragraph 7 is exercised, references to Articles 46 to 52 of this Directive shall be read as references to Articles 42 to 46 of Directive 2000/12/EC as those articles stood prior to the date referred to in Article 157.

Article 153

In the calculation of risk-weighted exposure amounts for exposures arising from property leasing transactions concerning offices or other commercial premises situated in their territory and meeting the criteria set out in Annex VI, Part 1, paragraph 51, the competent authorities may, until 31 December 2012 allow a 50% risk weighting to be applied without the application of Annex VI, Part 1, paragraphs 55 and 56.

Until 31 December 2010, competent authorities may, for the purpose of defining the secured portion of a past due loan for the purposes of Annex VI, recognise collateral other than eligible collateral as set out under Articles 90 to 93.

Article 154

1.           The requirements in Article 84(3) and (4) shall apply from the 31 December 2009.

2.           Until 31 December 2010 the exposure weighted average LGD for all retail exposures secured by residential properties and not benefiting from guarantees from central governments shall not be lower than 10%.

3.           Until 31 December 2017, the competent authorities of the Member States may exempt from the IRB treatment certain equity exposures held at 31 December 2007.

The exempted position shall be measured as the number of shares as of that date and any additional arising directly as a result of owning those holdings, as long as they do not increase the proportional share of ownership in a portfolio company.

If an acquisition increases the proportional share of ownership in a specific holding the exceeding part of the holding shall not be subject to the exemption. Nor shall the exemption apply to holdings that were originally subject to the exemption, but have been sold and then bought back.

Equity exposures covered by this transitional provision shall be subject to the capital requirements calculated in accordance with Title V, Chapter 2, Section 3, Subsection 1.

4.           Until 31 December 2011, for corporate exposures the competent authorities of each Member State may set the number of days past due that all credit institutions in its jurisdiction shall abide by under the definition of default set out in Annex VII, Part 4, paragraph 44 for exposures to such counterparts situated within this Member State. The specific number shall fall within 90- up to a figure of 180 days if local conditions make it appropriate. For exposures to such counterparts situated in the territories of other Member States, the competent authorities shall set a number of days past due which is not higher than the number set by the competent authority of the respective Member State.

5.           In respect of the observation period referred to in Annex VII, Part 4, paragraph 66, Member States may allow credit institutions which are not permitted to use own estimates of LGDs or conversion factors to have, when they implement the IRB Approach, but at the latest at the 31 December 2007, relevant data covering a period of two years. Until 31 December 2010 the period to be covered shall increase by one year each year.

6.           In respect of the observation period referred to in Annex VII, Part 4, paragraphs 71, 85 and 94 Member States may allow credit institutions to have, when they implement the IRB Approach, but at the latest at the 31 December 2007, relevant data covering a period of two years. Until 31 December 2010 the period to be covered shall increase by one year each year.

Article 155

Until 31 December 2012, for credit institutions the relevant indicator for the trading and sales business line of which represents at least 50% of the total of the relevant indicators for all of its business lines accordance with Annex X, Part 2, paragraphs 1 to 8, Member States may apply a percentage of 15% to the business line “trading and sales”.

ê 2000/12/EC

CHAPTER 2

FINAL PROVISIONS

ò new

Article 156

The Commission, in cooperation with Member States, and taking into account the contribution of the European Central Bank, shall periodically monitor whether this Directive taken as a whole, together with Directive [93/6/EEC], has significant effects on the economic cycle and, in the light of that examination, shall consider whether any remedial measures are justified.

Based on that analysis and taking into account the contribution of the European Central Bank, the Commission shall draw up a biennial report and submit it to the European Parliament and to the Council, together with any appropriate proposals.

Article 157

1.         Member States shall adopt and publish, by 31 December 2006 at the latest, the laws, regulations and administrative provisions necessary to comply with Articles 4, 22, 57, 61, 62, 63, 64, 66, 68 to 106, 108, 110 to 115, 117 to 119, 123 to 127, 129 to 132, 133, 136, 144 to 149, 152 to 155 and the Annexes II, III, V to XII. They shall forthwith communicate to the Commission the text of those provisions and a correlation table between those provisions and this Directive.

Notwithstanding paragraph 2, they shall apply those provisions from 31 December 2006.

When Member States adopt those provisions, they shall contain a reference to this Directive or be accompanied by such a reference on the occasion of their official publication. They shall also include a statement that references in existing laws, regulations and administrative provisions to the directive[s] repealed by this Directive shall be construed as references to this Directive. Member States shall determine how such reference is to be made and how that statement is to be formulated.

Member States shall communicate to the Commission the text of the main provisions of national law which they adopt in the field covered by this Directive.

2.         Member States shall apply, by 31 December 2007 at the latest, and not earlier, the laws regulations and administrative provisions necessary to comply with Articles 87(9) and 105.

ê 2000/12/EC Art. 66 (adapted)

Article 66

Commission information

Member States shall communicate to the Commission the text of the main laws, regulations and administrative provisions Ö of national law Õ which they adopt in the field covered by this Directive.

ê 2000/12/EC Art 67 (adapted)

Article 158

1. Directives 73/183/EEC, 77/780/EEC, 89/299/EEC, 89/646/EEC, 89/647/EEC, 92/30/EEC and 92/121/EEC, Directive 2000/12/EC as amended by the Directives set out in Annex V Ö XV Õ , Part A, are Ö is Õ hereby repealed without prejudice to the obligations of the Member States concerning the deadlines for transposition of the said Directives listed in Annex V Ö XV Õ , Part B.

2. References to the repealed Directives shall be construed as references to this Directive and should be read in accordance with the correlation table in Annex VI Ö XVI Õ.

ê 2000/12/EC Art 68 (adapted)

Article 159

Implementation

This Directive shall enter into force on the 20th day following its publication in the Official Journal of the Ö Union Õ European Communities.

ê 2000/12/EC Art. 69 (adapted)

Article 160

Addressees

This Directive is addressed to the Member States.

Done at Brussels, […].

                                                                       For the European Parliament

                                                                       The President

                                                                      

                                                                       For the Council

                                                                       The President

                                                                      

ê 2000/12/EC

ANNEX I

LIST OF ACTIVITIES SUBJECT TO MUTUAL RECOGNITION

1. Acceptance of deposits and other repayable funds

2. Lending including, inter alia: consumer credit, mortgage credit, factoring, with or without recourse, financing of commercial transactions (including forfeiting).[33]

3. Financial leasing

4. Money transmission services

5. Issuing and administering means of payment (e.g. credit cards, travellers' cheques and bankers' drafts)

6. Guarantees and commitments

7. Trading for own account or for account of customers in:

(a)        money market instruments (cheques, bills, certificates of deposit, etc.)

(b)        foreign exchange;

(c)        financial futures and options;

(d)       exchange and interest-rate instruments;

(e)        transferable securities

8. Participation in securities issues and the provision of services related to such issues

9. Advice to undertakings on capital structure, industrial strategy and related questions and advice as well as services relating to mergers and the purchase of undertakings

10. Money broking

11. Portfolio management and advice

12. Safekeeping and administration of securities

13. Credit reference services

14. Safe custody services

ê 2004/39/EC Art. 68 (adapted)

The services and activities provided for in Section A and B of annex I of Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on markets in financial instruments[34] when referring to the financial instruments provided for in Section C of Annex I of that Directive are subject to mutual recognition according to this Directive.

ê 2000/12/EC

ANNEX II

ê 2000/12/EC

ð new

CLASSIFICATION OF OFF-BALANCE-SHEET ITEMS

Full risk:

– Guarantees having the character of credit substitutes,

– ð Credit derivatives ï

– Acceptances,

– Endorsements on bills not bearing the name of another credit institution,

– Transactions with recourse,

– Irrevocable standby letters of credit having the character of credit substitutes,

– Assets purchased under outright forward purchase agreements,

– Forward forward deposits,

– The unpaid portion of partly-paid shares and securities,

– ð Asset sale and repurchase agreements as defined in Article 12(3) and (5) of Directive 86/635/EEC, ï

– Other items also carrying full risk.

Medium risk:

– Documentary credits issued and confirmed (see also medium/low risk),

– Warranties and indemnities (including tender, performance, customs and tax bonds) and guarantees not having the character of credit substitutes,

– Asset sale and repurchase agreements as defined in Article 12(3) and (5) of Directive 86/635/EEC,

– Irrevocable standby letters of credit not having the character of credit substitutes,

– Undrawn credit facilities (agreements to lend, purchase securities, provide guarantees or acceptance facilities) with an original maturity of more than one year,

– Note issuance facilities (NIFs) and revolving underwriting facilities (RUFs),

– Other items also carrying medium risk ð and as communicated to the Commission ï .

Medium/low risk:

– Documentary credits in which underlying shipment acts as collateral and other self-liquidating transactions,

– ð Undrawn credit facilities (agreements to lend, purchase securities, provide guarantees or acceptance facilities) with an original maturity of up to and including one year which may not be cancelled unconditionally at any time without notice or that do not effectively provide for automatic cancellation due to deterioration in a borrower’s creditworthiness, ï

– Other items also carrying medium/low risk ð and as communicated to the Commission ï .

Low risk:

– Undrawn credit facilities (agreements to lend, purchase securities, provide guarantees or acceptance facilities) with an original maturity of up to and including one year or which may be cancelled unconditionally at any time without notice,ð Undrawn credit facilities (agreements to lend, purchase securities, provide guarantees or acceptance facilities) which may be cancelled unconditionally at any time without notice, or that do effectively provide for automatic cancellation due to deterioration in a borrower’s creditworthiness. Retail credit lines may be considered as unconditionally cancellable if the terms permit the credit institution to cancel them to the full extent allowable under consumer protection and related legislation; ï

– Other items also carrying low risk ð and as communicated to the Commission ï .

The Member States undertake to inform the Commission as soon as they have agreed to include a new off-balance-sheet item in any of the last indents under each category of risk. Such items will be definitively classified at Community level once the procedure laid down in Article 59 has been completed.

ê 2000/12/EC

ANNEX III

ê 2000/12/EC (adapted)

ð new

THE TREATMENT OF OFF-BALANCE-SHEET ITEMS ð DERIVATIVE INSTRUMENTS ï

1. CHOICE OF THE METHOD

To measure the credit risks associated with ð determine the exposure value of ï the contracts listed in points 1 and 2 of Annex IV, credit institutions may choose, subject to the consent of the competent authorities, one of the methods set out Ö in this Annex Õ below. Credit institutions which have to comply with Article 6(1) Ö 33(1) and (2) Õ of Directive 93/6/EEC[35] must use method 1 set out Ö in this Annex Õ below. To measure the credit risks associated with ð determine the exposure value for ï the contracts listed in point 3 of Annex IV all credit institutions must use method 1 set out Ö in this Annex Õ below.

ò new

Contracts traded on recognised exchanges, and foreign-exchange contracts (except contracts concerning gold) with an original maturity of 14 calendar days or less are exempt from the application of the methods set out in this Annex and shall be attributed an exposure value of zero.

Competent authorities may exempt from the application of the methods set out in this Annex and attribute an exposure value of zero to over-the-counter (OTC) contracts cleared by a clearing house where the latter acts as the legal counterparty and all participants fully collateralise on a daily basis the exposure they present to the clearing house, thereby providing a protection covering both the current exposure and the potential future exposure.

The posted collateral must:

(a)     qualify for a 0% risk weight, or

(b)     be cash deposits placed with the lending institution, or

(c)     be certificates of deposit or similar instruments issued by and lodged with the latter.

The competent authorities must be satisfied that the risk of a build-up of the clearing house's exposures beyond the market value of posted collateral is eliminated.

ê 2000/12/EC (adapted)

2. METHODS

Method 1: the «mark to market» approach

Step (a):           by attaching current market values to contracts (mark to market), the current replacement cost of all contracts with positive values is obtained.

Step (b):          to obtain a figure for potential future credit exposure[36], Ö except in the case of single-currency «floating/floating» interest rate swaps in which only the current replacement cost will be calculated, Õ the notional principal amounts or underlying values are multiplied by the following percentages Ö in Table 1 Õ :

TABLE 1[37][38]

Residual maturity[39] || Interest-rate contracts || Contracts concerning foreign-exchange rates and gold || Contracts concerning equities || Contracts concerning precious metals except gold || Contracts concerning commodities other than precious metals

One year or less || 0% || 1% || 6% || 7% || 10%

Over one year, less than five years || 0,5% || 5% || 8% || 7% || 12%

Over five years || 1,5% || 7,5% || 10% || 8% || 15%

For the purpose of calculating the potential future exposure in accordance with step (b) the competent authorities may allow credit institutions until 31 December 2006 to apply the following percentages instead of those prescribed in Table 1 provided that the institutions make use of the option set out in Article 11a of Directive 93/6/EEC for contracts within the meaning of paragraph 3(b) and (c) of Annex IV:

TABLE 1a

Residual maturity || Precious metals (except gold) || Base metals || Agricultural products (softs) || Other, including energy products

One year or less || 2% || 2,5% || 3% || 4%

Over one year, less than five years || 5% || 4% || 5% || 6%

Over five years || 7,5% || 8% || 9% || 10%

ê 2000/12/EC (adapted)

Step (c):           the sum of current replacement cost and potential future credit exposure is multiplied by the risk weightings allocated to the relevant counterparties in Article 43 Ö is the exposure value. Õ

ê 2000/12/EC (adapted)

Method 2: the «original exposure» approach

Step (a):           the notional principal amount of each instrument is multiplied by the percentages given Ö in Table 2 Õ below:

TABLE 2

Original maturity[40] || Interest-rate contracts || Contracts concerning foreign-exchange rates and gold

One year or less || 0,5% || 2%

More than one year but not exceeding two years || 1% || 5%

Additional allowance for each additional year || 1% || 3%

ê 2000/12/EC

ð new

Step (b):          the original exposure thus obtained is multiplied by the risk weightings allocated to the relevant counterparties in Article 43ðshall be the exposure valueï

For methods 1 and 2 the competent authorities must ensure that the notional amount to be taken into account is an appropriate yardstick for the risk inherent in the contract. Where, for instance, the contract provides for a multiplication of cash flows, the notional amount must be adjusted in order to take into account the effects of the multiplication on the risk structure of that contract.

ê 2000/12/EC (adapted)

3. CONTRACTUAL NETTING (CONTRACTS FOR NOVATION AND OTHER NETTING AGREEMENTS)

(a) Types of netting that competent authorities may recognise

For the purpose of this Ö section Õ point 3 «counterparty» means any entity (including natural persons) that has the power to conclude a contractual netting agreement.

The competent authorities may recognise as risk-reducing the following types of contractual netting:

(i)           bilateral contracts for novation between a credit institution and its counterparty under which mutual claims and obligations are automatically amalgamated in such a way that this novation fixes one single net amount each time novation applies and thus creates a legally binding, single new contract extinguishing former contracts;

(ii)          other bilateral agreements between a credit institution and its counterparty.

(b) Conditions for recognition

The competent authorities may recognise contractual netting as risk-reducing only under the following conditions:

(i)           a credit institution must have a contractual netting agreement with its counterparty which creates a single legal obligation, covering all included transactions, such that, in the event of a counterparty's failure to perform owing to default, bankruptcy, liquidation or any other similar circumstance, the credit institution would have a claim to receive or an obligation to pay only the net sum of the positive and negative mark-to-market values of included individual transactions;

(ii)          a credit institution must have made available to the competent authorities written and reasoned legal opinions to the effect that, in the event of a legal challenge, the relevant courts and administrative authorities would, in the cases described under (i), find that the credit institution's claims and obligations would be limited to the net sum, as described in (i), under:

– the law of the jurisdiction in which the counterparty is incorporated and, if a foreign branch of an undertaking is involved, also under the law of the jurisdiction in which the branch is located;

– the law that governs the individual transactions included; , and

– the law that governs any contract or agreement necessary to effect the contractual netting;

(iii)         a credit institution must have procedures in place to ensure that the legal validity of its contractual netting is kept under review in the light of possible changes in the relevant laws.

The competent authorities must be satisfied, if necessary after consulting the other competent authorities concerned, that the contractual netting is legally valid under the law of each of the relevant jurisdictions. If any of the competent authorities are not satisfied in that respect, the contractual netting agreement will not be recognised as risk-reducing for either of the counterparties.

The competent authorities may accept reasoned legal opinions drawn up by types of contractual netting.

No contract containing a provision which permits a non-defaulting counterparty to make limited payments only, or no payments at all, to the estate of the defaulter, even if the defaulter is a net creditor (a «walkaway» clause), may be recognised as risk-reducing.

The competent authorities may recognise as risk-reducing contractual-netting agreements covering foreign-exchange contracts with an original maturity of 14 calendar days or less written options or similar off-balance-sheet items to which this Annex does not apply because they bear only a negligible or no credit risk. If, depending on the positive or negative market value of these contracts, their inclusion in another netting agreement can result in an increase or decrease of the capital requirements, competent authorities must oblige their credit institution to use a consistent treatment.

(c) Effects of recognition

(i) Contracts for novation

The single net amounts fixed by contracts for novation, rather than the gross amounts involved, may be weighted. Thus, in the application of method 1, in

– step (a): the current replacement cost, and in

– step (b): the notional principal amounts or underlying values

may be obtained taking account of the contract for novation. In the application of method 2, in step (a) the notional principal amount may be calculated taking account of the contract for novation; the percentages of Table 2 must apply.

(ii) Other netting agreements

In application of method 1:

– in step (a) the current replacement cost for the contracts included in a netting agreement may be obtained by taking account of the actual hypothetical net replacement cost which results from the agreement; in the case where netting leads to a net obligation for the credit institution calculating the net replacement cost, the current replacement cost is calculated as «0»,

– in step (b) the figure for potential future credit exposure for all contracts included in a netting agreement may be reduced according to the following equation: PCEred = 0.4 * PCEgross + 0.6 * NGR * PCEgross

where:

— || PCEred || = || the reduced figure for potential future credit exposure for all contracts with a given counterparty included in a legally valid bilateral netting agreement

— || PCEgross || = || the sum of the figures for potential future credit exposure for all contracts with a given counterparty which are included in a legally valid bilateral netting agreement and are calculated by multiplying their notional principal amounts by the percentages set out in Table 1

— || NGR || = || «net-to-gross ratio»: at the discretion of the competent authorities either: (i)           separate calculation: the quotient of the net replacement cost for all contracts included in a legally valid bilateral netting agreement with a given counterparty (numerator) and the gross replacement cost for all contracts included in a legally valid bilateral netting agreement with that counterparty (denominator), or (ii)          aggregate calculation: the quotient of the sum of the net replacement cost calculated on a bilateral basis for all counterparties taking into account the contracts included in legally valid netting agreements (numerator) and the gross replacement cost for all contracts included in legally valid netting agreements (denominator).               If Member States permit credit institutions a choice of methods, the method chosen is to be used consistently.

For the calculation of the potential future credit exposure according to the above formula perfectly matching contracts included in the netting agreement may be taken into account as a single contract with a notional principal equivalent to the net receipts. Perfectly matching contracts are forward foreign-exchange contracts or similar contracts in which a notional principal is equivalent to cash flows if the cash flows fall due on the same value date and fully or partly in the same currency.

In the application of method 2, in step (a)

– perfectly matching contracts included in the netting agreement may be taken into account as a single contract with a notional principal equivalent to the net receipts, the notional principal amounts are multiplied by the percentages given in Table 2,

– for all other contracts included in a netting agreement, the percentages applicable may be reduced as indicated in Table 3:

TABLE 3

Original maturity[41] || Interest-rate contracts || Foreign-exchange contracts

One year or less || 0.35% || 1.50%

More than one year but not more than two years || 0.75% || 3.75%

Additional allowance for each additional year || 0.75% || 2.25%

ê 2000/12/EC

ANNEX IV

ê 2000/12/EC

ð new

TYPES OF OFF-BALANCE-SHEET ITEMS ð DERIVATIVES ï

ê 2000/12/EC (adapted)

1. Interest-rate contracts:

(a)        single-currency interest rate swaps;

(b)        basis-swaps;

(c)        forward rate agreements;

(d)       interest-rate futures;

(e)        interest-rate options purchased;

(f)        other contracts of similar nature.

2. Foreign-exchange contracts and contracts concerning gold:

(a)        cross-currency interest-rate swaps;

(b)        forward foreign-exchange contracts;

(c)        currency futures;

(d)       currency options purchased;

(e)        other contracts of a similar nature;

(f)        contracts concerning gold of a nature similar to (a) to (e).

3. Contracts of a nature similar to those in points 1(a) to (e) and 2(a) to (d) concerning other reference items or indices concerning:

(a)        equities;

(b)        precious metals except gold;

(c)        commodities other than precious metals;

(d)       other contracts of a similar nature. Step (b):   to obtain a figure for potential future credit exposure[42], the notional principal amounts or underlying values are multiplied by the following percentages:

é

ò new

ANNEX V TO XII

[OMISSIS]

ò new

ANNEX XIII

PART A

REPEALED DIRECTIVES TOGETHER WITH THEIR SUCCESSIVE AMENDMENTS

(referred to in Article 158)

Directive 2000/12/EC of the European Parliament and of the Council of 20 March 2000 relating to the taking up and pursuit of the business of credit institutions

Directive 2000/28/EC of the European Parliament and of the Council of 18 September 2000 amending Directive 2000/12/EC relating to the taking up and pursuit of the business of credit institutions

Directive 2002/87/EC of the European Parliament and of the Council of 16 December 2002 on the supplementary supervision of credit institutions, insurance undertakings and investment firms in a financial conglomerate and amending Council Directives 73/239/EEC, 79/267/EEC, 92/49/EEC, 92/96/EEC, 93/6/EEC and 93/22/EEC, and Directives 98/78/EC and 2000/12/EC of the European Parliament and of the Council,

Only Art. 29.1(a)(b), Art. 29.2,, Art. 29.4(a)(b), Art. 29.5, Art. 29.6, Art. 29.7 (a) (b), Art. 29.8, Art. 29.9, Art. 29.10, Art. 29.11

Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on markets in financial instruments amending Council Directives 85/611/EEC and 93/6/EEC and Directive 2000/12/EC of the European Parliament and of the Council and repealing Council Directive 93/22/EEC

Only Art. 68

Commission Directive 2004/69/EC of 27 April 2004 amending Directive 2000/12/EC of the European Parliament and of the Council as regards the definition of "multilateral development banks" (Text with EEA relevance)

Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on amending Council Directives 73/239/EEC, 85/611/EEC, 91/675/EEC, 92/49/EEC, 93/6/EEC and 94/19/EC and Directives 98/78/EC, 2000/12/EC, 2001/34/EC, 2002/83/EC and 2002/87/EC, in order to establish a new financial services committee organisational structure.

Only Article 3

NON-REPEALED MODIFICATIONS

Act of accession 2003

PART B

DEADLINES FOR IMPLEMENTATION

(referred to in Article 158)

Directive || || Deadline for implementation

Directive 2000/12/EC || || -----

Directive 2000/28/EC || || 27.4.2002

Directive 2002/87/EC, || || 11.8.2004

Directive 2004/39/EC || || Not yet available

Directive 2004/69/EC || || 30.6.2004

Directive 2004/xx/EC || || Not yet available

ANΝΕΧ XIV

CORRELATION TABLE

This Directive || Directive 2000/12/EC || Directive 2000/28/EC || Directive 2001/87/EC || Directive 2004/69/EC || Directive 2004/xx/EC

Article 1 || Article 2(1) and (2) || || || ||

Article 2(1) || Article 2(3) Act of Accession || || || ||

Article 2(2) || Article 2(4) || || || ||

Article 3 || Article 2(5) and (6) || || || ||

Article 3 (1) final sentence || || || || || Article 3.2

Article 4.1 (1) || Article 1(1) || || || ||

Article 4.1 (2) to (5) || || Article 1(2) to (5) || || ||

Article 4.1 (7) to (9) || || Article 1(6) to (8) || || ||

Article 4 .1 (10) || || || Article 29.1 (a) || ||

Article 4.1 (11) to (14) || Article 1 (10), (12) and (13) || || || ||

Article 4.1 (21) and (22) || || || Article 29.1 (b) || ||

Article 4.1 (23) || Article 1 (23) || || || ||

Article 4.1 (45 to (47) || Article 1 (25 to (27) || || || ||

Article 4 .2 || Article 1(1) second sub-paragraph || || || ||

Article 5 || Article 3 || || || ||

Article 6 || Article 4 || || || ||

Article 7 || Article 8 || || || ||

Article 8 || Article 9 || || || ||

Article 9 (1) || Article 5(1) and 1(11) || || || ||

Article 9 (2) || Article 5(2) || || || ||

Article 10 || Article 5 (3) to (7) || || || ||

Article 11 || Article 6 || || || ||

Article 12 || Article 7 || || || ||

Article 13 || Article 10 || || || ||

Article 14 || Article 11 || || || ||

Article 15 (1) || Article 12 || || || ||

Article 15 (2) and (3) || || || Article 29.2 || ||

Article 16 || Article 13 || || || ||

Article 17 || Article 14 || || || ||

Article 18 || Article 15 || || || ||

Article 19 (1) || Article 16 (1) || || || ||

Article 19 (2) || || || Article 29.3 || ||

Article 20 || Article 16(3) || || || ||

Article 21 || Article 16 (4) to (6) || || || ||

Article 22 || Article 17 || || || ||

Article 23 || Article 18 || || || ||

Article 24 (1) || Article 19 paragraphs (1) to (3) || || || ||

Article 24 (2) || Article 19 paragraph (6) || || || ||

Article 24 (3) || Article 19 paragraph (4) || || || ||

Article 25 (1) to (3) || Article 20 (1) to (3) 1 and 2 sub-paragraph || || || ||

Article 25 (3) || Article 19 paragraph (5) || || || ||

Article 25 (4) || Article 20 (3) 3 sub-paragraph || || || ||

Article 26 || Article 20 (4) to (7) || || || ||

Article 27 || Article 1 (3) final clause || || || ||

Article 28 || Article 21 || || || ||

Article 29 || Article 22 || || || ||

Article 30 || Article 22 (2) to (4) || || || ||

Article 31 || Article 22 (5) || || || ||

Article 32 || Article 22 (6) || || || ||

Article 33 || Article 22 (7) || || || ||

Article 34 || Article 22 (8) || || || ||

Article 35 || Article 22 (9) || || || ||

Article 36 || Article 22 (10) || || || ||

Article 37 || Article 22 (11) || || || ||

Article 38 || Article 24 || || || ||

Article 39 (1) and (2) || Article 25 || || || ||

Article 39 (2) || || || || || Article 3.8

Article 40 || Article 26 || || || ||

Article 41 || Article 27 || || || ||

Article 42 || Article 28 || || || ||

Article 43 || Article 29 || || || ||

Article 44 || Article 30(1) to (3) || || || ||

Article 45 || Article 30(4) || || || ||

Article 46 || Article 30(3) || || || ||

Article 47 || Article 30(5) || || || ||

Article 48 || Article 30(6) and (7) || || || ||

Article 49 || Article 30(8) || || || ||

Article 50 || Article 30(9) 1 and 2 paragraphs || || || ||

Article 51 || Article 30(9) 3 paragraph || || || ||

Article 52 || Article 30(10) || || || ||

Article 53 || Article 31 || || || ||

Article 54 || Article 32 || || || ||

Article 55 || Article 33 || || || ||

Article 56 || Article 34(1) || || || ||

Article 57 || Article 34(2) 1 paragraph Article 34(1) point 2 final sentence || || Article 29.4(a) || ||

Article 58 || || || Article 29.4 (b) || ||

Article 59 || || || Article 29.4 (b) || ||

Article 60 || || || Article 29.4 (b) || ||

Article 61 || Article 34(3) and (4) || || || ||

Article 63 || Article 35 || || || ||

Article 64 || Article 36 || || || ||

Article 65 || Article 37 || || || ||

Article 66 (1) and (2) || Article 38 (1) and (2) || || || ||

Article 67 || Article 39 || || || ||

Article 73 || Article 52(3) || || || ||

Article 106 || Article 1(24) || || || ||

Article 107 || Article 1(1) 3 sub-paragraph || || || ||

Article 108 || Article 48(1) || || || ||

Article 109 || Article 48 (4) 1 paragraph || || || ||

Article 110 || Article 48(2) to (4)2 sub-paragraph || || || ||

Article 111 || Article 49 (1) to (5) || || || ||

Article 113 (1) to (3) || Article 49 (4) (6) and (7) || || || ||

Article 115 (1) and (2) || Article 49(8) and (9) || || || ||

Article 116 || Article 49(10) || || || ||

Article 117 || Article 49(11) || || || ||

Article 118 || Article 50 || || || ||

Article 120 || Article 51(1)(2)(5) || || || ||

Article 121 || Article 51(4) || || || ||

Article 122 (1) and (2) || Art. 51 (6) || || Article 29(5) || ||

Article 125 || Article 53(1) and (2) || || || ||

Article 126 || Article 53 (3) || || || ||

Article 128 || Article 53(5) || || || ||

Article 133 (1) || Article 54(1) || || Article 29(7)(a) || ||

Article 133 (2) and (3) || Article 54 (2) and (3) || || || ||

Article 134(1) || Article 54(4) first paragraph || || || ||

Article 134 (2) || Article 54(4) second paragraph || || || ||

Article 135 || || || Article 29(8) || ||

Article 137 || Article 55(1) and (2) || || || ||

Article 138 || || || Article 29(9) || ||

Article 139 || Article 56(1) to (3) || || || ||

Article 140 || Article 56(4) to (6) || || || ||

Article 141 || Article 56 (7) || || Article 29(10) || ||

Article 142 || Article 56(8) || || || ||

Article 143 || || || Article 29(11) || || Art. 3.10

Article 150 || Article 60(1) || || || ||

Article 151 || Article 60(2) || || || || Art. 3.10

Article 158 || Art. 67 || || || ||

Article 159 || Art. 68 || || || ||

Article 160 || Article 69 || || || ||

Annex I || Annex I || || || ||

Annex I final clause || || || || Article 68 ||

Annex II || Annex II || || || ||

Annex III || Annex III || || || ||

Annex IV || Annex IV || || || ||

[1]               The Basel Committee on Banking Supervision was established by the central bank Governors of the Group of Ten (G-10) countries. It consists of representatives of the authority responsible for prudential supervision of banks from the following countries: Belgium, Canada, France, Germany, Italy, Japan, Luxembourg, the Netherlands, Spain, Sweden, Switzerland, the United Kingdom and the United States. The European Commission, along with the European Central Bank, participates as an observer.

[2]               While formally agreed by the authorities of the G-10 group of industrialised countries for application to internationally active banks, the 1988 Accord has been applied throughout the world to banks of all sizes and levels of complexity.

[3]               OJ S167 of 29/08/2002,

[4]               Available on Commission website - http://europa.eu.int/comm/internal_market/regcapital/index_en.htm

[5]               OJ C 157, 25.5.1998, p. 13 Ö […] Õ .

[6]               Opinion of the European Parliament of 18 January 2000 (not yet published in the Official Journal) Ö […] Õ and Council Decision of 13 March 2000 (not yet published in the Official Journal) Ö […] Õ .

[7]               OJ L 126, 26.5.2000, p.1, as last amended by the Act of Accession 2003

[8]               OJ L 126, 26.5.2000, p.1, as last amended by the Act of Accession 2003

[9]               OJ L 126, 26.5.2000, p.1, as last amended by the Act of Accession 2003

[10]             OJ L 126, 26.5.2000, p.1, as last amended by the Act of Accession 2003

[11]             OJ L 126, 26.5.2000, p.1, as last amended by the Act of Accession 2003

[12]             OJ L 126, 26.5.2000, p.1, as last amended by the Act of Accession 2003

[13]             OJ L 126, 26.5.2000, p.1, as last amended by the Act of Accession 2003

[14]             OJ L 126, 26.5.2000, p.1 as last amended by Directive 2004/xx/EC (OJ L, […])

[15]             OJ L 3, 7.1.2004, p. 28

[16]             OJ L 372, 31.12.1986, p. 1.

[17]             OJ L 193, 18.7.1983, p. 1. Directive as last amended by Directive Ö 2003/51/EC (OJ L 178, 17.7.2003, p. 16). Õ

[18]             OJ L 243, 11.9.2002, p. 1.

[19]             Ö OJ L 184, 17.7.1999, p. 23. Õ

[20]             OJ L 275, 27.10.2000, p. 39.

[21]             OJ L 141, 11.6.1993, p. 1.

[22]             OJ L 222, 14.8.1978, p.11.

[23]             OJ L 35, 11.2.2003, p. 1.

[24]             Council Directive 88/627/EEC of 12 December 1988 on the information to be published when a major holding in a listed company is acquired or disposed of (OJ L 348, 17.12.1988, p. 62).

[25]             OJ L 184 , 6.7.2001, p. 1.

[26]             OJ L 126, 12.5.1984, p. 20.

[27]             OJ L 222, 14.8.1978, p. 11, as last amended by Directive 1999/60/EC (OJ L 62, 26.6.1999, p. 65).

[28]             OJ L 375, 31.12.1985, p. 3, as last amended by Directive 95/26/EC (OJ L 168, 18.7.1995, p. 7).

[29]             Ö OJ L 228, 16.8.1973, p. 3 Õ

[30]             Ö OJ L 63, 13.3.1979, p. 1 Õ

[31]             OJ L 330, 5.12.1998, p. 1.

[32]             Council Directive 93/22/EEC of 10 May 1993 on investment services in the securities field (OJ L 141, 11.6.1993, p. 27). Directive as last amended by Directive 97/9/EC (OJ L 84, 26.3.1997, p. 22).

[33]             Including, inter alia: consumer credit, mortgage credit, factoring, with or without recourse, financing of commercial transactions (including forfeiting).

[34]             OJ n° L 145 of 30.04.2004, p. 1

[35]             Council Directive 93/6/EEC of 15 March 1993 on the capital adequacy of investment firms and credit institutions (OJ L 141, 11.6.1993, p. 1). Directive amended by Directive 98/33/EC (OJ L 204, 21.7.1998, p. 29).

[36]             Except in the case of single-currency «floating/floating» interest rate swaps in which only the current replacement cost will be calculated.

[37]             Contracts which do not fall within one of the five categories indicated in this table shall be treated as contracts concerning commodities other than precious metals.

[38]             For contracts with multiple exchanges of principal, the percentages have to be multiplied by the number of remaining payments still to be made according to the contract.

[39]             For contracts that are structured to settle outstanding exposure following specified payment dates and where the terms are reset such that the market value of the contract is zero on these specified dates, the residual maturity would be equal to the time until the next reset date. In the case of interest-rate contracts that meet these criteria and have a remaining maturity of over one year, the percentage shall be no lower than 0,5%.

[40]             In the case of interest-rate contracts, credit institutions may, subject to the consent of their competent authorities, choose either original or residual maturity.

[41]             In the case of interest-rate contracts, credit institutions may, subject to the consent of their competent authorities, choose either original or residual maturity.

[42]             Except in the case of single-currency «floating/floating» interest rate swaps in which only the current replacement cost will be calculated.

EN

|| COMMISSION OF THE EUROPEAN COMMUNITIES

Brussels, 14.7.2004

COM(2004) 486 final

2004/0155 (COD) 2004/0159 (COD) Volume II

 

Proposal for

DIRECTIVES OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL

Re-casting Directive 2000/12/EC of the European Parliament and of the Council of 20 March 2000 relating to the taking up and pursuit of the business of credit institutions and Council Directive 93/6/EEC of 15 March 1993 on the capital adequacy of investment firms and credit institutions.

(presented by the Commission) {SEC(2004) 921}

ê 93/6/EEC (adapted)

2004/0159 (COD)

Proposal for a

COUNCIL DIRECTIVE Ö OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL Õ

on the capital adequacy of investment firms and credit institutions

(recast)

Ö THE EUROPEAN PARLIAMENT AND THE COUNCIL OF THE EUROPEAN UNION, Õ

Having regard to the Treaty establishing the European Economic Community, and in particular the first and third sentences of Article 57 Ö 47 Õ (2) thereof,

Having regard to the proposal from the Commission[1],

In cooperation with the European Parliament[2],

Having regard to the opinion of the European Economic and Social Committee[3],

Ö Having regard to the opinion of the Committee of the Regions[4], Õ

Ö Acting in accordance with the procedure laid down in Article 251 of the Treaty[5], Õ

Whereas:

ò new

(1) Council Directive 93/6/EEC of 15 March 1993 on the capital adequacy of investment firms and credit institutions[6] has been substantially amended several times. Since further amendments are to be made, it should be recast in the interests of clarity.

ê 93/6/EEC Recitals 1 (adapted)

(2) Whereas the main Ö One of the Õ objectives of Council Directive 93/22/EEC of 10 May 1993 on investment services in the securities field [7] Ö 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on markets in financial instruments amending Council Directives 85/611/EEC and 93/6/EEC and Directive 2000/12/EC of 20 March 2000 relating to the taking up and pursuit of credit institutions[8] and repealing Council Directive 93/22/EEC[9] Õ is to allow investment firms authorized by the competent authorities of their home Member States and supervised by the same authorities to establish branches and provide services freely in other Member States;. whereas tThat Directive accordingly provides for the coordination of the rules governing the authorizsation and pursuit of the business of investment firms;.

ê 93/6/EEC Recital 2 (adapted)

(3) Whereas tThat Directive does not, however, establish common standards for the own funds of investment firms nor indeed does it establish the amounts of the initial capital of such firms; whereas Ö neither does Õ it does not establish a common framework for monitoring the risks incurred by the same firms;. whereas it refers, in several of its provisions, to another Community initiative, the objective of which would be precisely to adopt coordinated measures in those fields;

ê 93/6/EC Recital 3 (adapted)

(4) Whereas the approach that has been adopted is Ö It is appropriate Õ to effect only the essential harmonization harmonisation that is necessary and sufficient to secure the mutual recognition of authorization authorisation and of prudential supervision systems; whereas the adoption of Ö In order to achieve mutual recognition within the framework of the internal financial market, Õ measures Ö should be laid down Õ to coordinate the definition of the own funds of investment firms, the establishment of the amounts of their initial capital and the establishment of a common framework for monitoring the risks incurred by investment firms are essential aspects of the harmonization necessary for the achievement of mutual recognition within the framework of the internal financial market;.

ò new

(5) Since the objective of the proposed action cannot be sufficiently achieved by the Member States and can, therefore, by reason of the scale and the effects of the action, be better achieved at Community level, the Community may adopt measures, in accordance with the principle of subsidiarity as set out in Article 5 of the Treaty. In accordance with the principle of proportionality, as set out in that Article, this Directive confines itself to the minimum required in order to achieve those objectives and does not go beyond what is necessary for that purpose.

ê 93/6/EEC Recital 4

(6) Whereas iIt is appropriate to establish different amounts of initial capital depending on the range of activities that investment firms are authorized to undertake;.

ê 93/6/EC Recital 5 (adapted)

(7) Whereas Existing investment firms should be permitted, under certain conditions, to continue their business even if they do not comply with the minimum amount of initial capital fixed for new Ö investment Õ firms;.

ê 93/6/EEC Recital 6 (adapted)

(8) Whereas theMember States may Ö should Õ also Ö be able to Õ establish rules stricter than those provided for in this Directive;.

ê 93/6/EC Recital 7 (adapted)

Whereas this Directive forms part of the wider international effort to bring about approximation of the rules in force regarding the supervision of investment firms and credit institutions (hereinafter referred to collectively as «institutions»);

ò new

(9) The smooth operation of the internal market requires not only legal rules but also close and regular cooperation and significantly enhanced convergence of regulatory and supervisory practices between the competent authorities of the Member States.

ê 93/6/EEC Recital 8 (adapted)

Whereas common basic standards for the own funds of institutions are a key feature in an internal market in the investment services sector, since own funds serve to ensure the continuity of institutions and to protect investors;

ò new

(10) Since investment firms face in respect of their trading book business the same risks as credit institutions, it is appropriate for the pertinent provisions of Directive 2000/12/EC to apply equally to investment firms.

ê 93/6/EEC Recital 9 (adapted)

ð new

(11) Whereas in a common financial market, institutions, whether they are ð The own funds of ï investment firms or credit institutions, ð (hereinafter referred to collectively as «institutions») can serve to absorb losses which are not matched by a sufficient volume of profits, to ensure the continuity of institutions and to protect investors. The own funds also serve as an important yardstick for the competent authorities, in particular for the assessment of the solvency of institutions and for other prudential purposes. Furthermore, institutions, whether they are investment firms or credit institutions, in the internal market ï engage in direct competition with one Ö each Õ another. ð Therefore, in order to strengthen the Community financial system and to prevent distortions of competition, it is appropriate to lay down common basic standards for own funds. ï

ê 93/6/EC Recital 10 (adapted)

Whereas it is therefore desirable to achieve equality in the treatment of credit institutions and investment firms;

ò new

(12) For these purposes, it is appropriate for the definition of own funds laid down in Directive 2000/12/EC to serve as a basis and to provide for supplementary specific rules which take into account the different scope of market risk related capital requirements.

ê 93/6/EEC Recital 11 (adapted)

(13) Whereas, aAs regards credit institutions, common standards are Ö have Õ already Ö been Õ established for the supervision and monitoring of Ö different types of Õ credit risks in Council Directive 89/647/EEC of 18 December 1989 on a solvency ratio for credit institutions[10] Öby Directive 2000/12/EC Õ;.

ò new

(14) In that respect, the provisions on minimum capital requirements should be considered in conjunction with other specific instruments also harmonising the fundamental techniques of the supervision of institutions.

ê 93/6/EEC Recital 12

(15) Whereas iIt is necessary to develop common standards for market risks incurred by credit institutions and provide a complementary framework for the supervision of the risks incurred by institutions, in particular market risks, and more especially position risks, counterparty/settlement risks and foreign-exchange risks;.

ê 93/6/EC Recital 13 (adapted)

(16) Whereas iIt is necessary to introduce Ö provide for Õ the concept of a «trading book» comprising positions in securities and other financial instruments which are held for trading purposes and are subject mainly to market risks and exposures relating to certain financial services provided to customers;.

ê 93/6/EEC Recital 14 (adapted)

(17) Whereas it is desirable that Ö With a view to reduce the administrative burden for Õ institutions with negligible trading-book business, in both absolute and relative terms, Ö such institutions Õ should be able to apply Directive 89/647/EEC Ö [2000/12/EC] Õ , rather than the requirements imposed in Annexes I and II to this Directive;.

ê 93/6/EC Recital 15 (adapted)

(18) Whereas It is important that monitoring of settlement/delivery risks should take account of the existence of systems offering adequate protection that reduces Ö reducing Õ that risk;.

ê 93/6/EEC Recital 16 (adapted)

(19) Whereas, in any case, institutions must Ö should Õ comply with this Directive as regards the coverage of the foreign-exchange risks on their overall business; Ö . Õ whereas lLower capital requirements should be imposed for positions in closely correlated currencies, whether statistically confirmed or arising out of binding intergovernmental agreements, with a view in particular to the creation of the European Monetary Union;.

ê 93/6/EC Recital 17 (adapted)

(20) Whereas tThe existence, in all institutions, of internal systems for monitoring and controlling interest-rate risks on all of their business Ö of institutions Õ is a particularly important way of minimizing minimising such risks; Ö . Õ whereas, cConsequently, such systems must be subject to overview Ö should be supervised Õ by the competent authorities;.

ê 93/6/EEC Recital 18 (adapted)

(21) Whereas Council Directive 92/121/EEC of 21 December 1992 on the monitoring and control of large exposures of credit institutions[11] Ö Since Directive [2000/12/EC] Õ is not aimed at establishing Ö does not establish Õ common rules for monitoring Ö and control of Õ large exposures in activities which are principally subject to market risks Ö , it is therefore appropriate to provide for such rules Õ ; whereas that Directive makes reference to another Community initiative intended to adopt the requisite coordination of methods in that field;.

ê 93/6/EEC Recital 19 (adapted)

Whereas it is necessary to adopt common rules for the monitoring and control of large exposures incurred by investment firms;

ò new

(22) Operational risk is a significant risk faced by institutions requiring coverage by own funds. It is essential to take account of the diversity of institutions in the EU by providing alternative approaches.

ê 93/6/EEC Recitals 20 to 22 (adapted)

Whereas the own funds of credit institutions have already been defined in Council Directive 89/299/EEC of 17 April 1989 on the own funds of credit institutions [12] ;

Whereas the basis for the definition of the own funds of institutions should be that definition;

Whereas, however, there are reasons why for the purposes of this Directive the definition of the own funds of institutions may differ from that in the aforementioned Directive in order to take account of the particular characteristics of the activities carried on by those institutions which mainly involve market risks;

ê 93/6/EEC Recital 23 (adapted)

(23) Whereas Council Directive 92/30/EEC of 6 April 1992 on the supervision of credit institutions on a consolidated basis[13]Ö Directive [2000/12/EC] Õ states the principle of consolidation; Ö . Õ whereas iIt does not establish common rules for the consolidation of financial institutions which are involved in activities principally subject to market risks;. whereas that Directive makes reference to another Community initiative intended to adopt coordinated measures in that field;

ò new

(24) In order to ensure adequate solvency of institutions within a group it is essential that the minimum capital requirements apply on the basis of the consolidated financial situation of the group. In order to ensure that own funds are appropriately distributed within the group and available to protect investments where needed, the minimum capital requirements should apply to individual institutions within a group, unless this objective can be effectively otherwise achieved.

ê 93/6/EEC Recital 24 (adapted)

(25) Whereas Directive 92/30/EEC Ö [2000/12/EC] Õ does not apply to groups which include one or more investment firms but no credit institutions;. whereas it was, however, felt desirable to provide aA common framework for the introduction of the supervision of investment firms on a consolidated basis Ö should therefore be provided for Õ ;.

ò new

(26) Institutions should ensure that they have internal capital which, having regard to the risks to which they are or might be exposed, is adequate in quantity, quality and distribution. Accordingly, institutions should have strategies and processes in place for assessing and maintaining the adequacy of their internal capital.

(27) Competent authorities should evaluate the adequacy of own funds of institutions, having regard to the risks to which the latter are exposed.

(28) In order for the internal market to operate effectively it is essential that there should be significantly enhanced convergence in implementation and application of the provisions of harmonised Community legislation.

(29) For the same reason and to ensure that Community institutions which are active in several Member States are not disproportionately burdened as a result of the continued responsibilities of individual Member State competent authorities for authorisation and supervision, it is essential to significantly enhance the cooperation between competent authorities. In this context the role of the consolidated supervisor should be strengthened.

(30) In order for the internal market to operate with increasing effectiveness and for citizens of the Community to be afforded adequate levels of transparency it is necessary that competent authorities disclose publicly and in a way which allows for meaningful comparison the manner in which the requirements of this Directive are implemented.

(31) In order to strengthen market discipline and stimulate institutions to improve their market strategy, risk control and internal management organisation, appropriate public disclosures by institutions should be provided for.

ê 93/6/EEC Recital 25 (adapted)

ð new

(32) Whereas technical adaptations to the detailed rules laid down in this Directive may from time to time be necessary to take account of new developments in the investment services field; whereas the Commission will accordingly propose such adaptations as are necessary ð The measures necessary for the implementation of this Directive should be adopted in accordance with Council Decision 1999/468/EC of 28 June 1999 laying down the procedures for the exercise of implementing powers conferred on the Commission[14]. ï;

ê 93/6/EEC Recital 26

Whereas the Council should, at a later stage, adopt provision for the adaptation of this Directive to technical progress in accordance with Council Decision 87/373/EEC of 13 July 1987 laying down the procedures for the exercise of implementing powers conferred on the Commission[15]; whereas meanwhile the Council itself, on a proposal from the Commission, should carry out such adaptations;

ê 93/6/EEC Recital 27 (adapted)

Whereas provision should be made for the review of this Directive within three years of the date of its application in the light of experience, developments on financial markets and work in international fora of regulatory authorities; whereas that review should also include the possible review of the list of areas that may be subject to technical adjustment;

ê 93/6/EEC Recital 28

Whereas this Directive and Directive 93/22/EEC on investment services in the securities field are so closely interrelated that their entry into force on different dates could lead to the distortion of competition;

ò new

(33) In order to avoid disruption to markets and to ensure continuity in overall levels of own funds, it is appropriate to provide for specific transitional arrangements.

(34) This Directive respects the fundamental rights and observes the principles recognised in particular by the Charter of Fundamental Rights of the European Union as general principles of Community law.

(35) The obligation to transpose this Directive into national law should be confined to those provisions which represent a substantive change as compared with the earlier Directives. The obligation to transpose the provisions which are unchanged arises under the earlier Directives.

(36) This Directive should be without prejudice to the obligations of the Member States relating to the time-limits for transposition into national law of the Directives set out in Annex VIII, Part B.

ê 93/6/EEC (adapted)

HASHAVE ADOPTED THIS DIRECTIVE:

Ö CHAPTER I Õ

Ö Subject matter, scope and definitions Õ

Ö Section 1 Õ

Ö Subject matter and scope Õ

ê 93/6/EEC (adapted)

Article 1

1.         Ö This directive lays down the capital adequacy requirements applying to investment firms and credit institutions, the rules for their calculation and the rules for their prudential supervision. Õ Member States shall apply the requirements of this Directive to investment firms and credit institutions as defined in Article 2.

2.         A Member State may impose additional or more stringent requirements on the investment firms and credit institutions that it has authorizsed.

ò new

Article 2

1.         Subject to Articles 18, 20, 28 to 32, 34 and 39 of this Directive, Articles 68 to 73 of Directive [2000/12/EC] shall apply mutatis mutandis to investment firms.

In addition, Articles 71 to 73 of Directive [2000/12/EC] shall apply in the following situations:

(a)     an investment firm has as a parent a parent credit institution in a Member State;

(b)     a credit institution has as a parent a parent investment firm in a Member State.

Where a financial holding company has as subsidiary both a credit institution and an investment firm, requirements on the basis of the consolidated financial situation of the financial holding company shall apply to the credit institution.

ê 93/6/EEC Art 7 (1) and (2) (adapted)

Article 7

General Principles

1.         The capital requirements imposed in Articles 4 and 5 for institutions which are neither parent undertakings nor subsidiaries of such undertakings shall be applied on a solo basis.

2.         The requirements imposed in Articles 4 and 5 for:

– any institution which has a credit institution within the meaning of Directive 92/30/EEC, an investment firm or another financial institution as a subsidiary or which holds a participation in such an entity, and

– any institution the parent undertaking of which is a financial holding company

shall be applied on a consolidated basis in accordance with the methods laid down in the abovementioned Directive and in paragraphs 7 to 14 of this Article.

ê 93/6/EEC Art. 7 (3) (adapted)

è1 2004/xx/EC Art. 1

ð new

2.         When a group covered by paragraph 2 Ö paragraph 1Õdoes not include a credit institution, Directive 92/30/EEC Ö [2000/12/EC] Õ shall apply, subject to the following adaptations:

– « financial holding company » shall means a financial institution, the subsidiary undertakings of which are either exclusively or mainly investment firms or other financial institutions, at least one of which is an investment firm, and which is not a mixed financial holding company within the meaning of Directive 2002/87/EC of the European Parliament and of the Council of 16 December 2002 on the supplementary supervision of credit institutions, insurance undertakings and investment firms in a financial conglomerate[16],

– «mixed-activity holding company » shall means a parent undertaking, other than a financial holding company or an investment firm or a mixed financial holding company within the meaning of Directive 2002/87/EC, the subsidiaries of which include at least one investment firm,

– -         competent authorities shall means the national authorities which are empowered by law or regulation to supervise investment firms

– the second subparagraph of Article 3 (5) of Directive 92/30/EEC shall not apply,

ð (a) every reference to credit institutions shall be construed as a reference to investment firms; ï

(b)     in Articles 4 Ö 125 Õ (1) and (2) and 7 Ö 140 (2) Õ (5) of Directive 92/30/EEC Ö [2000/12/EC] Õ each reference to Ö other articles of Õ Directive 77/780/EEC Ö [2000/12/EC] Õ shall be Ö construed as Õ replaced by a reference to Directive 93/22/EEC Ö 2004/39/EC Õ ;

(c)     for the purpose of Article 3 (9) and 8 Ö 39(3) Õ of Directive 92/30/EEC Ö [2000/12/EC] Õ the references to the è1 European Banking Committee ç shall be Ö construed as Õ substituted by references to the Council and the Commission;

(d)     Ö by derogation to Article 140(1) of Directive [2000/12/EC], where a group does not include a credit institution, Õ the first sentence of Ö that Õ Article 7 shall be replaced by the following: «Where an investment firm, a financial holding company or a mixed-activity holding company controls one or more subsidiaries which are insurance companies, the competent authorities and the authorities entrusted with the public task of supervising insurance undertakings shall cooperate closely».

ê 93/6/EEC Art 7 (4)

4. The competent authorities required or mandated to exercise supervision of groups covered by paragraph 3 on a consolidated basis may, pending further coordination on the supervision of such groups on a consolidated basis and where the circumstances justify it, waive that obligation provided that each investment firm in such a group:

(i)           uses the definition of own funds given in paragraph 9 of Annex V;

(ii)          meets the requirements imposed in Articles 4 and 5 on a solo basis;

(iii)         sets up systems to monitor and control the sources of capital and funding of all other financial institutions within the group.

ê 93/6/EC Art. 7 (5) and (6) (adapted)

5. The competent authorities shall require investment firms in a group which has been granted the waiver provided for in paragraph 4 5 to notify them of those the risks including those associated with the composition and sources of their capital and funding, which could undermine their financial positions, including those associated with the composition and sources of their capital and funding. If the competent authorities then consider that the financial positions of those investment firms is not adequately protected, they shall require them to take measures including, if necessary, limitations on the transfer of capital from such firms to group entities.

6. Where the competent authorities waive the obligation of supervision on a consolidated basis provided for in paragraph 4 5 they shall take other appropriate measures to monitor the risks, namely large exposures, of the whole group, including any undertakings not located in a Member State.

ê 93/6/EEC (adapted)

Ö SECTION 2Õ

DEFINITIONS

ê 93/6/EEC Art. 2 (1) (adapted)

ð new

Article 3

1.         For the purposes of this Directive ð the following definitions shall apply: ï

(a)1.  credit institutions shall mean Ö means credit institutions as defined in Article 4(1) of Directive [2000/12/EC]; Õ; all institutions that satisfy the definition in the first indent of Article 1 of the First Council Directive (77/780/EEC) of 12 December 1977 on the coordination of laws, regulations and administrative provisions relating to the taking up and pursuit of the business of credit institutions[17] which are subject to the requirements imposed by Directive 89/647/EEC;

ê 2004/39/EC Art. 67.2 (adapted)

ð new

(b)     investment firms shall mean Ö means Õ all institutions that satisfy the definition Ö as defined in Article 4(1) of Directive 2004/39/EC Õ of the European Parliament and of the Council of 21 April 2004 on markets in financial instruments, which are subject to the requirements imposed by the same Ö that Õ Directive, excluding:

(a)(i)  credit institutions;

(b)(ii) local firms as defined in 20 Ö point (p) of paragraph 1 of this Article; Õ, and

(c)(iii)   firms which ð are ï only ð authorised to provide the service of investment advice and/or ï receive and transmit orders from investors without in both cases holding money or securities belonging to their clients and which for that reason may not at any time place themselves in debit with their clients;

ê 93/6/EEC Art 2(3) to (4) (adapted (adapted)

3. (c) institutions shall mean Ömeans Õ credit institutions and investment firms;

4. (d) recognizzed third-country investment firms shall mean Ömeans Õ firms Ö meeting the following conditions: Õ

Ö (i)   firms Õ which, if they were established within the Community, would be covered by the definition of investment firm;

Ö (ii)  firms Õ in 2 which are authoriszed in a third country;

Ö (iii) firms Õ and which are subject to and comply with prudential rules considered by the competent authorities as at least as stringent as those laid down in this Directive;

ê 93/6/EEC (adapted)

ð new

5. (e) financial instruments shall mean Ömeans Õ the instruments listed in Section B of the Annex to Directive 93/22/EECð any contract that gives rise to both a financial asset of one party and a financial liability or equity instrument of another party ï;

ê 93/6/EEC Art. 2(6) (7)

6.           the trading book of an institution shall consist of:

(a)     its proprietary positions in financial instruments, commodities and commodity derivatives which are held for resale and/or which are taken on by the institution with the intention of benefiting in the short term from actual and/or expected differences between their buying and selling prices, or from other price or interest-rate variations, and positions in financial instruments, commodities and commodity derivatives, arising from matched principal broking, or positions taken in order to hedge other elements of the trading book;

(b)     the exposures due to the unsettled transactions, free deliveries and over-the-counter (OTC) derivative instruments referred to in paragraphs 1, 2, 3 and 5 of Annex II, the exposures due to repurchase agreements and securities and commodities lending which are based on securities or commodities included in the trading book as defined in (a) referred to in paragraph 4 of Annex II, those exposures due to reverse repurchase agreements and securities-borrowing and commodities-borrowing transactions described in the same paragraph, provided the competent authorities so approve, which meet either conditions (i), (ii), (iii) and (v) or conditions (iv) and (v) as follows:

(i)      the exposures are marked to market daily following the procedures laid down in Annex II;

(ii)     the collateral is adjusted in order to take account of material changes in the value of the securities or commodities involved in the agreement or transaction in question, according to a rule acceptable to the competent authorities;

(iii)    the agreement or transaction provides for the claims of the institution to be automatically and immediately offset against the claims of its counter-party in the event of the latter's defaulting;

(iv)    the agreement or transaction in question is an interprofessional one;

(v)     such agreements and transactions are confined to their accepted and appropriate use and artificial transactions, especially those not of a short-term nature, are excluded; and

(c)     those exposures in the form of fees, commission, interest, dividends and margin on exchange-traded derivatives which are directly related to the items included in the trading book referred to in paragraph 6 of Annex II.

              Particular items shall be included in or excluded from the trading book in accordance with objective procedures including, where appropriate, accounting standards in the institution concerned, such procedures and their consistent implementation being subject to review by the competent authorities;

ê 93/6/EEC Art 2(7) (adapted)

7.           parent undertaking, subsidiary undertaking, and financial institution shall be defined in accordance with Article 1 of Directive 92/30/EEC;

ê 93/6/EEC Art 2(8) (adapted)

8.           financial holding company shall mean a financial institution the subsidiary undertakings of which are either exclusively or mainly credit institutions, investment firms or other financial institutions, one of which at least is a credit institution or an investment firm;

ò new

(f)     parent investment firm in a Member State means an investment firm which has an institution or another financial institution as a subsidiary or which holds a participation in such entities, and which is not itself a subsidiary of another institution authorised in the same Member State, or of a financial holding company set up in the same Member State, and in which no other institution authorised in the same Member State holds a participation;

(g)     EU parent investment firm means a parent investment firm in a Member State which is not a subsidiary of another institution authorised in any Member State, or of a financial holding company set up in any Member State, and in which no other institution authorised in any Member State holds a participation;

ê 93/6/EEC Art 2 (9) (adapted)

9.           risk weightings shall mean the degrees of credit risk applicable to the relevant counter-parties under Directive 89/647/EEC. However assets constituting claims on and other exposures to investment firms or recognized third-country investment firms and exposures incurred to recognized clearing houses and exchanges shall be assigned the same weighting as that assigned where the relevant counterparty is a credit institution;

ê 98/33/EC Art. 3.1 (adapted)

10(h) over-the-counter (OTC) derivative instruments shall mean Ömeans Õ the off balance sheet items Ö falling within the list in Annex IV to Directive [2000/12/EC] other than those items to which an exposure value of zero is attributed under paragraph 2 of Annex III of that Directive; Õ to which according to the first subparagraph of Article 6(3) of Directive 89/647/EEC the methods set out in Annex II to the said Directive shall be applied;

ê 93/6/EEC (adapted)

11.(i) regulated market shall mean Ömeans Õ a market that satisfies the definition given in Article 1 (13) of Directive 93/22/EEC; Ö as defined in Article 4(14) of Directive 2004/39/EC Õ;

ê 93/6/EEC (adapted)

12.         qualifying items shall mean long and short positions in the assets referred to in Article 6 (1) (b) of Directive 89/647/EEC and in debt instruments issued by investment firms or by recognized third-country investment firms. It shall also mean long and short positions in debt instruments provided that such instruments meet the following conditions: such instruments must firstly be listed on at least one regulated market in a Member State or on a stock exchange in a third country provided that that exchange is recognized by the competent authorities of the relevant Member State; and secondly both be considered by the institution concerned to be sufficiently liquid and, because of the solvency of the issuer, be subject to a degree of default risk which is comparable to or lower than that of the assets referred to in Article 6 (1) (b) of Directive 89/647/EEC; the manner in which the instruments are assessed shall be subject to scrutiny by the competent authorities, which shall overturn the judgment of the institution if they consider that the instruments concerned are subject to too high a degree of default risk to be qualifying items.

              Notwithstanding the foregoing and pending further coordination, the competent authorities shall have the discretion to recognize as qualifying items instruments which are sufficiently liquid and which, because of the solvency of the issuer, are subject to a degree of default risk which is comparable to or lower than that of the assets referred to in Article 6 (1) (b) of Directive 89/647/EEC. The default risk associated with such instruments must have been evaluated at such a level by at least two credit-rating agencies recognized by the competent authorities or by only one such credit-rating agency so long as they are not rated below such a level by any other credit-rating agency recognized by the competent authorities.

              The competent authorities may, however, waive the condition imposed in the preceding sentence if they judge it inappropriate in the light of, for example, the characteristics of the market, the issuer, the issue, or some combination of those characteristics.

              Furthermore, the competent authorities shall require the institutions to apply the maximum weighting shown in Table 1 in paragraph 14 of Annex I to instruments which show a particular risk because of the insufficient solvency of the issuer or liquidity.

              The competent authorities of each Member State shall regularly provide the Council and the Commission with information concerning the methods used to evaluate the qualifying items, in particular the methods used to assess the degree of liquidity of the issue and the solvency of the issuer;

13.         central government items shall mean long and short positions in the assets referred to in Article 6 (1) (a) of Directive 89/647/EEC and those assigned a weighting of 0 % in Article 7 of the same Directive;

ê 93/6/EEC Art 2 (14) (adapted)

14.(j) convertible shall mean Ömeans Õ a security which, at the option of the holder, may be exchanged for another security, usually the equity of the issue;

ê 98/31/EC Art. 1.1(b) (adapted)

15.(k)  «warrant» shall mean Ömeans Õ a security which gives the holder the right to purchase an underlying at a stipulated price until or at the warrants’ expiry date Ö of the warrant and which Õ may be settled by the delivery of the underlying itself or by cash settlement;

16. (l)            «stock financing» shall mean Ömeans Õ positions where physical stock has been sold forward and the cost of funding has been locked in until the date of the forward sale;

ê 98/31/EC Art. 1.1(c) (adapted)

17.(m) «repurchase agreement» and «reverse repurchase agreement» shall mean Ö mean Õ any agreement in which an institution or its counter-party transfers securities or commodities or guaranteed rights relating to title to securities or commodities where that guarantee is issued by a recognised exchange which holds the rights to the securities or commodities and the agreement does not allow an institution to transfer or pledge a particular security or commodity to more than one counter-party at one time, subject to a commitment to repurchase them – (or substituted securities or commodities of the same description) - at a specified price on a future date specified, or to be specified, by the transferor, being a repurchase agreement for the institution selling the securities or commodities and a reverse repurchase agreement for the institution buying them;

ê 93/6/EEC Art 2(17) 2nd paragraph

              A reverse repurchase agreement shall be considered an interprofessional transaction when the counter-party is subject to prudential coordination at Community level or is a Zone A credit institution as defined in Directive 89/647/EEC or is a recognized third-country investment firm or when the agreement is concluded with a recognized clearing house or exchange;

ê 98/31/EC Art. 1.1(d) (adapted)

18.(n)            «securities or commodities lending» and «securities or commodities borrowing» shall mean Ö mean Õ any transaction in which an institution or its counter-party transfers securities or commodities against appropriate collateral subject to a commitment that the borrower will return equivalent securities or commodities at some future date or when requested to do so by the transferor, that transaction being securities or commodities lending for the institution transferring the securities or commodities and being securities or commodities borrowing for the institution to which they are transferred;

ê 98/31/EC Art. 1.1(d)

              Securities or commodities borrowing shall be considered an interprofessional transaction when the counter-party is subject to prudential coordination at Community level or is a Zone A credit institution as defined in Directive 89/647/EEC or is a recognised third-country investment firm or when the transaction is concluded with a recognised clearing house or exchange;

ê 93/6/EEC Art 2(19) (adapted)

19.(o)            clearing member shall mean Ömeans Õ a member of the exchange or the clearing house which has a direct contractual relationship with the central counterparty (market guarantor); non-clearing members must have their trades routed through a clearing member;

ê 93/6/EEC Art 2(20) (adapted)

ð new

20.(p)            local firm shall mean Ömeans Õ a firm dealing only for its on own account ð on markets ï in a financial-futures or options exchange ð or other derivatives and on cash markets for the sole purpose of hedging positions on derivatives markets or which deals ï for the accounts of or making a price to other members ð of those markets ï the same exchange and ð which are ï guaranteed by a clearing members of the same exchange ð markets, where ï Rresponsibility for ensuring the performance of contracts entered into by such a firms must be Ö is Õ assumed by a clearing members of the same exchange ð markets; ï , and such contracts must be taken into account in the calculation of the clearing member's overall capital requirements so long as the local firm's positions are entirely separate from those of the clearing member;

ê 93/6/EEC Art 2(21) (adapted)

21.(q)            delta shall mean Ömeans Õ the expected change in an option price as a proportion of a small change in the price of the instrument underlying the option;

ê 93/6/EEC Art 2(22) (adapted)

22.         for the purposes of paragraph 4 of Annex I, long position shall mean a position in which an institution has fixed the interest rate it will receive at some time in the future, and short position shall mean a position in which it has fixed the interest rate it will pay at some time in the future;

ê 93/6/EEC Art 2(23) (adapted)

23.(r) own funds shall mean Ömeans Õ own funds as defined in Directive 89/299/EEC Ö [2000/12/EC] Õ.This definition may, however, be amended in the circumstances described in Annex V;

ê 93/6/EC Art. 2 (24) and (25) (adapted)

24.       initial capital shall mean items 1 and 2 of Article 2(1) of Directive 89/299/EEC;

25        original own funds shall mean the sum of items 1, 2 and 3, less the sum of items 9, 10 and 11 of Article 2 (1) of Directive 89/299/EEC;

ê 93/6/EEC Art 2 (26)

26.(s) capital shall mean own funds;.

ê 93/6/EEC Art 2(27) (adapted)

27.     modified duration shall be calculated using the formula set out in paragraph 26 of Annex I.

ò new

For the purposes of applying supervision on a consolidated basis, the term investment firm shall include recognised third-country investment firms.

For the purposes of point (e) of the first subparagraph, financial instruments shall include both primary financial instruments or cash instruments, and derivative financial instruments the value of which is derived from the price of an underlying financial instrument or a rate or an index or the price of an underlying other item and include as a minimum the instruments specified in Section C of Annex I of Directive 2004/39/EC.

ê 93/6/EEC Art 2 (7) and (8) (adapted)

2.         Ö The terms Õ“parent undertaking”,“subsidiary undertaking”,Ö ”asset management company” Õ and “financial institution” shall be Ö cover undertakings Õ defined in accordance with Ö as such in Article 4Õ Article 1 of Directive 92/30/EEC Ö[2000/12/EC] Õ.

Ö The terms Õ “financial holding company”, Ö “parent financial holding company in a Member State”, “EU parent financial holding company” and “ancillary services undertaking” Õ shall mean a financial institution the subsidiary undertaking of which are either exclusively or mainly credit institutions, investment firms or other financial institutions, one of which at least is a credit institution or an investment firm Ö shall cover undertakings defined as such in Article 4 of Directive [2000/12/EC], save that every reference to credit institutions shall be read as a reference to institutions. Õ

ò new

3.         For the purposes of applying Directive [2000/12/EC] to groups covered by Article 2(1), which do not include a credit institution, the following definitions shall apply:

ê 2002/87/EC Art. 26 (adapted)

1.(a)  «financial holding company » means a financial institution, the subsidiary undertakings of which are either exclusively or mainly investment firms or other financial institutions, at least one of which is an investment firm, and which is not a mixed financial holding company within the meaning of Directive 2002/87/EC[18] of the European Parliament and of the Council.;

2. (b) «mixed-activity holding company » means a parent undertaking, other than a financial holding company or an investment firm or a mixed financial holding company within the meaning of Directive 2002/87/EC, the subsidiaries of which include at least one investment firm;

3. (c) “competent authorities” means the national authorities which are empowered by law or regulation to supervise investment firms.

ê 93/6/EEC (adapted)

Ö CHAPTER II Õ

INITIAL CAPITAL

ê 93/6/EEC Art 2(24) (adapted)

Article 4

1. Initial capital shall mean Ömeans points (a) and (b) Õ items 1 and 2 of Article Ö 57 Õ 2 (1) of Directive 89/299/EEC Ö[2000/12/EC]Õ.

ê 93/6/EEC Art. 3(1) and (2) (adapted)

Article 5

1.         Investment firms Ö that do not deal in any financial instruments for their own account or underwrite issues of financial instruments on a firm commitment basis, but Õ which hold clients' money and/or securities and which offer one or more of the following services, shall have initial capital of ECU Ö EUR Õ 125 000:

(a)     the reception and transmission of investors' orders for financial instruments;

(b)     the execution of investors' orders for financial instruments;

(c)     the management of individual portfolios of investments in financial instruments.

provided that they do not deal in any financial instruments for their own account or underwrite issues of financial instruments on a firm commitment basis.

The holding of non-trading-book positions in financial instruments in order to invest own funds shall not be considered as dealing for the purposes set out in the first paragraph or for the purposes of paragraph 2.

2.         The competent authorities may, however, allow an investment firm which executes investors' orders for financial instruments to hold such instruments for its own account if Ö the following conditions are met Õ :

(a)     such positions arise only as a result of the firm's failure to match investors' orders precisely;

(b)     the total market value of all such positions is subject to a ceiling of 15 % of the firm's initial capital;

(c)     the firm meets the requirements imposed Ö laid down Õ in Articles 18, 20 and 28; and

(d)     such positions are incidental and provisional in nature and strictly limited to the time required to carry out the transaction in question.

The holding of non-trading-book positions in financial instruments in order to invest own funds shall not be considered as dealing for the purposes set out in paragraph 1 or for the purposes of paragraph 3.

3.2       Member States may reduce the amount referred to in paragraph 1 to ECU Ö EUR Õ 50000 where a firm is not authoriszed to hold clients' money or securities, to deal for its own account, or to underwrite issues on a firm commitment basis.

ê 93/6/EEC Art 3 (3) (adapted)

3. All other investment firms shall have initial capital of ECU 730 000.

ê 2004/39/EC Art. 67(2) (adapted)

Article 6

4. The firms referred to in point (b) of Article 2(2)Ö Local firms Õ shall have initial capital of EUR 50 000 in so far as they benefit from the freedom of establishment or to provide services Ö specified in Õ under Articles 31 or 32 of Directive 2004/39/EC.

ê 2004/39/EC Article 67 (3) (adapted)

Article 7

Pending revision of Directive 93/6/EEC, theCoverage for the firms referred to in point (b)(iii) of Article 2 Ö 3 Õ (1) shall take one of the following forms:

(a)          initial capital of EUR 50 000;

(b)          professional indemnity insurance covering the whole territory of the Community or some other comparable guarantee against liability arising from professional negligence, representing at least EUR 1 000 000 applying to each claim and in aggregate EUR 1 500 000 per year for all claims;

(c)          a combination of initial capital and professional indemnity insurance in a form resulting in a level of coverage equivalent to that referred to in points (a) or (b).

The amounts referred to in the first subparagraph shall be periodically reviewed by the Commission in order to take account of changes in the European Index of Consumer Prices as published by Eurostat, in line with and at the same time as the adjustments made under Article 4(7) of Directive 2002/92/EC of the European Parliament and of the Council[19] (*).

Ö Article 8 Õ

If an investment firm referred to in point (b)(iii) of Article 2 Ö 3 Õ (1) is also registered under Directive 2002/92/EC it shall comply with Article 4(3) of that Directive and have coverage in one of the following forms:

(a)          initial capital of EUR 25 000;

(b)          professional indemnity insurance covering the whole territory of the Community or some other comparable guarantee against liability arising from professional negligence, representing at least EUR 500 000 applying to each claim and in aggregate EUR 750 000 per year for all claims;

(c)          a combination of initial capital and professional indemnity insurance in a form resulting in a level of coverage equivalent to that referred to in points (a) or (b).

ê 93/6/EEC Art 3(3) (adapted)

Article 9

All other investment firms shall have initial capital of ECU Ö EUR Õ 730 000.

ê 93/6/EEC Art 3(5) to (8) (adapted)

Article 10

1.         Ö By derogation to Articles 5(1), 5(3), 6 and 9, Õ Notwithstanding paragraphs 1 to 4, Member States may continue the authorisation of investment firms and firms covered by Ö Article 6 Õ paragraph 4 in existence before Ö 31 December 1995 Õ this Directive is applied the own funds of which are less than the initial capital levels specified for them in Ö Articles 5(1), 5(3), 6 and 9 Õ paragraphs 1 to 4.

The own funds of such firms shall not fall below the highest reference level calculated after the date of notification of this Directive Ö 1993/6/EEC Õ. That reference level shall be the average daily level of own funds calculated over a six-month period preceding the date of calculation. It shall be calculated every six months in respect of the corresponding preceding period.

2.         If control of a firm covered by paragraph 5Ö 1 Õ is taken by a natural or legal person other than the person who controlled it previously, the own funds of that firm must attain at least the level specified for it in Ö Articles 5(1), 5(3), 6 and 9 Õ paragraphs 1 to 4, except in the following situations: (i)-       in the case of the first transfer by inheritance after Ö 31 December 1995 Õ the application of this Directive, subject to the competent authorities' approval, for not more than 10 years after that transfer.;

(ii)          in the case of a change in the composition of a partnership, as long as at least one of the partners at the date of the application of this Directive remains in the partnership, for not more than 10 years after the date of the application of this Directive.

3.         In certain specific circumstances, and with the consent of the competent authorities, however, in the event of a merger of two or more investment firms and/or firms covered by paragraph 4Ö Article 6Õ, the own funds of the firm produced by the merger need not attain the level specified in paragraphs 1 to 4Ö Articles 5(1), 5(3), 6 and 9 Õ. Nevertheless, during any period when the levels specified in paragraphs 1 to 4 Ö Articles 5(1), 5(3), 6 and 9 Õ have not been attained, the own funds of the new firm may not fall below the merged firms' total own funds at the time of the merger.

4.         The own funds of investment firms and firms covered by paragraph 4Ö Article 6 Õ may not fall below the level specified in paragraphs 1 to 5 and 7 Ö Articles 5(1), 5(3), 6, 9, 10(1) and 10(3)Õ.

If they do, however, the competent authorities may, where the circumstances justify it, allow such firms a limited period in which to rectify their situations or cease their activities.

ò new

CHAPTER III

TRADING BOOK

Article 11

1.         The trading book of an institution shall consist of all positions in financial instruments and commodities held either with trading intent or in order to hedge other elements of the trading book, which must either be free of any restrictive covenants on their tradability or able to be hedged.

2.         Positions held with trading intent are those held intentionally for short-term resale and/or with the intention of benefiting from actual or expected short-term price differences between buying and selling prices, or from other price or interest rate variations. The term “positions” shall include proprietary positions, positions arising from client servicing and market making.

3.         Trading intent shall be evidenced based on the strategies, policies and procedures set up by the institution to manage the position or portfolio in accordance with Annex VII Part A.

4.         Institutions shall establish and maintain systems and controls to manage their trading book, in accordance with Annex VII, Part B.

5.         Internal hedges may be included in the trading book, in which case Annex VII Part C shall apply.

ò new

CHAPTER IV

OWN FUNDS

ê 93/6/EEC Art. 2 (25) (adapted)

Article 12

Original own funds means the sum of items 1, 2 and Ö points (a) to (c) Õ , less the sum of items 9, 10 and 11 Ö points (i) to (k) Õ of Article 2 (1) Ö 57 Õ of Directive 89/299/EEC Ö [2000/12/EC] Õ.

ò new

The Commission shall, by 1 January 2009 at the latest, submit an appropriate proposal to the European Parliament and to the Council for amendment of this Chapter.

ê 93/6/EEC Annex V first and second subparagraph (adapted)

ð new

Article 13

1.         ð Subject to paragraphs 2 to 5 of this Article, and Articles 14 to 17,ï Tthe own funds of investment firms and credit institutions shall be defined Ö determined Õ in accordance with Directive 89/299/EEC Ö [2000/12/EC] Õ .

In addition, the first subparagraph applies to investment firms which do not have one of the legal forms referred to in Article 1 (1) of the Fourth Council Directive 78/660/EEC.

ê 93/6/EEC Annex V (1) 2nd subparagraph (2) to (5) (adapted)

è1 98/31/EC Art. 1.7 and Annex 4(a) (b)

ð new

2.         è1 Notwithstanding Ö By derogation to Õ paragraph 1, the competent authorities may permit those institutions which are obliged to meet the capital own-funds requirements calculated in accordance with Ö Articles 21 and 28 to 32 and Õ laid down in Annexes I, II, III, IV, VI, VII and VIII Ö and III to VI Õ to use, for that purpose only, an alternative definition when meeting those requirements only Ö determination Õof own funds. ç No part of the own funds used for that purpose thus provided may be used simultaneously to meet other capital own-funds requirements.

This alternative definition Ö determination Õ shall be the sum of the items set out in points (a) to (c) below, minus the item set out in point (d) below, with include the following items (a), (b) and (c) less item (d), the deduction of that last item being left to the discretion of the competent authorities:

(a)     own funds as defined in Directive 89/299/EEC Ö [2000/12/EC] Õ excluding only items (12) Ö points (l) to (p) Õ and (13) of Article 2 (1) Ö 57 Õ of that Directive for those investment firms which are required to deduct item (d) of this paragraph from the total of items (a), (b) and (c) of this paragraph;

(b)     an institution's net trading-book profits net of any foreseeable charges or dividends, less net losses on its other business provided that none of those amounts has already been included in item (a) of this paragraph under the items set out in paragraphs (2) or (11) Ö points (b) or (k) Õ of Article 2 (1) of Directive 89/299/EEC Ö 57 of Directive [2000/12/EC] Õ;

(c)     subordinated loan capital and/or the items referred to in paragraphs 5, subject to the conditions set out in paragraphs 3 to 7 Ö and 4 and Article 14 Õ ;

(d)     illiquid assets as defined Ö specified Õ in paragraph 8 Ö Article 15 Õ .

3.         The subordinated loan capital referred to in Ö point (c) Õ of paragraph 2 shall have an initial maturity of at least two years. It shall be fully paid up and the loan agreement shall not include any clause providing that in specified circumstances other than the winding up of the institution the debt will become repayable before the agreed repayment date, unless the competent authorities approve the repayment. Neither the principal nor the interest on such subordinated loan capital may be repaid if such repayment would mean that the own funds of the institution in question would then amount to less than 100 % of the Ö that Õ institution's overall requirements.

In addition, an institution shall notify the competent authorities of all repayments on such subordinated loan capital as soon as its own funds fall below 120 % of its overall Ö capital Õ requirements.

4.         The subordinated loan capital referred to in Ö point (c) of Õ paragraph 2 may not exceed a maximum of 150 % of the original own funds left to meet the requirements Ö calculated in accordance with Articles 21 and 28 to 32 andÕ laid down in Annexes I, II, III, IV, VI, VII, and VIII Ö to VI Õ and may approach that maximum only in particular circumstances acceptable to the relevant authorities.

5.         The competent authorities may permit institutions to replace the subordinated loan capital referred to Ö in point (c) of paragraph 2 Õ in paragraphs 3 and 4 with items 3 and 5 to 8 Ö points (d) to (h) Õ of Article 2 (1) of Directive 89/299/EEC Ö 57 of Directive [2000/12/EC] Õ.

ê 98/31/EC Annex .4(c) (adapted)

Article 14

1.         The competent authorities may permit investment firms to exceed the ceiling for subordinated loan capital Ö set out Õ prescribed in paragraph 4 Ö Article 13(4) Õ if they judge it prudentially adequate and provided that the total of such subordinated loan capital and the items referred to in paragraph 5 Ö Article 13(5) Õ does not exceed 200 % of the original own funds left to meet the requirements calculated in accordance with imposed in Ö Articles 21, 28 to 32 and Õ Annexes I, II, III, IV, VI, VII and VIII Ö and III to VI Õ or 250 % of the same amount where investment firms deduct the item set out in point (d) of referred to in paragraph 2 Ö Article 13(2) Õ when calculating own funds.

2.         The competent authorities may permit the ceiling for subordinated loan capital set out prescribed in paragraph 4 Ö Article 13(4) Õ to be exceeded by a credit institution if they judge it prudentially adequate and provided that the total of such subordinated loan capital and items (4) to (8) Ö points (d) to (h) Õ of Article 35(2) Ö 57 Õ of Directive [2000/12/EC] referred to in paragraph 5 does not exceed 250 % of the original own funds left to meet the requirements calculated in accordance with imposed in Articles Ö 28 to 32 and Õ Annexes I, II, III, IV, V and VI Ö and III to VI Õ.

ê 93/6/EEC Annex V (8) (adapted)

Article 15

Illiquid assets Ö as referred to in point (d) of Article 12(2) shall include the following: Õ

(a)     tangible fixed assets, (except to the extent that land and buildings may be allowed to count against the loans which they are securing);

(b)     holdings in, including subordinated claims on, credit or financial institutions which may be included in the own funds of Ö those Õ such institutions, unless they have been deducted under items (12) Ö points (l) to (p) Õ of Article 2 (1) Ö 57 Õ of Directive 89/299/EEC Ö [2000/12/EC] Õ or under Article 15(d) of this Annex Ö Directive Õ ;

(c)     holdings and other investments, in undertakings other than credit institutions and other financial institutions, which are not readily marketable;

(d)     deficiencies in subsidiaries;

(e)     deposits made, other than those which are available for repayment within 90 days, and also excluding payments in connection with margined futures or options contracts;

(f)     loans and other amounts due, other than those due to be repaid within 90 days;

(g)     physical stocks, unless they are Ö already Õ subject to the capital requirements imposed in Article 4 (2) and provided that such requirements are not less stringent than those imposed in Article 4 (1)(iii) Ö at least as stringent as those set out in Articles 18 to 20 Õ .

ê 93/6/EEC Annex V(8) second indent, second subparagraph (adapted)

Ö For the purposes of point (b), w Õ Wwhere shares in a credit or financial institution are held temporarily for the purpose of a financial assistance operation designed to reorganise and save that institution, the competent authorities may waive this provision. They may also waive it in respect of those shares which are included in the investment firm's trading book,.

ê 93/6/EEC Annex V (9) (adapted)

Article 16

9. Those i Investment firms included in a group subject to Ö which has been granted Õ the waiver provided for described in Article 7(4) Ö 22 Õ shall calculate their own funds in accordance with paragraphs 1 to 8 Ö Articles 13 to 15 Õ subject to the following modifications:

(a)(i)  the illiquid assets referred to in paragraph 2Ö point (d) of Article 13(2) Õ shall be deducted;

(b)(ii) the exclusion referred to in paragraph 2 Ö point (a) of Article 12(2) Õ shall not cover those components of items 12 Ö points (l) to (p) Õ of Article 2 (1) Ö 57 Õ of Directive 89/299/EEC Ö [2000/12/EC] Õ which an investment firm holds in respect of undertakings included in the scope of consolidation as defined in Article Ö 2 (1) Õ of this Directive;

(c)(iii) the limits referred to in points (a) and (b) of Article 6 Ö 66 Õ (1)(a) and (b) of Directive 89/299/EEC Ö [2000/12/EC] Õ shall be calculated with reference to the original own funds less those Ö the Õ components of items (12) Ö points (l) to (p) Õ of Article 2 (1) Ö 57 Õ of Directive 89/299/EEC Ö[2000/12/EC] Õ described in (ii) Ö referred to in point (b) Õ which are elements of the original own funds of the undertakings in question;

(d)(iv) those Ö the Õ components of items (12) Ö points (l) to (p) Õ of Article 2 (1) Ö 57 Õ of Directive 89/299/EEC Ö[2000/12/EC] Õ referred to in point (c) shall be deducted from the original own funds rather than from the total of all items as laid down prescribed in point (c) of Article 6 Ö 66 Õ(1) (c) of that same Directive for the purposes, in particular, of paragraphs 4 to 7 Ö Articles 13(4), 13(5) and 14 Õ of this Annex Ö Directive Õ .

ò new

Article 17

1.         Where an institution calculates risk-weighted exposure amounts for the purposes of Annex II in accordance with the provisions of Articles 84 to 89 of Directive [2000/12/EC], then for the purposes of the calculation provided for in Directive [2000/12/EC] Annex VII, Part 1, Sub-part 4, the following shall apply:

(a)     value adjustments made to take account of the credit quality of the counterparty may be included in the sum of value adjustments and provisions made for the exposures indicated in Annex II;

(b)     subject to the approval of the competent authorities, if the credit risk of the counterparty is adequately taken into account in the valuation of a position included in the trading book the expected loss amount for the counterparty risk exposure shall be zero.

For the purposes of point (a), for such institutions, such value adjustments shall not be included in own funds other than in accordance with this sub-paragraph.

2.         For the purposes of this Article, Article 153 and 154 of Directive [2000/12/EC] shall apply.

ê 93/6/EEC (adapted)

Ö CHAPTER V Õ

Ö Section 1 Õ

PROVISIONS AGAINST RISKS

ê 93/6/EEC Art 4(1) 1st subparagraph (adapted)

ð new

Article 18

1.         The competent authorities shall require iInstitutions ð shall have ï to provide own funds which are always more than or equal to the sum of Ö the following Õ :

ê 98/31/EC Art. 1.2 (adapted)

i) (a)  the capital requirements, calculated in accordance with Ö the methods and options laid down in Articles 28 to 32 and Õ Annexes I, II and VI and, as appropriate, Annex VIII, for their trading-book business;

ii) (b) the capital requirements, calculated in accordance with Ö the methods and options laid down in Õ Annexes III and VII Ö IV Õ and, as appropriate, Annex VIII, for all of their business activities.

ê 93/6/EEC Art. 4.1 (iii) and (iv) (adapted)

(iii)         the capital requirements imposed in Directive 89/647/EEC for all of their business activities, excluding both their trading-book business and their illiquid assets it they are deducted from own funds under paragraph 2 (d) of Annex V;

(iv)         the capital requirements imposed in paragraph 2.

ê 93/6/EEC Art. 4.1 (iii) to (iv), second subparagraph

Irrespective of the amount of the capital requirement referred to in (i) to (iv) the own-funds requirement for investment firms shall never be less than the amount prescribed in Annex IV.

ê 93/6/EEC Art. 4 (2) to (5)

2. The competent authorities shall require institutions to cover the risks arising in connection with business that is outside the scope of both this Directive and Directive 89/647/EEC and considered to be similar to the risks covered by those Directives by adequate own funds.

3. If the own funds held by an institution fall below the amount of the own funds requirement imposed in paragraph 1, the competent authorities shall ensure that the institution in question takes appropriate measures to rectify its situation as quickly as possible.

4. The competent authorities shall require institutions to set up systems to monitor and control the interest-rate risk on all of their business, and those systems shall be subject to overview by the competent authorities.

5. Institutions shall be required to satisfy their competent authorities that they employ systems which can calculate their financial positions with reasonable accuracy at any time.

ê 93/6/EEC Art 4(6) (adapted)

2.         Notwithstanding Ö By derogation to Õ paragraph 1, the competent authorities may allow institutions to calculate the capital requirements for their trading book business in accordance with Directive 89/647/EEC rather than in accordance with Annexes I and II to this Directive provided that Ö Article 75(a) of Directive [2000/12/EC] and paragraphs 6, 7, 8 and 10 of Annex II of this Directive, Õ rather than in accordance with Annexes I and II of this Directive, where the size of the trading book business meets the Ö following Õ requirements set out below:

i) (a)  the trading-book business of such institutions does not normally exceed 5% of their total business;

ii) (b) their total trading-book positions do not normally exceed ECU Ö EUR Õ 15 million; and

iii)(c) the trading-book business of such institutions never exceeds 6% of their total business and their total trading-book positions never exceed ECU Ö EUR Õ 20 million.

ê 93/6/EEC Art 4(7) (adapted)

3.         In order to calculate the proportion that trading-book business bears to total business as in Ö points (a) and (c) of Õ paragraph 6 Ö 2 Õ i) and iii), the competent authorities may refer either to the size of the combined on- and off-balance-sheet business, to the profit and loss account or to the own funds of the institutions in question, or to a combination of those measurements. When the size of on- and off-balance-sheet business is assessed, debt instruments shall be valued at their market prices or their principal values, equities at their market prices and derivatives according to the nominal or market values of the instruments underlying them. Long positions and short positions shall be summed regardless of their signs.

ê 93/6/EEC Art 4(8) (adapted)

4.         If an institution should happen for more than a short period to exceed either or both of the limits imposed in paragraph 6 Ö 2 (a) and (b)Õ (i) and (ii) or to exceed either or both of the limits imposed in paragraph 6 Ö 2 (c) Õ (iii), it shall be required to meet the requirements imposed in Article Ö paragraph 1 (a) Õ 4 (i) rather than those of Ö Article 75(a) of ÕDirective 89/647/EEC Ö [2000/12/EC] Õ in respect of its trading-book business and to notify the competent authority.

ò new

Article 19

1.         For the purposes of paragraph 14 of Annex I, subject to national discretion, a 0% weighting can be assigned to debt securities issued by the same entities and denominated and funded in domestic currency.

ê 93/6/EEC Art 11(2) (adapted)

2.         Notwithstanding Ö By derogation to Õ paragraphs Ö 13 and Õ 14 of Annex I, Member States may set a specific risk requirement for any bonds assigned a weighting of 10% under Articles 11(2) of Directive 89/647/EEC Ö falling within Annex VI, Part 1, paragraphs 65 to 67 of Directive [2000/12/EC], Õ equal to half the specific risk requirement for a qualifying item with the same residual maturity as such a bond Ö , reduced in accordance with the percentages given in Annex VI, Part 1, paragraph 68 of Directive [2000/12/EC] Õ .

ò new

3.         If, as set out in paragraph 52 of Annex I, a competent authority approves a third country CIU as eligible, a competent authority in another Member State may make use of this recognition without conducting its own assessment.

Article 20

1.         Subject to paragraphs 2, 3 and 4 of this Article, and Article 34 of this Directive, the requirements in Article 75 of Directive [2000/12/EC] shall apply to investment firms.

2.         By derogation to paragraph 1, competent authorities may allow investment firms that are not authorised to provide the investment services listed in point 3 and point 6 of Annex I, Section A of Directive 2004/39/EC to provide own funds which are always more than or equal to the higher of the following:

(a)     the sum of the capital requirements contained in points (a) to (c) of Article 75 of Directive [2000/12/EC];

(b)     the amount laid down in Article 21 of this Directive.

3.         By derogation to paragraph 1, competent authorities may allow investment firms which hold initial capital as set out in Article 9, but which fall within the following categories, to provide own funds which are always more than or equal to the sum of the capital requirements calculated in accordance with the requirements contained in points (a) to (c) of Article 75 of Directive [2000/12/EC] and the amount prescribed in Article 21 of this Directive:

(a)     investment firms that deal on own account for the purpose of fulfilling or executing a client order or for the purpose of gaining entrance to a clearing and settlement system or a recognised exchange when acting in an agency capacity or executing a client order;

(b)     investment firms:

(i)      that do not hold client money or securities;

(ii)     that undertake only dealing on own account;

(iii)    that have no external customers;

(iv)    the execution and settlement of whose transactions takes place under the responsibility of a clearing institution and are guaranteed by that clearing institution.

4.         Investment firms referred to in paragraphs 2 and 3 shall remain subject to all other provisions regarding operational risk set out in Annex V of Directive [2000/12/EC].

ê 93/6/EEC Annex IV

Article 21

Investment firms shall be required to hold own funds equivalent to one quarter of their preceding year's fixed overheads.

The competent authorities may adjust that requirement in the event of a material change in a firm's business since the preceding year.

Where a firm has not completed a year's business, including the day it starts up, the requirement shall be a quarter of the fixed overheads figure projected in its business plan unless an adjustment to that plan is required by the authorities.

ê 93/6/EEC (adapted)

Ö section 2 Application of requirements on a consolidated basis Õ

ò new

Article 22

1.         The competent authorities required or mandated to exercise supervision of groups covered by Article 2 on a consolidated basis may waive, on a case by case basis, the application of capital requirements on a consolidated basis provided that:

(a)     each investment firm in such a group uses the definition of own funds given in Article 16;

(b)     all investment firms in such a group fall within the categories in paragraphs 2 and 3 of Article 20;

(c)     each investment firm in such a group meets the requirements imposed in Articles 18 and 20 on an individual basis and at the same time deducts from its own funds any contingent liability in favour of investment firms, financial institutions, asset management companies and ancillary services undertakings which would otherwise be consolidated;

(d)     any financial holding company which is the parent undertaking of any investment firm in such a group holds at least as much capital, defined here as the sum of points (a) to (h) of Article 57 of Directive [2000/12/EC], as the sum of the full book value of any holdings, subordinated claims, and instruments referred to in Article 57 of Directive [2000/12/EC] in investment firms, financial institutions, asset management companies and ancillary services undertakings which would otherwise be consolidated, and the total amount of any contingent liability in favour of investment firms, financial institutions, asset management companies and ancillary services undertakings which would otherwise be consolidated;

Where the criteria in the first sub-paragraph are met, each investment firm shall have in place systems to monitor and control the sources of capital and funding of all financial holding companies, investment firms, financial institutions, asset management companies and ancillary services undertakings within the group.

2.         By derogation to paragraph 1, competent authorities may permit financial holding companies which are the parent of an investment firm in such a group to use a value lower than the value calculated under point (d) of paragraph 1, but no lower than the sum of the requirements imposed in Article 18 and 20 on an individual basis to investment firms, financial institutions, asset management companies and ancillary services undertakings which would otherwise be consolidated, and the total amount of any contingent liability in favour of investment firms, financial institutions, asset management companies and ancillary services undertakings which would otherwise be consolidated. For the purposes of this paragraph the capital requirement for financial institutions, asset management companies and ancillary services undertakings is a notional capital requirement.

ê 93/6/EEC Art. 7(5) & (6) (adapted)

Article 23

The competent authorities shall require investment firms in a group which has been granted the waiver provided for in Article 20 Ö 22 Õ to notify them of the risks which could undermine their financial positions, including those associated with the composition and sources of their capital and funding. If the competent authorities then consider that the financial positions of those investment firms is not adequately protected, they shall require the investment firms to take measures including, if necessary, limitations on the transfer of capital from such firms to group entities.

Where the competent authorities waive the obligation of supervision on a consolidated basis provided for in Ö Article 22 Õ paragraph 4 they shall take other appropriate measures to monitor the risks, namely large exposures, of the whole group, including any undertakings not located in a Member State.

ò new

Where the competent authorities waive the obligation of supervision on a consolidated basis provided for in Article 22, the requirements of Title V, Chapter 5 of Directive [2000/12/EC] shall continue to apply on an individual basis and the requirements of Article 124 of Directive [2000/12/EC] shall continue to apply to the supervision of investment firms on an individual basis.

ê 93/6/EC Art. 7 (7) to (9)

7. Member States may waive the application of the requirements imposed in Articles 4 and 5, on an individual or subconsolidated basis, to an institution which, as a parent undertaking, is subject to supervision on a consolidated basis, and to any subsidiary of such an institution which is subject to their authorization and supervision and is included in the supervision on a consolidated basis of the institution which is its parent company.

The same right of waiver shall be granted where the parent undertaking is a financial holding company which has its head office in the same Member State as the institution, provided that it is subject to the same supervision as that exercised over credit institutions or investment firms, and in particular the requirements imposed in Articles 4 and 5.

In both cases, if the right of waiver is exercised measures must be taken to ensure the satisfactory allocation of own funds within the group.

8. Where an institution the parent undertaking of which is an institution has been authorized and is situated in another Member State, the competent authorities which granted that authorization shall apply the rules laid down in Articles 4 and 5 to that institution on a individual or, where appropriate, a subconsolidated basis.

9. Notwithstanding paragraph 8, the competent authorities responsible for authorizing the subsidiary of a parent undertaking which is an institution may, by a bilateral agreement, delegate their responsibility for supervising the subsidiary's capital adequacy and large exposures to the competent authorities which authorized and supervise the parent undertaking. The Commission must be kept informed of the existence and content of such agreements. It shall forward such information to the competent authorities of the other Member States and to the Banking Advisory Committee and to the Council, except in the case of groups covered by paragraph 3.

ò new

Article 24

By derogation to Article 2(2), competent authorities may exempt investment firms from the consolidated capital requirement established there, provided that all the investment firms in the group fall within the investment firms referred to in Article 20(2) and the group does not include credit institutions.

Where the requirements of the first sub-paragraph are met, the parent investment firm shall be required to provide own funds which are always more than or equal to the higher of the following two consolidated requirements, calculated as set out in Section 3 of this Chapter:

(a) the sum of the capital requirements contained in points (a) to (c) of Article 75 of Directive [2000/12/EC];

(b) the amount prescribed in Article 21.

Article 25

By derogation to Article 2(2), competent authorities may exempt investment firms from the consolidated capital requirement established there, provided that all the investment firms in the group fall within the investment firms referred to in Articles 20(2) and (3), and the group does not include credit institutions.

Where the requirements of the first sub-paragraph are met, the parent investment firm shall be required to provide own funds which are always more than or equal to the sum of the consolidated capital requirements, calculated as set out in Section 3 of this Chapter, of the requirements contained in points (a) to (c) of Article 75 of Directive [2000/12/EC] and the amount prescribed in Article 21 of this Directive.

ê 93/6/EEC (adapted)

Ö section 3 Õ

calculating Ö calculation of Õ consolidated requirements

ê 98/31/EC Art. 1.4 (adapted)

Article 26

1.         Where the right of waiver provided for in Article 20 Ö 22 Õ is not exercised, the competent authorities may, for the purpose of calculating the capital requirements set out in Annexes I and VIII and the exposures to clients set out in Ö Articles 28 to 32 and Õ Annex VI on a consolidated basis, permit positions in the trading book of one institution to offset positions in the trading book of another institution according to the rules set out in Ö Articles 28 to 32 Õ Annexes I, VI and VIII.

In addition, they may allow foreign-exchange positions in one institution to offset foreign-exchange positions in another institution in accordance with the rules set out in Annex III and/or Annex VIII. They may also allow commodities positions in one institution to offset commodities positions in another institution in accordance with the rules set out in Annex VII Ö IV Õ and/or Annex VIII.

ê 93/6/EEC Art 7(11) (adapted)

2.         The competent authorities may also permit offsetting of the trading book and of the foreign-exchange and commodities positions, respectively, of undertakings located in third countries, subject to the simultaneous fulfilment of the following conditions:

i) (a)  those undertakings have been authorized in a third country and either satisfy the definition of credit institution given in the first indent of Article 1 Ö 4(1) Õ of Directive 77/780/EEC Ö [2000/12/EC] Õ or are recognized third-country investment firms;

ii) (b) such undertakings comply, on a solo basis, with capital adequacy rules equivalent to those laid down in this Directive;

iii)(c) no regulations exist in the countries in question which might significantly affect the transfer of funds within the group.

ê 93/6/EEC Art 7(12) (adapted)

3.         The competent authorities may also allow the offsetting provided for in paragraph 10 Ö 1 Õ between institutions within a group that have been authorized in the Member State in question, provided that:

i) (a)  there is a satisfactory allocation of capital within the group;

ii) (b) the regulatory, legal or contractual framework in which the institutions operate is such as to guarantee mutual financial support within the group.

ê 93/6/EEC Art 7(13) (adapted)

4.         Furthermore, the competent authorities may allow the offsetting provided for in paragraph 10 Ö 1 Õ between institutions within a group that fulfil the conditions imposed in paragraph 12 Ö 3 Õ and any institution included in the same group which has been authorized in another Member State provided that that institution is obliged to fulfil the capital requirements imposed in Articles 4 and 5 Ö 18, 20 and 28 Õ on a solo Ö an individual Õ basis.

ê 93/6/EEC Art 7(14) & (15) (adapted)

Article 27

1.         In the calculation of own funds on a consolidated basis Article 5 Ö 65 Õ of Directive 89/299/EEC Ö [2000/12/EC] Õ shall apply.

2.         The competent authorities responsible for exercising supervision on a consolidated basis may recognise the validity of the specific own-funds definitions applicable to the institutions concerned under Chapter IV in the calculation of their consolidated own funds.

ê 93/6/EEC (adapted)

Ö section 4 Õ

Ö MONITORING AND CONTROL OF LARGE EXPOSURES Õ

ê 93/6/EEC Art 5(1) (adapted)

Article 28

1.         Institutions shall monitor and control their large exposures in accordance with Directive 92/121/EEC Ö Articles 106 to 118 of Directive [2000/12/EC]. Õ

ê 98/31/EC Art. 1.3 (adapted)

2.         Ö By derogation to paragraph 1, Õ Notwithstanding institutions which calculate the capital requirements for their trading-book business in accordance with Annexes I and II, and, as appropriate, Annex VIII, shall monitor and control their large exposures in accordance with Directive 92/121/EEC Ö Articles 106 to 118 of Directive [2000/12/EC] Õ subject to the amendments laid down in Articles 27 to 30 Ö 29 to 32 Õ of this Directive.

ò new

3.         By 31 December 2007, the Commission shall submit to the European Parliament and to the Council a report on the functioning of this Section, together with any appropriate proposals.

ê 93/6/EEC Annex VI (2) (adapted)

ð new

Article 29

1.         The exposures to individual clients which arise on the trading book shall be calculated by summing the following items (i), (ii) and (iii):

i) (a)  the excess — where positive — of an institution's long positions over its short positions in all the financial instruments issued by the client in question, Ö with Õ (the net position in each of the different instruments being calculated according to the methods laid down in Annex I);

ii) (b) the net exposure, in the case of the underwriting of a debt or an equity instrument;, the institution's exposure shall be its net exposure; (which is calculated by deducting those underwriting positions which are subscribed or sub-underwritten by third parties on the basis of a formal agreement) reduced by the factors set out in paragraph 39 of Annex I.

iii)(c) the exposures due to the transactions, agreements and contracts referred to in Annex II with the client in question, such exposures being calculated in the manner laid down in that Annex, ð for the calculation of exposure values ï without application of the weightings for counterparty risk.

Ö For the purposes of point (b), the net exposure is calculated by deducting those underwriting positions which are subscribed or sub-underwritten by third parties on the basis of a formal agreement reduced by the factors set out in paragraph 41 of Annex I. Õ

Ö For the purposes of point (b), Õ Ppending further coordination, the competent authorities shall require institutions to set up systems to monitor and control their underwriting exposures between the time of the initial commitment and working day one in the light of the nature of the risks incurred in the markets in question.

ðFor the purposes of point (c), Articles 84 to 89 of Directive [2000/12/EC] shall be excluded from the reference in paragraph 5 of Annex II of this Directive.ï

ê 93/6/EEC Annex VI (3) (adapted)

2.         Thereafter, T Ö the Õ exposures to groups of connected clients on the trading book shall be calculated by summing the exposures to individual clients in a group, as calculated in paragraph 12.

ê 93/6/EEC Annex VI (4) (adapted)

Article 30

1.         The overall exposures to individual clients or groups of connected clients shall be calculated by summing the exposures which arise on the trading book and the exposures which arise on the non-trading book, taking into account Article 4 Ö 112 to 117 Õ (6) to (12) of Directive 92/121/EEC Ö [2000/12/EC] Õ.

In order to calculate the exposure on the non-trading book, institutions shall take the exposure arising from assets which are deducted from their own funds by virtue of Ö point (d) of Article 13(2) Õ paragraph 2(d) of Annex V to be zero.

ê 93/6/EEC Annex VI (5) (adapted)

ð new

2.         Institutions' overall exposures to individual clients and groups of connected clients calculated in accordance with paragraph 4 shall be reported in accordance with Article 3 Ö 110 Õ of Directive 92/121/EEC Ö [2000/12/EC] Õ.

ð Other than in relation to repurchase transactions, securities or commodities lending or borrowing transactions, the calculation of large exposures to clients and groups of connected clients for reporting purposes shall not include the recognition of credit risk mitigation. ï

ê 93/6/EEC Annex VI (6) (adapted)

3.         That Ö The Õ sum of the exposures to an individual client or group of connected clients Ö in paragraph 1 Õ shall be limited in accordance with Article 4 Ö Articles 111 to 117 Õ of Directive 92/121/EEC Ö [2000/12/EC] Õ subject to the transitional provisions of Article 6 of the same Directive.

ê 93/6/EEC Annex VI (7) (adapted)

4.         Ö By derogation to Õ Notwithstanding paragraph Ö 3 Õ 6, the competent authorities may allow assets constituting claims and other exposures investment firms on recognized recognised third-country investment firms and recognized recognised clearing houses and exchanges in financial instruments to be subject to the same treatment accorded to those on institutions Ö laid out Õ in Article Ö Articles 113(2)(i), 115(2) and 116Õ 4 (7) (i), (9) and (10) of Directive 92/121/EEC Ö [2000/12/EC]. Õ

ê 93/6/EEC Annex VI (8) (adapted)

Article 31

The competent authorities may authorize the limits laid down in Article 4 Ö Articles 111 to 117 Õ of Directive 92/121/EEC Ö [2000/12/EC] Õ to be exceeded subject to Ö if Õ the following conditions being met simultaneously Ö are met Õ:

1. (a)      the exposure on the non-trading book to the client or group of clients in question does not exceed the limits laid down in Directive 92/121/EEC Ö Articles 111 to 117 of [Directive 2000/12/EC] Õ, calculated with reference to own funds as defined Ö specified Õ in Directive 89/299/EEC Ö [2000/12/EC] Õ, so that the excess arises entirely on the trading book;

2.(b)       the Ö institution Õ firm meets an additional capital requirement on the excess in respect of the limits laid down in Article 4 Ö 111 Õ (1) and (2) of Directive 92/121/EEC Ö [2000/12/EC], calculated in accordance with Annex VI of this DirectiveÕ;

3.(c)       where 10 days or less has elapsed since the excess occurred, the trading-book exposure to the client or group of connected clients in question must not exceed 500 % of the institution's own funds;

4.(d)       any excesses which have persisted for more than 10 days must not, in aggregate, exceed 600 % of the institution's own funds;

5 .(e)      institutions must report to the competent authorities every three months all cases where the limits laid down in Article 4 Ö 111 Õ (1) and (2) of Directive 92/121/EEC Ö [2000/12/EC] Õ have been exceeded during the preceding three months.

In relation to point (e), in each case in which the limits have been exceeded the amount of the excess and the name of the client concerned must be reported.

ê 93/6/EEC Annex VI (9) & (12) (adapted)

Article 32

1.         The competent authorities shall establish procedures of which they shall notify the Council and the Commissionto prevent institutions from deliberately avoiding the additional capital requirements that they would otherwise incur, on exposures exceeding the limits laid down in Article 4 Ö 111 Õ (1) and (2) of Directive 92/121/EEC Ö [2000/12/EC] Õ once those exposures have been maintained for more than 10 days, by means of temporarily transferring the exposures in question to another company, whether within the same group or not, and/or by undertaking artificial transactions to close out the exposure during the 10 day period and create a new exposure. Institutions shall maintain systems which ensure that any transfer which has this effect is immediately reported to the competent authorities.

The competent authorities shall notify Ö the Council and Õ the Commission of those procedures.

Institutions shall maintain systems which ensure that any transfer which has the effect referred to in the first subparagraph is immediately reported to the competent authorities.

2.         The competent authorities may permit those institutions which are allowed to use the alternative definition Ö determination Õ of own funds under paragraph 2 of Annex V Ö Article 13(2) Õ to use that definition Ö determination Õ for the purposes of paragraphs 5, 6 and 8 of this Annex Ö Articles 30(2), 30(3) and 31 Õ provided that the institutions concerned are required, in addition, to meet all of the obligations set out in Articles 3 and 4 Ö 110 to 117 Õ of Directive 92/121/EEC Ö [2000/12/EC] Õ, in respect of the exposures which arise outside their trading books by using own funds as defined in Directive 89/299/EEC Ö [2000/12/EC] Õ.

ê 93/6/EEC (adapted)

Ö section 5 Õ

VALUATION OF POSITIONS FOR REPORTING PURPOSES

Article 33

ò new

1.         All trading book positions shall be subject to prudent valuation rules as specified in Annex VII, Part B. These rules shall require institutions to ensure that the value applied to each of its trading book positions appropriately reflects the current market value. This value shall contain an appropriate degree of certainty having regard to the dynamic nature of trading book positions, the demands of prudential soundness and the mode of operation and purpose of capital requirements in respect of trading book positions.

2.         Positions shall be re-valued at least daily.

ê 93/6/EEC Art. 6 (adapted)

1. Institutions shall mark to market their trading books on a daily basis unless they are subject to Article 4 (6).

23.       In the absence of readily available market prices, for example in the case of dealing in new issues on the primary markets, the competent authorities may waive the requirement imposed in paragraphs 1 Ö and 2 Õ and Ö shall Õ require institutions to use alternative methods of valuation provided that those methods are sufficiently prudent and have been approved by competent authorities.

ê 93/6/EEC

SUPERVISION ON A CONSOLIDATED BASIS

ò new

SCOPE OF APPLICATION

ê 96/3/EEC

Article 7

General principles

ê 98/31EC Art. 7(10) (adapted)

10. Where the rights of waiver provided for in paragraphs 7 and 9 are not exercised, the competent authorities may, for the purpose of calculating the capital requirements set out in Annexes I and VIII and the exposures to clients set out in Annex VI on a consolidated basis, permit positions in the trading book of one institution to offset positions in the trading book of another institution according to the rules set out in Annexes I, VI and VIII.

In addition, they may allow foreign-exchange positions in one institution to offset foreign-exchange positions in another institution in accordance with the rules set out in Annex III and/or Annex VIII. They may also allow commodities positions in one institution to offset commodities positions in another institution in accordance with the rules set out in Annex VII and/or Annex VIII.

ò new

section 6

Risk management and capital assessment

Article 34

Competent authorities shall require that every investment firm, as well as meeting the requirements in Article 13 of Directive 2004/39/EC, shall meet the requirements in Articles 22 and 123 of Directive [2000/12/EC].

ê 93/6/EEC (adapted)

Ö section 7 Õ

REPORTING REQUIREMENTS

ê 93/6/EEC Art. 8 (adapted)

Article 35

1.         Member States shall require that investment firms and credit institutions provide the competent authorities of their home Member States with all the information necessary for the assessment of their compliance with the rules adopted in accordance with this Directive. Member States shall also ensure that institutions'internal control mechanisms and administrative and accounting procedures Ö of the institutions Õ permit the verification of their compliance with such rules at all times.

2.         Investment firms shall be obliged toreport to the competent authorities in the manner specified by the latter at least once every month in the case of firms covered by Article 3(3) Ö 9 Õ , at least once every three months in the case of firms covered by Article 3 Ö 5 Õ (1) and at least once every six months in the case of firms covered by Article 3 Ö 5 Õ (2).

3.         Notwithstanding paragraph 2, investment firms covered by Articles 3 Ö 5 Õ (1) and (3) Ö 9 Õ shall be required to provide the information on a consolidated or sub-consolidated basis only once every six months.

4.         Credit institutions shall be obliged to report in the manner specified by the competent authorities as often as they are obliged to report under Directive 89/647/EEC Ö [2000/12/EC] Õ.

ê 98/31/EC Art. 1.5

5.         The competent authorities shall oblige institutions to report to them immediately any case in which their counter-parties in repurchase and reverse repurchase agreements or securities and commodities-lending and securities and commodities-borrowing transactions default on their obligations. Commission shall report to the Council on such cases and their implications for the treatment of such agreements and transactions in this Directive not more than three years after the date referred to in Article 12. Such report shall also describe the way that institutions meet those of conditions (i) to (v) in Article 2(6)(b) that apply to them, in particular condition (v). Furthermore it shall give details of any changes in the relative volume of institutions' traditional lending and their lending through reverse repurchase agreements and securities-borrowing or commodities-borrowing transactions. If the Commission concludes on the basis of this report and other information that further safeguards are needed to prevent abuse, it shall make appropriate proposals.

ê 93/6/EEC (adapted)

Ö Chapter VI Õ

Ö SECTION 1 Õ

COMPETENT AUTHORITIES

ê 93/6/EEC Art. 9 (adapted)

Article 36

1.         Member States shall designate the authorities which are Ö competent Õ to carry out the duties provided for in this Directive. They shall inform the Commission thereof, indicating any division of duties.

2.         The Ö competent Õ authorities referred to in paragraph 1 must Ö shall Õ be public authorities or bodies officially recognized by national law or by public authorities as part of the supervisory system in operation in the Member State concerned.

3.         The Ö competent Õ authorities concerned must Ö shall Õ be granted all the powers necessary for the performance of their tasks, and in particular that of overseeing the constitution of trading books.

1. 4. The competent authorities of the various Member States shall collaborate closely in the performance of the duties provided for in this Directive, particularly when investment services are provided on a services basis or through the establishment of branches in one or more Member States. They shall on request supply one another with all information likely to facilitate the supervision of the capital adequacy of investment firms and credit institutions, in particular the verification of their compliance with the rules laid down in this Directive. Any exchange of information between competent authorities which is provided for in this Directive in respect of investment firms shall be subject to the obligation of professional secrecy imposed in Article 25 of Directive 93/22/EEC and, as regards credit institutions, to the obligation imposed in Article 12 of Directive 77/780/EEC, as amended by Directive 89/646/EEC.

ò new

SECTION 2

Supervision

Article 37

1.         Articles 124 to 132, 136 and 144 of Directive [2000/12/EC] shall apply mutatis mutandis to the supervision of investment firms in accordance with the following:.

(a)     references to Article 6 of Directive [2000/12/EC] shall be construed as references to Article 5 of Directive 2004/39/EC;

(b)     references to Article 22 and 123 of Directive [2000/12/EC] shall be construed as references to Article 34 of this Directive;

(c)     references to Articles 44 to 52 of Directive [2000/12/EC] shall be read as references to Articles 54 and 58 of Directive 2004/39/EC.

Where an EU parent financial holding company has as subsidiary both a credit institution and an investment firm, one competent authority responsible for supervision of the credit institution shall be identified to be responsible for consolidated supervision of the entities controlled by that parent.

2.         The requirements set out in Article 129(2) of Directive [2000/12/EC] shall also apply to the recognition of internal models of institutions under Annex V of this Directive.

The period for the recognition referred to in the first sub-paragraph shall be six months.

ê 93/6/EEC Art. 9 (4) (adapted)

Article 38

1.         The competent authorities of the various Member States shall Ö cooperate Õcollaborate closely in the performance of the duties provided for in this Directive, particularly when Ö where Õinvestment services are provided on a services basis or through the establishment of branches in one or more Member States.

They shall on request supply one another with all information likely to facilitate the supervision of the capital adequacy of investment firms and credit institutions, in particular the verification of their compliance with the rules laid down in this Directive.

2.         Any exchange of information between competent authorities which is provided for in this Directive in respect of investment firms shall be subject to the Ö following Õ obligation Ö s Õ of professional secrecy Ö : Õ

(a)     Ö for investment firms, those Õ imposed in Article 25 Ö 54 and 58 Õ of Directive 93/22/EEC Ö 2004/39/EC Õ;

(b)     and, as regardsÖ for Õ credit institutions, to the obligation Ö those Õ imposed in Articles Ö 44 to 52 Õ 12 of Directive 77/780/EEC, as amended by Directive 89/646/EEC Öof Directive [2000/12/EC] Õ .

ò new

Chapter VII

Disclosure

Article 39

The requirements set out in Title V, Chapter 5 of Directive [2000/12/EC] shall apply to investment firms.

ê 93/6/EEC (adapted)

Ö Chapter VIII Õ

Ö SECTION 1 Õ

ò new

Article 40

For the purposes of the calculation of minimum capital requirements for counterparty risk under this directive, and for credit risk under Directive [2000/12/EC], and without prejudice to the provisions of the second to sixth paragraphs of Annex III of Directive [2000/12/EC], exposures to recognized third-country investment firms and exposures incurred to recognized clearing houses and exchanges shall be treated as exposures to institutions.

Article 41

By 31 December 2008, the Commission shall examine and, if necessary, revise the treatment of counterparty risk set out in Annex II.

ê 93/6/EEC (adapted)

Ö SECTION 2 Õ

ÖPowers of executionÕ

ê 93/6/EEC Art. 10 (adapted)

ð new

Article 42

1.         Pending adoption of a further Directive laying down provisions for adapting this Directive to technical progress in the areas specified below, the Council shall, acting by qualified majority on a proposal form the Commission, in accordance with Decision 87/373/EEC, adopt those adaptations which may be necessary as follows ÖThe Commission shall decide on any amendments in the following areas in accordance with the procedure referred to in Article 43(2). Õ

(a)     clarification of the definitions in Article 2 Ö 3 Õ in order to ensure uniform application of this Directive throughout the Community;

(b)     clarification of the definitions in Article 2 Ö 3 Õ to take account of developments on financial markets;

(c)     alteration of the amounts of initial capital prescribed in Articles 3 Ö 5 to 9 Õ and the amount referred to in Article 4(6) Ö18(2)Õ to take account of developments in the economic and monetary field;

ð (d) amendment of the categories of investment firms in Articles 20(2) and (3) to take account of developments on financial markets; ï

ð (e) clarification of the requirement laid down in Article 21 to ensure uniform application of this Directive throughout the Community; ï

(f)     the alignment of terminology on and the framing of definitions in accordance with subsequent acts on institutions and related matters.;

ð (g) amendment of the technical provisions in Annexes I to VII in order to take account of developments in financial markets, risk measurement, accounting standards or requirements set out in Community legislation. ï

ò new

Article 43

1.         The Commission shall be assisted by a Committee.

2.         Where reference is made to this paragraph, the procedure laid down in Article 5 of Decision 1999/468/EC shall apply, in compliance with Article 7(3) and Article 8 thereof.

The period provided for in Article 5(6) of Decision 1999/468/EC shall be three months.

ê 93/6/EEC (adapted)

Ö SECTION 3 Õ

TRANSITIONAL PROVISIONS

ê 93/6/EEC Art. 11

Article 11

1. Member States may authorize investment firms subject to Article 30 (1) of Directive 93/22/EEC the own funds of which are on the day of the application of this Directive lower than the levels specified in Article 3 (1) to (3) of this Directive. Thereafter, however, the own funds of such investment firms must fulfil the conditions laid down in Article 3 (5) to (8) of this Directive.

2. Notwithstanding paragraph 14 of Annex I, Member States may set a specific-risk requirement for any bonds assigned a weighting of 10 % under Article 11 (2) of Directive 89/647/EEC equal to half the specific-risk requirement for a qualifying item with the same residual maturity as such a bond.

ê 98/31/EC Art. 1.6 (adapted)

Article 1

Until 31 December 2006, Member States may authorise their institutions to use the minimum spread, carry and outright rates set out in the following table instead of those indicated in paragraphs 13, 14, 17 and 18 of Annex VII provided that the institutions, in the opinion of their competent authorities:

(i)           undertake significant commodities business,

(ii)          have a diversified commodities portfolio, and

(iii)         are not yet in a position to use internal models for the purpose of calculating the capital requirement on commodities risk in accordance with Annex VIII.

Table

|| Precious metals (except gold) || Base metals || Agricultural products (softs) || Other, including energy products

Spread rate (%) || 1.0 || 1.2 || 1.5 || 1.5

Carry rate (%) || 0.3 || 0.5 || 0.6 || 0.6

Outright rate (%) || 8 || 10 || 12 || 15

Member States shall inform the Commission of the use they make of this Article.

ò new

Article 44

Article 152(1) to (6) of Directive [2000/12/EC] shall apply, in accordance with Article 2 and Chapter V, Sections 2 and 3 of this Directive, to investment firms calculating risk-weighted exposure amounts, for the purposes of Annex II of this Directive, in accordance with Articles 84 to 89 of Directive [2000/12/EC], or using the Advanced Measurement Approach as specified in Article 105 of that Directive for the calculation of their capital requirements for operational risk.

Article 45

Until 31 December 2012, for investment firms the relevant indicator for the trading and sales business line of which represents at least 50% of the total of relevant indicators for all of its business lines calculated in accordance with Article 20 of this Directive and Annex X, Part 2, paragraphs 1 to 8 of Directive [2000/12/EC], Member States may apply a percentage of 15% to the business line “trading and sales”.

ê 93/6/EEC Art. 12 (adapted)

ð new

Ö SECTION 4 Õ

FINAL PROVISIONS

Article 46

1.         Member States shall bring into force the laws, regulations and administrative provisions necessary for them to comply with this Directive by the date fixed in the second paragraph of Article 31 of Directive 93/22/EEC. They shall forthwith inform the Commission thereof.

1.         Member States shall adopt and publish, by 31 December 2006 at the latest, the laws, regulations and administrative provisions necessary to comply with Articles 2, 3, 11, 13, 17, 18, 19, 20, 22, 23, 24, 25, 29, 30, 33, 34, 35, 37, 39, 40, 42, 44, 45, 47 and the Annexes I, II, III, V, VII. They shall forthwith communicate to the Commission the text of those provisions and a correlation table between those provisions and this Directive.

They shall apply those provisions from 31 December 2006.

When Member States adopt those provisions, they shall contain a reference to this Directive or add such a reference Ö be accompanied by such a referenceÕ on the occasion of their official publication. Ö They shall also include a statement that references in existing laws, regulations and administrative provisions to these directives repealed by this Directive shall be construed as references to this Directive. Õ The manner in which such references are to be made shall be laid down by the Member State.

2.         Member States shall communicate to the Commission the ð text of the ï main provisions of national law which they adopt in the field covered by this Directive.

ò new

Article 47

1.         Article 152(7) to (12) of Directive [2000/12/EC] shall apply mutatis mutandis for the purposes of this Directive subject to the following provisions which shall apply where the discretion referred to in Article 152(7) of Directive [2000/12/EC] is exercised:

(a)     References in Annex II paragraph 6 of Directive [2000/12/EC] shall be read as references to Directive 2000/12/EC as that Directive stood prior to the date referred to in Article 46;

(b)     Annex II, paragraph 4.1, shall apply as it stood prior to the date referred to in Article 46.

2.         Article 157 (2) of Directive [2000/12/EC] shall apply mutatis mutandis for the purposes of Articles 18 and 20.

ê 93/6/EEC Art. 13

Article 13

The Commission shall as soon as possible submit to the Council proposals for capital requirements in respect of commodities trading, commodity derivatives and units of collective-investment undertakings.

The Council shall decide on the Commission's proposals no later than six months before the date of application of this Directive.

ò new

Article 48

Directive 93/6/EEC, as amended by the Directives listed in Annex VIII, Part A, is repealed without prejudice to the obligations of the Member States relating to the time-limits for transposition into national law of the Directives set out in Annex VIII, Part B.

References to the repealed Directives shall be construed as references to this Directive and shall be read in accordance with the correlation table in Annex IX.

Article 49

This Directive shall enter into force on the twentieth day following that of its publication in the Official Journal of the European Union.

ê 93/6/EEC Art 14

REVIEW CLAUSE

Article 14

Within three years of the date referred to in Article 12, acting on a proposal from the Commission, the Council shall examine and, if necessary, revise this Directive in the light of the experience acquired in applying it, taking into account market innovation and, in particular, developments in international fora of regulatory authorities.

ê 93/6/EEC Art. 15

Article 50

This Directive is addressed to the Member States.

Done at Brussels, […]

For the European Parliament                        For the Council

The President                                                 The President

[…]                                                                […]

ê 93/6/EEC (adapted)

ð new

ANNEX I

ð CALCULATING CAPITAL REQUIREMENTS FOR ï POSITION RISK

INTRODUCTION Ö GENERAL PROVISIONS Õ

Netting

1. The excess of an institution's long (short) positions over its short (long) positions in the same equity, debt and convertible issues and identical financial futures, options, warrants and covered warrants shall be its net position in each of those different instruments. In calculating the net position the competent authorities shall allow positions in derivative instruments to be treated, as laid down in paragraphs 4 to 7, as positions in the underlying (or notional) security or securities. Institutions' holdings of their own debt instruments shall be disregarded in calculating specific risk under paragraph 14 Ö 14 Õ .

2. No netting shall be allowed between a convertible and an offsetting position in the instrument underlying it, unless the competent authorities adopt an approach under which the likelihood of a particular convertible's being converted is taken into account or have a capital requirement to cover any loss which conversion might entail.

3. All net positions, irrespective of their signs, must be converted on a daily basis into the institution's reporting currency at the prevailing spot exchange rate before their aggregation.

Particular instruments

ê 93/6/EC (adapted)

è1 98/31/EC Art. 1.7 and Annex .1(a)

4. Interest-rate futures, forward-rate agreements (FRAs) and forward commitments to buy or sell debt instruments shall be treated as combinations of long and short positions. Thus a long interest-rate futures position shall be treated as a combination of a borrowing maturing on the delivery date of the futures contract and a holding of an asset with maturity date equal to that of the instrument or notional position underlying the futures contract in question. Similarly a sold FRA will be treated as a long position with a maturity date equal to the settlement date plus the contract period, and a short position with maturity equal to the settlement date. Both the borrowing and the asset holding shall be included in the central government column Ö first category set out in Õ of Table 1 in paragraph 14 Ö 14 Õ in order to calculate the capital required against specific risk for interest-rate futures and FRAs. A forward commitment to buy a debt instrument shall be treated as a combination of a borrowing maturing on the delivery date and a long (spot) position in the debt instrument itself. The borrowing shall be included in the central government column Ö first category set out in Õ of Table 1 Ö in paragraph 14 Õfor purposes of specific risk, and the debt instrument under whichever column is appropriate for it in the same table.è1 --- ç

ê 98/31/EC Art. 1.7 and Annex .1(a) (adapted)

The competent authorities may allow the capital requirement for an exchange-traded future to be equal to the margin required by the exchange if they are fully satisfied that it provides an accurate measure of the risk associated with the future and that it is at least equal to the capital requirement for a future that would result from a calculation made using the method set out in this Annex or applying the internal models method described in Annex VIII.

Until 31 December 2006 tThe competent authorities may also allow the capital requirement for an OTC derivatives contract of the type referred to in this paragraph cleared by a clearing house recognised by them to be equal to the margin required by the clearing house if they are fully satisfied that it provides an accurate measure of the risk associated with the derivatives contract and that it is at least equal to the capital requirement for the contract in question that would result from a calculation made using the method set out in the this Annex or applying the internal models method described in Annex VIII.

ê 93/6/EEC Art. 2(22)

For the purposes of this paragraph, long position means a position in which an institution has fixed the interest rate it will receive at some time in the future, and short position means a position in which it has fixed the interest rate it will pay at some time in the future.

ê 93/6/EEC

5. Options on interest rates, debt instruments, equities, equity indices, financial futures, swaps and foreign currencies shall be treated as if they were positions equal in value to the amount of the underlying instrument to which the option refers, multiplied by its delta for the purposes of this Annex. The latter positions may be netted off against any offsetting positions in the identical underlying securities or derivatives. The delta used shall be that of the exchange concerned, that calculated by the competent authorities or, where that is not available or for OTC-options, that, calculated by the institution itself, subject to the competent authorities' being satisfied that the model used by the institution is reasonable.

However, the competent authorities may also prescribe that institutions calculate their deltas using a methodology specified by the competent authorities.

ê 98/31/EC Art. 1.7 and Annex .1(b) (adapted)

The competent authorities shall require that the oOther risks, apart from the delta risk, associated with options are Ö shall be Õ safeguarded against. The competent authorities may allow the requirement against a written exchange-traded option to be equal to the margin required by the exchange if they are fully satisfied that it provides an accurate measure of the risk associated with the option and that it is at least equal to the capital requirement against an option that would result from a calculation made using the method set out in the remainder of this Annex or applying the internal models method described in Annex VIII. Until 31 December 2006 tThe competent authorities may also allow the capital requirement for an OTC option cleared by a clearing house recognised by them to be equal to the margin required by the clearing house if they are fully satisfied that it provides an accurate measure of the risk associated with the option and that it is at least equal to the capital requirement for an OTC option that would result from a calculation made using the method set out in the remainder of this Annex or applying the internal models method described in Annex VIII. In addition they may allow the requirement on a bought exchange-traded or OTC option to be the same as that for the instrument underlying it, subject to the constraint that the resulting requirement does not exceed the market value of the option. The requirement against a written OTC option shall be set in relation to the instrument underlying it.

ê 98/31/EC Art. 1.7 and Annex .1(c)

6. Warrants relating to debt instruments and equities shall be treated in the same way as options under paragraph 5.

ê 93/6/EEC

7. Swaps shall be treated for interest-rate risk purposes on the same basis as on-balance-sheet instruments. Thus an interest-rate swap under which an institution receives floating-rate interest and pays fixed-rate interest shall be treated as equivalent to a long position in a floating-rate instrument of maturity equivalent to the period until the next interest fixing and a short position in a fixed-rate instrument with the same maturity as the swap itself.

ò new

8. For credit derivatives, unless specified differently, the notional amount of the credit derivative contract must be used. When calculating the capital requirement for the market risk of the party who assumes the credit risk (the “protection seller”), positions are determined as follows:

A total return swap creates a long position in the general market risk of the reference obligation and a short position in the general market risk of a government bond which is assigned a 0% risk weight under Annex VI of Directive [2000/12/EC]. It also creates a long position in the specific risk of the reference obligation.

A credit default swap does not create a position for general market risk. For the purposes of specific risk, the institution must record a synthetic long position in an obligation of the reference entity. If premium or interest payments are due under the product, these cash flows must be represented as notional positions in a government bond with the appropriate fixed or floating rate.

A credit linked note creates a long position in the general market risk of the note itself, as an interest product. For the purpose of specific risk, a synthetic long position is created in an obligation of the reference entity. In addition, a long position is created in the specific risk of the issuer of the note.

A first-asset-to-default basket creates a position for the notional amount in an obligation of each reference entity. If the size of the maximum credit event payment is lower than the capital requirement under the method in the first sentence of this sub-paragraph, the maximum payment amount may be taken as the capital requirement for specific risk.

A second-asset-to-default basked product creates a position for the notional amount in an obligation of each reference entity less one (that with the lowest specific risk capital requirement). If the size of the maximum credit event payment is lower than the capital requirement under the method in the first sentence of this sub-paragraph, this amount may be taken as the capital requirement for specific risk.

Where a credit linked note basket product has an external rating and meets the conditions for a qualifying debt item, a single long position with the specific risk of the note issuer may be recorded instead of the specific risk positions for all reference entities.

A basket product providing proportional protection creates a position in each reference entity for the purposes of specific risk, with the total notional amount of the contract assigned across the positions according to the proportion of the total notional amount that each exposure to a reference entity represents. Where more than one obligation of a reference entity can be selected, the obligation with the highest risk weighting determines the specific risk. The maturity of the credit derivative contract is applicable instead of the maturity of the obligation.

For the party who transfers credit risk (the “protection buyer”), the positions are determined as the mirror image of the protection seller, with the exception of a credit linked note (which entails no short position in the issuer). If at a given moment there is a call option in combination with a step-up, such moment is treated as the maturity of the protection. In the case of the nth to default credit derivatives, protection buyers are allowed to off-set specific risk for n-1 of the underlyings (i.e., the n-1 assets with the lowest specific risk charge).

ê 93/6/EEC (adapted)

89. However, iInstitutions which mark to market and manage the interest-rate risk on the derivative instruments covered in paragraphs 4 to 7 on a discounted-cash-flow basis may use sensitivity models to calculate the positions referred to above and may use them for any bond which is amortizsed over its residual life rather than via one final repayment of principal. Both the model and its use by the institution must be approved by the competent authorities. These models should generate positions which have the same sensitivity to interest-rate changes as the underlying cash flows. This sensitivity must be assessed with reference to independent movements in sample rates across the yield curve, with at least one sensitivity point in each of the maturity bands set out in Table 2 of paragraph 18 Ö 20 Õ . The positions shall be included in the calculation of capital requirements according to the provisions laid down in paragraphs 15 to 30 Ö 17 to 32 Õ .

910. Institutions which do not use models under paragraph 8 Ö 9 Õmay instead, with the approval of the competent authorities, treat as fully offsetting any positions in derivative instruments covered in paragraphs 4 to 7 which meet the following conditions at least:

(ia)    the positions are of the same value and denominated in the same currency;

(iib)   the reference rate (for floating-rate positions) or coupon (for fixed-rate positions) is closely matched;

(iiic)  the next interest-fixing date or, for fixed coupon positions, residual maturity corresponds with the following limits:

(i)      less than one month hence: same day,;

(ii)     between one month and one year hence: within seven days,;

(iii)    over one year hence: within 30 days.

1011. The transferor of securities or guaranteed rights relating to title to securities in a repurchase agreement and the lender of securities in a securities lending shall include these securities in the calculation of its capital requirement under this Annex provided that such securities meet the criteria laid down in Article 2(6)(a) Ö 11 Õ .

ê 93/6/EEC (adapted)

11. Positions in units of collective-investment undertakings shall be subject to the capital requirements of Directive 89/647/EEC rather than to position-risk requirements under this Annex.

Specific and general risks

12. The position risk on a traded debt instrument or equity (or debt or equity derivative) shall be divided into two components in order to calculate the capital required against it. The first shall be its specific-risk component — this is the risk of a price change in the instrument concerned due to factors related to its issuer or, in the case of a derivative, the issuer of the underlying instrument. The second component shall cover its general risk — this is the risk of a price change in the instrument due (in the case of a traded debt instrument or debt derivative) to a change in the level of interest rates or (in the case of an equity or equity derivative) to a broad equity-market movement unrelated to any specific attributes of individual securities.

TRADED DEBT INSTRUMENTS

13.       The institution shall classify its nNet positions Ö shall be classified Õ according to the currency in which they are denominated and shall calculate the capital requirement for general and specific risk in each individual currency separately.

Specific risk

ê 93/6/EC

ð new

14. The institution shall assign its net positions, as calculated in accordance with paragraph 1, to the appropriate categories in Table 1 on the basis of their residual maturities and then multiply them by the weightings shown. It shall sum its weighted positions (regardless of whether they are long or short) in order to calculate its capital requirement against specific risk. ð in the trading book, as calculated in accordance with paragraph 1 to the appropriate categories in Table 1 on the basis of their issuer/obligor, external or internal credit assessment, and residual maturity, and then multiply them by the weightings shown. It shall sum its weighted positions (regardless of whether they are long or short) in order to calculate its capital requirement against specific risk. ï

ê 93/6/EEC

Table 1

Central government items || Qualifying items || Other items

|| Up to 6 months || Over 6 and up to 24 months || Over 24 months ||

0,00 % || 0,25 % || 1,00 % || 1,60 % || 8,00 %

ò new

Table 1

Items || Specific risk capital charge

Debt securities issued or guaranteed by central governments, issued by central banks, international organisations, multilateral development banks or Member States’ regional government or local authorities which would receive a 0% risk weighting under the RSA or IRB approaches. || 0%

Debt securities issued or guaranteed by central governments, issued by central banks, international organisations, multilateral development banks or Member States’ regional governments or local authorities which would receive a 20% or 50% risk weighting under the RSA Other qualifying items as defined in paragraph 15 below || 0.25% (residual term to final maturity six months or less) 1.00% (residual term to final maturity greater than six months and up to and including 24 months) 1.60% (residual term to maturity exceeding 24 months)

All others || 8.00%

15.       For the purposes of paragraph 14 qualifying items shall include:

(a)     long and short positions in assets qualifying for a credit quality step corresponding at least to investment grade in the mapping process described in Title V, Chapter 2, Section 3, Sub-section 1 of Directive [2000/12/EC];

(b)     long and short positions in assets which, because of the solvency of the issuer, have a PD which is not higher than that of the assets referred to under a) above, under the approach described in Title V, Chapter 2, Section 3, Sub-section 2 of Directive [2000/12/EC];

(c)     long and short positions in assets for which a credit assessment by a nominated external credit assessment institution is not available and which meet the following conditions:

(i)      they are considered by the institutions concerned to be sufficiently liquid;

(ii)     their investment quality is, according to the institution’s own discretion, at least equivalent to that of the assets referred to under point a);

(iii)    they are listed on at least one regulated market in a Member State or on a stock exchange in a third country provided that the exchange is recognised by the competent authorities of the relevant Member State;

(d)     they are, subject to competent authorities discretion, long and short positions in assets issued by institutions subject to the capital adequacy requirements set forth in Directive [2000/12/EC]

The manner in which the debt instruments are assessed shall be subject to scrutiny by the competent authorities, which shall overturn the judgment of the institution if they consider that the instruments concerned are subject to too high a degree of specific risk to be qualifying items;

16. The competent authorities shall require the institution to apply the maximum weighting shown in Table 1 to instruments that show a particular risk because of the insufficient solvency of the issuer of liquidity.

ê 93/6/EEC

General risk

(a) Maturity-based

ê 93/6/EEC (adapted)

1517. The procedure for calculating capital requirements against general risk involves two basic steps. First, all positions shall be weighted according to maturity (as explained in paragraph 16 Ö 18 Õ ), in order to compute the amount of capital required against them. Second, allowance shall be made for this requirement to be reduced when a weighted position is held alongside an opposite weighted position within the same maturity band. A reduction in the requirement shall also be allowed when the opposite weighted positions fall into different maturity bands, with the size of this reduction depending both on whether the two positions fall into the same zone, or not, and on the particular zones they fall into. There are three zones (groups of maturity bands) altogether.

1618. The institution shall assign its net positions to the appropriate maturity bands in column 2 or 3, as appropriate, in Table 2 appearing in paragraph 18 Ö 20 Õ . It shall do so on the basis of residual maturity in the case of fixed-rate instruments and on the basis of the period until the interest rate is next set in the case of instruments on which the interest rate is variable before final maturity. It shall also distinguish between debt instruments with a coupon of 3 % or more and those with a coupon of less than 3 % and thus allocate them to column 2 or column 3 in Table 2. It shall then multiply each of them by the weighing for the maturity band in question in column 4 in Table 2.

ê 93/6/EEC

1719. It shall then work out the sum of the weighted long positions and the sum of the weighted short positions in each maturity band. The amount of the former which are matched by the latter in a given maturity band shall be the matched weighted position in that band, while the residual long or short position shall be the unmatched weighted position for the same band. The total of the matched weighted positions in all bands then be calculated.

1820. The institution shall compute the totals of the unmatched weighted long positions for the bands included in each of the zones in Table 2 in order to derive the unmatched weighted long position for each zone. Similarly the sum of the unmatched weighted short positions for each band in a particular zone shall be summed to compute the unmatched weighted short position for that zone. That part of the unmatched weighted long position for a given zone that is matched by the unmatched weighted short position for the same zone shall be the matched weighted position for that zone. That part of the unmatched weighted long or unmatched weighted short position for a zone that cannot be thus matched shall be the unmatched weighted position for that zone.

Table 2

Zone || Maturity band || Weighting (in %) || Assumed interest rate change (in %)

Coupon of 3 % or more || Coupon of less than 3 %

One || 0 ≤ 1 month || 0 ≤ 1 month || 0.00 || —

> 1 ≤ 3 months || > 1 ≤ 3 months || 0.20 || 1.00

> 3 ≤ 6 months || > 3 ≤ 6 months || 0.40 || 1.00

> 6 ≤ 12 months || > 6 ≤ 12 months || 0.70 || 1.00

Two || > 1 ≤ 2 years || > 1,0 ≤ 1,9 years || 1.25 || 0.90

> 2 ≤ 3 years || > 1,9 ≤ 2,8 years || 1.75 || 0.80

> 3 ≤ 4 years || > 2,8 ≤ 3,6 years || 2.25 || 0.75

Three || > 4 ≤ 5 years || > 3,6 ≤ 4,3 years || 2.75 || 0.75

> 5 ≤ 7 years || > 4,3 ≤ 5,7 years || 3.25 || 0.70

> 7 ≤ 10 years || > 5,7 ≤ 7,3 years || 3.75 || 0.65

> 10 ≤ 15 years || > 7,3 ≤ 9,3 years || 4.50 || 0.60

> 15 ≤ 20 years || > 9,3 ≤ 10,6 years || 5.25 || 0.60

> 20 years || > 10,6 ≤ 12,0 years || 6.00 || 0.60

|| > 12,0 ≤ 20,0 years || 8.00 || 0.60

|| > 20 years || 12.50 || 0.60

ê 93/6/EC (adapted)

1921. The amount of the unmatched weighted long (short) position in zone one which is matched by the unmatched weighted short (long) position in zone two shall then be computed. This shall be referred to in paragraph 23 Ö 25Õ as the matched weighted position between zones one and two. The same calculation shall then be undertaken with regard to that part of the unmatched weighted position in zone two which is left over and the unmatched weighted position in zone three in order to calculate the matched weighted position between zones two and three.

2022. The institution may, if it wishes, reverse the order in paragraph 19 Ö 21 Õ so as to calculate the matched weighted position between zones two and three before working out that between zones one and two.

ê 93/6/EEC (adapted)

2123. The remainder of the unmatched weighted position in zone one shall then be matched with what remains of that for zone three after the latter's matching with zone two in order to derive the matched weighted position between zones one and three.

2224. Residual positions, following the three separate matching calculations in paragraphs 19, 20 and 21 Ö 21, 22 and 23, Õ shall be summed.

2325. The institution's capital requirement shall be calculated as the sum of:

(a)          10 % of the sum of the matched weighted positions in all maturity bands;

(b)          40 % of the matched weighted position in zone one;

(c)          30 % of the matched weighted position in zone two;

(d)          30 % of the matched weighted position in zone three;

(e)          40 % of the matched weighted position between zones one and two and between zones two and three (see paragraph 19 Ö 21 Õ );

(f)          150 % of the matched weighted position between zones one and three;

(g)          100 % of the residual unmatched weighted positions.

(b) Duration-based

2426. The competent authorities in a Member State may allow institutions in general or on an individual basis to use a system for calculating the capital requirement for the general risk on traded debt instruments which reflects duration instead of the system set out in paragraphs 15 to 23 Ö 17 to 25 Õ , provided that the institution does so on a consistent basis.

ê 93/6/EC (adapted)

2527. Under such a system Ö referred to in paragraph 26 Õ the institution shall take the market value of each fixed-rate debt instrument and thence calculate its yield to maturity, which is implied discount rate for that instrument. In the case of floating-rate instruments, the institution shall take the market value of each instrument and thence calculate its yield on the assumption that the principal is due when the interest rate can next be changed.

ê 93/6/EEC

2628. The institution shall then calculate the modified duration of each debt instrument on the basis of the following formula: modified duration = ((duration (D))/(1 + r)), where:

D || = || ((∑t = 1m((t Ct)/((1 + r)t)))/(∑t = 1m((Ct)/((1 + r)t))))

where:

R || = || yield to maturity (see paragraph 25),

Ct || = || cash payment in time t,

M || = || total maturity (see paragraph 25).

2729. The institution shall then allocate each debt instrument to the appropriate zone in Table 3. It shall do so on the basis of the modified duration of each instrument.

Table 3

Zone || Modified duration (in years) || Assumed interest (change in %)

One || > 0 ≤ 1,0 || 1.0

Two || > 1,0 ≤ 3,6 || 0.85

Three || > 3,6 || 0.7

2830. The institution shall then calculate the duration-weighted position for each instrument by multiplying its market price by its modified duration and by the assumed interest-rate change for an instrument with that particular modified duration (see column 3 in Table 3).

2931. The institution shall work out its duration-weighted long and its duration-weighted short positions within each zone. The amount of the former which are matched by the latter within each zone shall be the matched duration-weighted position for that zone.

ê 93/6/EEC (adapted)

The institution shall then calculate the unmatched duration-weighted positions for each zone. It shall then follow the procedures laid down for unmatched weighted positions in paragraphs 19 to 22 Ö 21 to 24 Õ .

ê 93/6/EC

3032. The institution's capital requirement shall then be calculated as the sum of:

(a)          2 % of the matched duration-weighted position for each zone;

(b)          40 % of the matched duration-weighted positions between zones one and two and between zones two and three;

(c)          150 % of the matched duration-weighted position between zones one and three;

(d)          100 % of the residual unmatched duration-weighted positions.

EQUITIES

3133. The institution shall sum all its net long positions and all its net short positions in accordance with paragraph 1. The sum of the two figures shall be its overall gross position. The difference between them shall be its overall net position.

Specific risk

ê 93/6/EEC

ð new

32.34ð The institution shall sum all its net long positions and all its net short positions in accordance with paragraph 1. ï It shall multiply its overall gross position by 4 % in order to calculate its capital requirement against specific risk.

ê 93/6/EC (adapted)

3335. Notwithstanding paragraph 35 Ö By derogation to paragraph 34 Õ, the competent authorities may allow the capital requirement against specific risk to be 2% rather than 4% for those portfolios of equities that an institution holds which meet the following conditions:

ê 98/31/EC Art. 1.7 and Annex .1(d) (adapted)

(ia)         the equities shall not be those of issuers which have issued only traded debt instruments that currently attract an 8 % requirement in Table 1 appearing in paragraph 14 or that attract a lower requirement only because they are guaranteed or secured;

ê 93/6/EEC

(iib)        the equities must be adjudged highly liquid by the competent authorities according to objective criteria;

ê 93/6/EEC (adapted)

(iiic)       no individual position shall comprise more than 5 % of the value of the institution's whole equity portfolio. However

Ö For the purpose of point (c) Õ, the competent authorities may authorizse individual positions of up to 10 % provided that the total of such positions does not exceed 50 % of the portfolio.

ê 93/6/EEC

General risk

3436. Its capital requirement against general risk shall be its overall net position multiplied by 8 %.

Stock-index futures

ê 93/6/EEC (adapted)

3537. Stock-index futures, the delta-weighted equivalents of options in stock-index futures and stock indices collectively referred to hereafter as «stock-index futures», may be broken down into positions in each of their constituent equities. These positions may be treated as underlying positions in the equities in question,; therefore Ö and may Õ, subject to the approval of the competent authorities, they may be netted against opposite positions in the underlying equities themselves.

ê 93/6/EEC

3638. The competent authorities shall ensure that any institution which has netted off its positions in one or more of the equities constituting a stock-index future against one or more positions in the stock-index future itself has adequate capital to cover the risk of loss caused by the future's values not moving fully in line with that of its constituent equities; they shall also do this when an institution holds opposite positions in stock-index futures which are not identical in respect of either their maturity or their composition or both.

ê 93/6/EEC (adapted)

3739. Notwithstanding Ö By derogation to Õ paragraphs 35 and 36 Ö 37 and 38 Õ, stock-index futures which are exchange traded and — in the opinion of the competent authorities — represent broadly diversified indices shall attract a capital requirement against general risk of 8 %, but no capital requirement against specific risk. Such stock-index futures shall be included in the calculation of the overall net position in paragraph 31 Ö 33 Õ, but disregarded in the calculation of the overall gross position in the same paragraph.

ê 93/6/EEC

3840. If a stock-index future is not broken down into its underlying positions, it shall be treated as if it were an individual equity. However, the specific risk on this individual equity can be ignored if the stock-index future in question is exchange traded and, in the opinion of the competent authorities, represents a broadly diversified index.

UNDERWRITING

ê 93/6/EEC (adapted)

3941. In the case of the underwriting of debt and equity instruments, the competent authorities may allow an institution to use the following procedure in calculating its capital requirements. Firstly, it shall calculate the net positions by deducting the underwriting positions which are subscribed or sub-underwritten by third parties on the basis of formal agreements; secondly. Secondly, it shall reduce the net positions by the following reduction factors: Ö in Table 4 Õ

Table 4

— working day 0: || 100 %

— working day 1: || 90 %

— working days 2 to 3: || 75 %

— working day 4: || 50 %

— working day 5: || 25 %

— after working day 5: || 0 %.

ê 93/6/EEC

Working day zero shall be the working day on which the institution becomes unconditionally committed to accepting a known quantity of securities at an agreed price.

Thirdly, it shall calculate its capital requirements using the reduced underwriting positions.

The competent authorities shall ensure that the institution holds sufficient capital against the risk of loss which exists between the time of the initial commitment and working day 1.

ò new

SPECIFIC RISK CAPITAL CHARGES FOR TRADING BOOK POSITIONS HEDGED BY CREDIT DERIVATIVES

42. An allowance shall be given for protection provided by credit derivatives, in accordance with the principles set out in paragraphs 43 to 46.

43. Full allowance shall be given when the value of two legs always move in the opposite direction and broadly to the same extent. This will be the case in either of the following situations:

(a)     the two legs consist of completely identical instruments;

(b)     a long cash position is hedged by a total rate of return swap (or vice versa) and there is an exact match between the reference obligation and the underlying exposures (i.e., the cash position). The maturity of the swap itself may be different from that of the underlying exposure.

In these cases, a specific risk capital charge should not be applied to either side of the position.

44. An 80% offset will be applied when the value of two legs always move in the opposite direction and where there is an exact match in terms of the reference obligation, the maturity of both the reference obligation and the credit derivative, and the currency of the underlying exposure. In addition, key features of the credit derivative contract should not cause the price movement of the credit derivative to materially deviate from the price movements of the cash position. To the extent that the transaction transfers risk, an 80% specific risk offset will be applied to the side of the transaction with the higher capital charge, while the specific risk requirements on the other side shall be zero.

45. Partial allowance shall be given when the value of two legs usually move in the opposite direction. This would be the case in the following situations:

(a)     the position is captured in paragraph 43(b) but there is an asset mismatch between the reference obligation and the underlying exposure. However, the positions meet the following requirements:

(i)      the reference obligation ranks pari passu with or is junior to the underlying obligation;

(ii)     the underlying obligation and reference obligation share the same obligor and have legally enforceable cross-default or cross-acceleration clauses;

(b)     the position is captured in paragraph 43(a) or paragraph 44 but there is a currency or maturity mismatch between the credit protection and the underlying asset (currency mismatches should be included in the normal reporting foreign exchange risk under Annex III;

(c)     the position is captured in paragraph 44 but there is an asset mismatch between the cash position and the credit derivative. However, the underlying asset is included in the (deliverable) obligations in the credit derivative documentation.

In each of those cases, rather than adding the specific risk capital requirements for each side of the transaction, only the higher of the two capital requirements shall apply.

46. In all cases not falling under paragraph 45, a specific risk capital charge will be assessed against both sides of the position.

Capital charges for CIUs in the trading book

47. The capital requirements for positions in collective investment undertakings (CIUs) which meet the conditions specified in Article 11 for a trading book capital treatment, shall be calculated in accordance with the methods set out in paragraphs 48 to 56.

48. Without prejudice to other provisions in this section, positions in CIUs shall be subject to a capital requirement for position risk (specific and general) of 32%. Without prejudice to provisions in Annex III (3)(i) or Annex V (13)(v), where the modified gold treatment set out in those paragraphs is used, positions in CIUs shall be subject to a capital requirement for position risk (specific and general) and foreign-exchange risk of no more than 40%.

49. Institutions may determine the capital requirement for positions in CIUs which meet the criteria set out in paragraph 51, by the methods set out in paragraphs 53 to 56.

50. Unless noted otherwise, no netting is permitted between the underlying investments of a CIU and other positions held by the institution.

GENERAL CRITERIA

51. The general eligibility criteria for using the methods in paragraphs 53 to 56, for CIUs issued by companies supervised or incorporated within the Community are that:

(a)     the CIU’s prospectus or equivalent document shall include:

(i)      the categories of assets the CIU is authorised to invest in;

(ii)     if investment limits apply, the relative limits and the methodologies to calculate them;

(iii)    if leverage is allowed, the maximum level of leverage;

(iv)    if investment in OTC financial derivatives or repo-style transactions are allowed, a policy to limit counterparty risk arising from these transactions;

(b)     the business of the CIU shall be reported in half-yearly and annual reports to enable an assessment to be made of the assets and liabilities, income and operations over the reporting period;

(c)     the units/shares of the CIU are redeemable in cash, out of the undertaking’s assets, on a daily basis at the request of the unit holder;

(d)     investments in the CIU shall be segregated from the assets of the CIU manager;

(e)     there shall be adequate risk assessment, by the investing institution, of the CIU.

52. Third country CIUs may be eligible if the requirements in points (a) to (e) of paragraph 51 are met, subject to the approval of the institution’s competent authority.

SPECIFIC METHODS

53. Where the institution is aware of the underlying investments of the CIU on a daily basis the institution may look through to those underlying investments in order to calculate the capital requirements for position risk (general and specific) for those positions in accordance with the methods set out in this Annex or, if permission has been granted, in accordance with the methods set out in Annex V. Under this approach, positions in CIUs shall be treated as positions in the underlying investments of the CIU. Netting is permitted between positions in the underlying investments of the CIU and other positions held by the institution, as long as the institution holds a sufficient quantity of units to allow for redemption/creation in exchange for the underlying investments.

54. Institutions may calculate the capital requirements for position risk (general and specific) for positions in CIUs in accordance with the methods set out in this Annex or, if permission has been granted, in accordance with the methods set out in Annex V, to assumed positions representing those necessary to replicate the composition and performance of the externally generated index or fixed basket of equities or debt securities referred to in (a), subject to the following conditions:

(a)     the purpose of the CIU’s mandate is to replicate the composition and performance of an externally generated index or fixed basket of equities or debt securities;

(b)     a minimum correlation of 0.9 between daily price movements of the CIU and the index or basket of equities or debt securities it tracks can be clearly established over a minimum period of six months. Correlation in this context means the correlation coefficient between daily returns on the exchange traded fund and the index or basket of equities or debt securities it tracks.

55. Where the institution is not aware of the underlying investments of the CIU on a daily basis, the institution may calculate the capital requirements for position risk (general and specific) in accordance with the methods set out in this Annex, subject to the following conditions:

(a)     it will be assumed that the CIU first invests to the maximum extent allowed under its mandate in the asset classes attracting the highest capital requirement for position risk (general and specific), and then continues making investments in descending order until the maximum total investment limit is reached. The position in the CIU will be treated as a direct holding in the assumed position;

(b)     institutions shall take account of the maximum indirect exposure that they could achieve by taking leveraged positions through the CIU when calculating their capital requirement for position risk, by proportionally increasing the position in the CIU up to the maximum exposure to the underlying investment items resulting from the investment mandate;

(c)     should the capital requirement for position risk (general and specific) under this approach exceed that set out in paragraph 48, the capital requirement shall be capped at that level.

56. Institutions may rely on a third party to calculate and report capital requirements for position risk (general and specific) for positions in CIUs falling within paragraphs 53 and 55, in accordance with the methods set out in this Annex, provided that the correctness of the calculation and the report is adequately ensured.

ê 93/6/EEC (adapted)

ANNEX II

Ö CALCULATING CAPITAL REQUIREMENTS FOR Õ SETTLEMENT AND COUNTER-PARTY RISK

SETTLEMENT/DELIVERY RISK

ê 98/31/EC Art. 1.7 and Annex .2(a)

1. In the case of transactions in which debt instruments, equities and commodities (excluding repurchase and reverse repurchase agreements and securities or commodities lending and securities or commodities borrowing) are unsettled after their due delivery dates, an institution must calculate the price difference to which it is exposed. This is the difference between the agreed settlement price for the debt instrument, equity or commodity in question and its current market value, where the difference could involve a loss for the institution. It must multiply this difference by the appropriate factor in column A of the table appearing in paragraph 2 in order to calculate its capital requirement.

ê 93/6/EEC (adapted)

2. Notwithstanding Ö By derogation to Õ paragraph 1, an institution may, at the discretion of its competent authorities, calculate its capital requirements by multiplying the agreed settlement price of every transaction which is unsettled between 5 and 45 working days after its due date by the appropriate factor in column B of the tTable 1below. As from 46 working days after the due date it shall take the requirement to be 100 % of the price difference to which it is exposed as in column A Ö of Table 1Õ .

Ö Table 1 Õ

Number of working days after due settlement date || Column A (%) || Column B (%)

5 — 15 || 8 || 0.5

16 — 30 || 50 || 4.0

31 — 45 || 75 || 9.0

46 or more || 100 || see paragraph 2

COUNTER-PARTY RISK

ò new

3. An institution shall be required to hold capital against the counterparty risk arising from exposures due to the following:

(a)     free deliveries;

(b)     OTC derivative instruments and credit derivatives;

(c)     Repurchase agreements, reverse repurchase agreements, securities or commodities lending or borrowing transactions based on securities or commodities included in the trading book;

(d)     exposures in the form of fees, commission, interest dividends and margin in exchange-traded derivative contracts which are neither covered in this Annex or Annex I, nor deducted from own funds under paragraph 2(d) of Article 13, and which are directly related to the items included in the trading book.

4. For these purposes a free-delivery will be deemed to have occurred if the institution has paid for securities or commodities before receiving them or it has delivered securities or commodities before receiving payment for them, and, in the case of cross-border transactions, one day or more has elapsed since it made that payment or delivery.

5. Subject to paragraphs 6 to 9, exposure values and risk-weighted exposure amounts for such exposures shall be calculated in accordance with the provisions of Title V, Chapter 2, Section 3 of Directive [2000/12/EC] with references to ‘credit institutions’ in that Section interpreted as references to ‘institutions’, references to ‘parent credit institutions’ interpreted as references to ‘parent institutions’, and with concomitant terms interpreted accordingly.

6. For the purposes of paragraph 5:

Annex IV to Directive [2000/12/EC] shall be considered to be amended to include after point 3(d) the words ‘and credit derivatives’;

Annex III to Directive [2000/12/EC] shall be considered to be amended to include after Table 1(a):

To obtain a figure for potential future credit exposure in the case of total return swap credit derivatives and credit default swap credit derivatives, the nominal amount of the instrument is multiplied by the following percentages:

Where the reference obligation is one that if it gave rise to a direct exposure of the institution would be a qualifying item for the purposes of Annex I - 5%;

Where the reference obligation is one that if it gave rise to a direct exposure of the institution would not be a qualifying item for the purposes of Annex I - 10%.

However, in the case of a credit default swap, an institution the exposure of which arising from the swap represents a long position in the underlying shall be permitted to use a figure of 0% for potential future credit exposure, unless the credit default swap is subject to closeout upon the insolvency of the entity the exposure of which arising from the swap represents a short position in the underlying, even though the underlying has not defaulted.”

Where the credit derivative provides protection in relation to ‘nth to default’ amongst a number of underlying obligations, which of the percentage figures prescribed above is to be applied is determined by the obligation with the nth lowest credit quality determined by whether it is one that if incurred by the institution would be a qualifying item for the purposes of Annex I.’

7. For the purposes of paragraph 5, in calculating risk-weighted exposure amounts institutions shall not be permitted to use the Financial Collateral Simple Method, set out in Annex VIII, Part 3, paragraphs 25 to 30 of Directive [2000/12/EC], for the recognition of the effects of financial collateral.

8. For the purposes of paragraph 5, in the case of repurchase transactions and securities or commodities lending or borrowing transactions, all financial instruments and commodities that are eligible to be included in the trading book may be recognised as eligible collateral. For exposures due to OTC derivative instruments booked in the trading book, commodities that are eligible to be included in the trading book may also be recognised as eligible collateral. For the purposes of calculating volatility adjustments where such financial instruments or commodities are lent, sold or provided, or borrowed, purchased or received by way of collateral or otherwise under such a transaction such instruments and commodities shall be treated in the same way as non-main index equities listed on a recognised exchange.

9. For the purposes of paragraph 5, in relation to the recognition of master netting agreements covering repurchase transactions and/or securities or commodities lending or borrowing transactions and/or other capital market-driven transactions netting across positions in the trading book and the non-trading book will only be recognised when the netted transactions fulfil the following conditions:

(a)     all transactions are marked to market daily;

(b)     any items lent, sold or provided, or borrowed, purchased or received under the transactions may be recognised as eligible financial collateral under Title V, Chapter 2, Section 3, Sub-section 3 of Directive [2000/12/EC] without the application of paragraph 8 of this Annex.

10. Where a credit derivative included in the trading book forms part of an internal hedge and the credit protection is recognised under Directive [2000/12/EC], there shall be deemed not to be counterparty risk arising from the position in the credit derivative.

11. The capital requirement shall be 8% of the total risk-weighted exposure amounts.

ê 93/6/EEC

Free deliveries

ê 98/31/EC Art. 1.7 and Annex .2(b)

3.1. An institution shall be required to hold capital against counterparty risk if:

(i)           it has paid for securities or commodities before receiving them or it has delivered securities or commodities before receiving payment for them;

              and

(ii)          in the case of cross-border transactions, one day or more has elapsed since it made that payment or delivery.

3.2. The capital requirement shall be 8 % of the value of the securities or commodities or cash owed to the institution multiplied by the risk weighting applicable to the relevant counterparty.

ê 98/31/EC Art. 1.7 and Annex .2(c)

Repurchase and reverse repurchase agreements, securities or commodities lending and borrowing

4.1. In the case of repurchase agreements and securities or commodities lending based on securities or commodities included in the trading book the institution shall calculate the difference between the market value of the securities or commodities and the amount borrowed by the institution or the market value of the collateral, where that difference is positive. In the case of reverse repurchase agreements and securities or commodities borrowing, the institution shall calculate the difference between the amount the institution has lent or the market value of the collateral and the market value of the securities or commodities it has received, where that difference is positive.

ê 93/6/EEC

The competent authorities shall take measures to ensure that the excess collateral given is acceptable.

Furthermore, the competent authorities may allow institutions not to include the amount of excess collateral in the calculations described in the first two sentences of this paragraph if the amount of excess collateral is guaranteed in such a way that the transferor is always assured that the excess collateral will be returned to it in the event of defaults of its counter-party.

Accrued interest shall be included in calculating the market value of amounts lent or borrowed and collateral.

4.2. The capital requirement shall be 8 % of the figure produced in accordance with paragraph 4.1, multiplied by the risk weighting applicable to the relevant counter-party.

OTC derivative instruments

ê 98/33/EC Art. 3.2

5. In order to calculate the capital requirement on their OTC derivative instruments, institutions shall apply Article II to Directive 89/647/EEC. The risk weightings to be applied to the relevant counterparties shall be determined in accordance with Article 2(9) of this Directive.

Until 31 December 2006, the competent authorities of Member States may exempt from the application of the methods set out in Annex II OTC contracts cleared by a clearing house where the latter acts as the legal counterparty and all participants fully collateralise on a daily basis the exposure they present to the clearing house, thereby providing a protection covering both the current exposure and the potential future exposure. The competent authorities must be satisfied that the posted collateral gives the same level of protection as collateral which complies with Article 6(1)(a)(7) of Directive 89/647/EEC and that the risk of a build-up of the clearing house's exposures beyond the market value of posted collateral is eliminated. Member States shall inform the Commission of the use they make of this option.

ê 93/6/EEC

OTHER

6. The capital requirements of Directive 89/647/EEC shall apply to those exposures in the form of fees, commission, interest, dividends and margin in exchange-traded futures or options contracts which are neither covered in this Annex or Annex I nor deducted from own funds under paragraph 2 (d) of Annex V and which are directly related to the items included in the trading book

The risk weightings to be applied to the relevant counter-parties shall be determined in accordance with Article 2 (9) of this Directive.

ê 93/6/EEC (adapted)

ANNEX III

Ö CALCULATING CAPITAL REQUIREMENTS FOR Õ FOREIGN-EXCHANGE RISK

ê 98/31/EC Art. 1.7 and Annex .3(a) (adapted)

1. If the sum of an institution's overall net foreign-exchange position and its net gold position, calculated in accordance with the procedure set out below Ö in paragraph 2 Õ , exceeds 2 % of its total own funds, it shall multiply the sum of its net foreign-exchange position and its net gold position by 8 % in order to calculate its own-funds requirement against foreign-exchange risk.

Until 31 December 2004, the competent authorities may allow institutions to calculate their own-funds requirement by multiplying by 8 % the amount by which the sum of the overall net foreign-exchange position and the net gold position exceeds 2 % of the total own funds.

ê 93/6/EEC (adapted)

2. A two-stage calculation shall be used Ö for capital requirements for foreign-exchange risk Õ.

ê 98/31/EC Art. 1.7 and Annex .3(b) (adapted)

32.1. Firstly, the institution's net open position in each currency (including the reporting currency) and in gold shall be calculated.

This Ö net open Õ position shall consist of the sum of the following elements (positive or negative):

-(a)    the net spot position (i.e. all asset items less all liability items, including accrued interest, in the currency in question or, for gold, the net spot position in gold),

-(b)    the net forward position (i.e. all amounts to be received less all amounts to be paid under forward exchange and gold transactions, including currency and gold futures and the principal on currency swaps not included in the spot position),

-(c)    irrevocable guarantees (and similar instruments) that are certain to be called and likely to be irrecoverable,

-(d)   net future income/expenses not yet accrued but already fully hedged (at the discretion of the reporting institution and with the prior consent of the competent authorities, net future income/expenses not yet entered in accounting records but already fully hedged by forward foreign-exchange transactions may be included here). Such discretion must be exercised on a consistent basis,

-(e)    the net delta (or delta-based) equivalent of the total book of foreign-currency and gold options,

-(f)    the market value of other (i.e. non-foreign-currency and non-gold) options,.

- aAny positions which an institution has deliberately taken in order to hedge against the adverse effect of the exchange rate on its capital ratio may be excluded from the calculation of net open currency positions. Such positions should be of a non-trading or structural nature and their exclusion, and any variation of the terms of their exclusion, shall require the consent of the competent authorities. The same treatment subject to the same conditions as above may be applied to positions which an institution has which relate to items that are already deducted in the calculation of own funds.

ò new

For the purposes of the calculation referred to in the first sub-paragraph, in respect of CIUs the actual foreign exchange positions of the CIU shall be taken into account. Institutions may rely on third party reporting of the foreign exchange positions in the CIU, where the correctness of this report is adequately ensured. If an institution is not aware of the foreign exchange positions in a CIU, it shall be assumed that the CIU is invested up to the maximum extent allowed under the CIU’s mandate in foreign exchange and institutions shall, for trading book positions, take account of the maximum indirect exposure that they could achieve by taking leveraged positions through the CIU when calculating their capital requirement for foreign exchange risk. This shall be done by proportionally increasing the position in the CIU up to the maximum exposure to the underlying investment items resulting from the investment mandate. The assumed position of the CIU in foreign exchange shall be treated as a separate currency according to the treatment of investments in gold, subject to the modification that, if the direction of the CIU's investment is available, the total long position may be added to the total long open foreign exchange position and the total short position may be added to the total short open foreign exchange position. There would be no netting allowed between such positions prior to the calculation.

ê 98/31/EC Art. 1.7 and Annex .3(b)

3.2 The competent authorities shall have the discretion to allow institutions to use the net present value when calculating the net open position in each currency and in gold.

ê 93/6/EEC

è1 98/31/EC Art. 1.7 and Annex .3(c)

è1 42.2. Secondly, net short and long positions in each currency other than the reporting currency and the net long or short position in gold shall be converted at spot rates into the reporting currency. ç They shall then be summed separately to form the total of the net short positions and the total of the net long positions respectively. The higher of these two totals shall be the institution's overall net foreign-exchange position.

ê 93/6/EEC (adapted)

53. Notwithstanding Ö By derogation to Õ paragraphs 1 to 4 Ö and 2 Õ and pending further coordination, the competent authorities may prescribe or allow institutions to use alternative Ö the following Õ procedures for the purposes of this Annex.

ê 93/6/EEC (adapted)

63.1. Firstly, tThe competent authorities may allow institutions to provide lower capital requirements against positions in closely correlated currencies than those which would result from applying paragraphs 1 to 4 Ö and 2 Õ to them. The competent authorities may deem a pair of currencies to be closely correlated only if the likelihood of a loss — calculated on the basis of daily exchange-rate data for the preceding three or five years — occurring on equal and opposite positions in such currencies over the following 10 working days, which is 4 % or less of the value of the matched position in question (valued in terms of the reporting currency) has a probability of at least 99 %, when an observation period of three years is used, or 95 %, when an observation period of five years is used. The own-funds requirement on the matched position in two closely correlated currencies shall be 4 % multiplied by the value of the matched position. The capital requirement on unmatched positions in closely correlated currencies, and all positions in other currencies, shall be 8 %, multiplied by the higher of the sum of the net short or the net long positions in those currencies after the removal of matched positions in closely correlated currencies.

ê 98/31/EC Art. 1.7 and Annex .3(d) (adapted)

7. Secondly, until 31 December 2004, the competent authorities may allow institutions to apply an alternative method to those outlined in paragraphs 1 to 6 for the purposes of this Annex. The capital requirement produced by this method must be sufficient to exceed 2 % of the net open position as measured in paragraph 4 and, on the basis of an analysis of exchange-rate movements during all the rolling 10-working-day periods over the preceding three years, to exceed the likely loss 99 % or more of the time.

The alternative method described in the first subparagraph may only be used under the following conditions:

(i)           the calculation formula and the correlation coefficients are set by the competent authorities, based on their analysis of exchange-rate movements;

(ii)          the competent authorities review the correlation coefficients regularly in the light of developments in foreign-exchange markets.

ê 93/6/EEC (adapted)

83.2. Thirdly, tThe competent authorities may allow institutions to remove positions in any currency which is subject to a legally binding intergovernmental agreement to limit its variation relative to other currencies covered by the same agreement from whichever of the methods described in paragraphs 1 to 7 Ö, 2 and 3.1 Õ that they apply. Institutions shall calculate their matched positions in such currencies and subject them to a capital requirement no lower than half of the maximum permissible variation laid down in the intergovernmental agreement in question in respect of the currencies concerned. Unmatched positions in those currencies shall be treated in the same way as other currencies.

Notwithstanding Ö By derogation to Õ the first Ö sub- Õ paragraph, the competent authorities may allow the capital requirement on the matched positions in currencies of Member States participating in the second stage of the European monetary union to be 1.6 %, multiplied by the value of such matched positions.

ê 93/6/EEC (adapted)

9. The competent authorities shall notify the Council and Commission of the methods, if any, that they are prescribing or allowing in respect of paragraphs 6 to 8.

10. The Commission shall report to the Council on the methods referred to in paragraph 9 and, where necessary and with due regard to international developments, shall propose a more harmonized treatment of foreign-exchange risk.

ê 93/6/EEC

114. Net positions in composite currencies may be broken down into the component currencies according to the quotas in force.

ê 98/31/EC Art. 1.7 and Annex .5 (adapted)

ANNEX VIII Ö IV Õ

Ö CALCULATING CAPITAL REQUIREMENTS FOR Õ COMMODITIES RISK

ê 98/31/EC Art. 1.7 and Annex .5

1. Each position in commodities or commodity derivatives shall be expressed in terms of the standard unit of measurement. The spot price in each commodity shall be expressed in the reporting currency.

ê 98/31/EC Art. 1.7 and Annex .5 (adapted)

2. Positions in gold or gold derivatives shall be considered as being subject to foreign-exchange risk and treated according to Annex III or Annex VIII, as appropriate, for the purpose of calculating market risk.

3. For the purposes of this Annex, positions which are purely stock financing may be excluded from the commodities risk calculation only.

4. The interest-rate and foreign-exchange risks not covered by other provisions of this Annex shall be included in the calculation of general risk for traded debt instruments and in the calculation of foreign-exchange risk.

5. When the short position falls due before the long position, institutions shall also guard against the risk of a shortage of liquidity which may exist in some markets.

6. For the purpose of paragraph 19, the excess of an institution's long (short) positions over its short (long) positions in the same commodity and identical commodity futures, options and warrants shall be its net position in each commodity.

The competent authorities shall allow positions in derivative instruments to be treated, as laid down in paragraphs 8, 9 and 10, as positions in the underlying commodity.

ê 98/31/EC Art. 1.7 and Annex .5

7. The competent authorities may regard the following positions as positions in the same commodity:

-(a)         positions in different sub-categories of commodities in cases where the sub-categories are deliverable against each other;

              and

-(b)         positions in similar commodities if they are close substitutes and if a minimum correlation of 0,9 0.9 between price movements can be clearly established over a minimum period of one year.

ê 98/31/EC Art. 1.7 and Annex .5

Particular instruments

ê 98/31/EC Art. 1.7 and Annex .5 (adapted)

8. Commodity futures and forward commitments to buy or sell individual commodities shall be incorporated in the measurement system as notional amounts in terms of the standard unit of measurement and assigned a maturity with reference to expiry date.

The competent authorities may allow the capital requirement for an exchange-traded future to be equal to the margin required by the exchange if they are fully satisfied that it provides an accurate measure of the risk associated with the future and that it is at least equal to the capital requirement for a future that would result from a calculation made using the method set out in the remainder of this Annex or applying the internal models method described in Annex VIII.

Until 31 December 2006 tThe competent authorities may also allow the capital requirement for an OTC commodity derivatives contract of the type referred to in this paragraph cleared by a clearing house recognised by them to be equal to the margin required by the clearing house if they are fully satisfied that it provides an accurate measure of the risk associated with the derivatives contract and that it is at least equal to the capital requirement for the contract in question that would result from a calculation made using the method set out in the remainder of this Annex or applying the internal models method described in Annex VIII.

ê 98/31/EC Art. 1.7 and Annex .5 (adapted)

9. Commodity swaps where one side of the transaction is a fixed price and the other the current market price shall be incorporated into the maturity ladder approach Ö, as set out in paragraphs 13 to 18, Õ as a series of positions equal to the notional amount of the contract, with one position corresponding with each payment on the swap and slotted into the maturity ladder set out in the tTable appearing in paragraph 13 Ö 1 Õ. The positions would be long positions if the institution is paying a fixed price and receiving a floating price and short positions if the institution is receiving a fixed price and paying a floating price.

Commodity swaps where the sides of the transaction are in different commodities are to be reported in the relevant reporting ladder for the maturity ladder approach.

ê 98/31/EC Art. 1.7 and Annex .5 (adapted)

10. Options on commodities or on commodity derivatives shall be treated as if they were positions equal in value to the amount of the underlying to which the option refers, multiplied by its delta for the purposes of this Annex. The latter positions may be netted off against any offsetting positions in the identical underlying commodity or commodity derivative. The delta used shall be that of the exchange concerned, that calculated by the competent authorities or, where none of those is available, or for OTC options, that calculated by the institution itself, subject to the competent authorities being satisfied that the model used by the institution is reasonable.

However, the competent authorities may also prescribe that institutions calculate their deltas using a methodology specified by the competent authorities.

The competent authorities shall require that the oOther risks, apart from the delta risk, associated with commodity options are Ö shall be Õ safeguarded against.

The competent authorities may allow the requirement for a written exchange-traded commodity option to be equal to the margin required by the exchange if they are fully satisfied that it provides an accurate measure of the risk associated with the option and that it is at least equal to the capital requirement against an option that would result from a calculation made using the method set out in the remainder of this Annex or applying the internal models method described in Annex VIII.

Until 31 December 2006 tThe competent authorities may also allow the capital requirement for an OTC commodity option cleared by a clearing house recognised by them to be equal to the margin required by the clearing house if they are fully satisfied that it provides an accurate measure of the risk associated with the option and that it is at least equal to the capital requirement for an OTC option that would result from a calculation made using the method set out in the remainder of this Annex or applying the internal models method described in Annex VIII.

In addition they may allow the requirement on a bought exchange-traded or OTC commodity option to be the same as that for the commodity underlying it, subject to the constraint that the resulting requirement does not exceed the market value of the option. The requirement for a written OTC option shall be set in relation to the commodity underlying it.

ê 98/31/EC Art. 1.7 and Annex .5 (adapted)

11. Warrants relating to commodities shall be treated in the same way as commodity options under Ö referred to in Õ paragraph 10.

ê 98/31/EC Art. 1.7 and Annex .5

12. The transferor of commodities or guaranteed rights relating to title to commodities in a repurchase agreement and the lender of commodities in a commodities lending agreement shall include such commodities in the calculation of its capital requirement under this Annex.

ê 98/31/EC Art. 1.7 and Annex .5 (adapted)

(a) Maturity ladder approach

13. The institution shall use a separate maturity ladder in line with the following tTable 1 for each commodity. All positions in that commodity and all positions which are regarded as positions in the same commodity pursuant to paragraph 7 shall be assigned to the appropriate maturity bands. Physical stocks shall be assigned to the first maturity band.

Ö Table 1 Õ

Maturity band (1) || Spread rate (in %) (2)

0 ≤ 1 month || 1.50

> 1 ≤ 3 months || 1.50

> 3 ≤ 6 months || 1.50

> 6 ≤ 12 months || 1.50

> 1 ≤ 2 years || 1.50

> 2 ≤ 3 years || 1.50

> 3 years || 1.50

14. Competent authorities may allow positions which are, or are regarded pursuant to paragraph 7 as, positions in the same commodity to be offset and assigned to the appropriate maturity bands on a net basis for Ö the following Õ :

- (a)      positions in contracts maturing on the same date;

and

- (b)        positions in contracts maturing within 10 days of each other if the contracts are traded on markets which have daily delivery dates.

ê 98/31/EC Art. 1.7 and Annex .5

15. The institution shall then work out the sum of the long positions and the sum of the short positions in each maturity band. The amount of the former (latter) which are matched by the latter (former) in a given maturity band shall be the matched positions in that band, while the residual long or short position shall be the unmatched position for the same band.

16. That part of the unmatched long (short) position for a given maturity band that is matched by the unmatched short (long) position for a maturity band further out shall be the matched position between two maturity bands. That part of the unmatched long or unmatched short position that cannot be thus matched shall be the unmatched position.

17. The institution's capital requirement for each commodity shall be calculated on the basis of the relevant maturity ladder as the sum of the following:

(ia)         the sum of the matched long and short positions, multiplied by the appropriate spread rate as indicated in the second column of the table appearing in paragraph 13 for each maturity band and by the spot price for the commodity;

(iib)        the matched position between two maturity bands for each maturity band into which an unmatched position is carried forward, multiplied by 0,6 % (carry rate) and by the spot price for the commodity;

(iiic)       the residual unmatched positions, multiplied by 15 % (outright rate) and by the spot price for the commodity.

18. The institution's overall capital requirement for commodities risk shall be calculated as the sum of the capital requirements calculated for each commodity according to paragraph 17.

(b) Simplified approach

19. The institution's capital requirement for each commodity shall be calculated as the sum of:

(ia)         15% of the net position, long or short, multiplied by the spot price for the commodity;

(iib)        3% of the gross position, long plus short, multiplied by the spot price for the commodity.

20. The institution's overall capital requirement for commodities risk shall be calculated as the sum of the capital requirements calculated for each commodity according to paragraph 19.

ê 93/6/EEC Art 11a (adapted)

Ö (c) Extended Maturity ladder approach Õ

Until 31 December 2006, Member States Ö Competent authorities Õ may authorise their institutions to use the minimum spread, carry and outright rates set out in the following table instead of those indicated in paragraphs 13, 14, 17 and 18 of Annex VII provided that the institutions, in the opinion of their competent authorities:

(a)     undertake significant commodities business,

(b)     have a diversified commodities portfolio, and

(c)     are not yet in a position to use internal models for the purpose of calculating the capital requirement on commodities risk in accordance with Annex Ö V Õ VIII.

Table 2

|| Precious metals (except gold) || Base metals || Agricultural products (softs) || Other, including energy products

Spread rate (%) || 1.0 || 1.2 || 1.5 || 1.5

Carry rate (%) || 0.3 || 0.5 || 0.6 || 0.6

Outright rate (%) || 8 || 10 || 12 || 15

ê 98/31/EC Art. 1.7 and Annex .5 (adapted)

è1 98/31/EC Art. 1.7 and Annex .5 amended by Corrigendum, OJ L 248, 8.9.1998, p. 20

ANNEX VIII

Ö USE OF Õ INTERNAL MODELS Ö TO CALCULATE CAPITAL REQUIREMENTS Õ

1. The competent authorities may, subject to the conditions laid down in this Annex, allow institutions to calculate their capital requirements for position risk, foreign-exchange risk and/or commodities risk using their own internal risk-management models instead of or in combination with the methods described in Annexes I, III and VII Ö IV Õ. Explicit recognition by the competent authorities of the use of models for supervisory capital purposes shall be required in each case.

2. Recognition shall only be given if the competent authority is satisfied that the institution's risk-management system is conceptually sound and implemented with integrity and that, in particular, the following qualitative standards are met:

(ia)    the internal risk-measurement model is closely integrated into the daily risk-management process of the institution and serves as the basis for reporting risk exposures to senior management of the institution;

(iib)   the institution has a risk control unit that is independent from business trading units and reports directly to senior management. The unit must be responsible for designing and implementing the institution's risk-management system. It shall produce and analyse daily reports on the output of the risk-measurement model and on the appropriate measures to be taken in terms of trading limits;

(iiic)  the institution's board of directors and senior management are actively involved in the risk-control process and the daily reports produced by the risk-control unit are reviewed by a level of management with sufficient authority to enforce both reductions of positions taken by individual traders as well as in the institution's overall risk exposure;

(ivd)  the institution has sufficient numbers of staff skilled in the use of sophisticated models in the trading, risk-control, audit and back-office areas;

(ve)   the institution has established procedures for monitoring and ensuring compliance with a documented set of internal policies and controls concerning the overall operation of the risk-measurement system;

(vif)  the institution's models have a proven track record of reasonable accuracy in measuring risks;

(viig) the institution frequently conduct a rigorous programme of stress testing and the results of these tests are reviewed by senior management and reflected in the policies and limits it sets;

(viiih) the institution must conduct, as part of its regular internal auditing process, an independent review of its risk-measurement system.

This Ö The Õ review Ö referred to in point (h) of the first subparagraph Õ must Ö shall Õ include both the activities of the business trading units and of the independent risk-control unit. At least once a year, the institution must conduct a review of its overall risk-management process.

The review must Ö shall Õ consider Ö the following Õ :

- (a)   the adequacy of the documentation of the risk-management system and process and the organisation of the risk-control unit;

- (b)   the integration of market risk measures into daily risk management and the integrity of the management information system;

- (c)   the process the institution employs for approving risk-pricing models and valuation systems that are used by front and back-office personnel;

- (d)  the scope of market risks captured by the risk-measurement model and the validation of any significant changes in the risk-measurement process;

- (e)   the accuracy and completeness of position data, the accuracy and appropriateness of volatility and correlation assumptions, and the accuracy of valuation and risk sensitivity calculations;

- (f)   the verification process the institution employs to evaluate the consistency, timeliness and reliability of data sources used to run internal models, including the independence of such data sources;

         and

- (g)   the verification process the institution uses to evaluate back-testing that is conducted to assess the model's accuracy.

3. The institution shall monitor the accuracy and performance of its model by conducting a back-testing programme. The back-testing has to provide for each business day a comparison of the one-day value-at-risk measure generated è1 by the institution's model for the portfolio's end-of-day positions to the one-day change of the portfolio's value ç by the end of the subsequent business day.

Competent authorities shall examine the institution's capability to perform back-testing on both actual and hypothetical changes in the portfolio's value. Back-testing on hypothetical changes in the portfolio's value is based on a comparison between the portfolio's end-of-day value and, assuming unchanged positions, its value at the end of the subsequent day. Competent authorities shall require institutions to take appropriate measures to improve their back-testing programme if deemed deficient.

4. For the purpose of calculating capital requirements for specific risk associated with traded debt and equity positions, the competent authorities may recognise the use of an institution's internal model if, in addition to compliance with the conditions in the remainder of this Annex, the model Ö meets the following conditions Õ :

- (a)   it explains the historical price variation in the portfolio;

- (b)   it captures concentration in terms of magnitude and changes of composition of the portfolio;

- (c)   it is robust to an adverse environment;

- (d)  it is validated through back-testing aimed at assessing whether specific risk is being accurately captured. If competent authorities allow this back-testing to be performed on the basis of relevant sub-portfolios, these must be chosen in a consistent manner.

ê 98/31/EC Art. 1.7 and Annex .5

5. Institutions using internal models which are not recognised in accordance with paragraph 4 shall be subject to a separate capital charge for specific risk as calculated according to Annex I.

6. For the purpose of paragraph 10(ii) the results of the institution's own calculation shall be scaled up by a multiplication factor of at least 3.

ê 98/31/EC Art. 1.7 and Annex .5 (adapted)

7. The multiplication factor shall be increased by a plus-factor of between 0 and 1 in accordance with the following tTable Ö 1 Õ, depending on the number of overshootings for the most recent 250 business days as evidenced by the institution's back-testing. Competent authorities shall require the institutions to calculate overshootings consistently on the basis of back-testing either on actual or on hypothetical changes in the portfolio's value. An overshooting is a one-day change in the portfolio's value that exceeds the related one-day value-at-risk measure generated by the institution's model. For the purpose of determining the plus-factor the number of overshootings shall be assessed at least quarterly.

Ö Table 1 Õ

Number of overshootings || Plus-factor

Fewer than 5 || 0.00

5 || 0.40

6 || 0.50

7 || 0.65

8 || 0.75

9 || 0,85

10 or more || 1.00

The competent authorities can Ö may Õ, in individual cases and owing to an exceptional situation, waive the requirement to increase the multiplication factor by the plus-factor according to the above tTable Ö 1 Õ, if the institution has demonstrated to the satisfaction of the competent authorities that such an increase is unjustified and that the model is basically sound.

If numerous overshootings indicate that the model is not sufficiently accurate, the competent authorities shall revoke the model's recognition or impose appropriate measures to ensure that the model is improved promptly.

In order to allow competent authorities to monitor the appropriateness of the plus-factor on an ongoing basis, institutions shall notify promptly, and in any case no later than within five working days, the competent authorities of overshootings that result form their back-testing programme and that would according to the above table imply an increase of a plus-factor.

8. If the institution's model is recognised by the competent authorities in accordance with paragraph 4 for the purpose of calculating capital requirements for specific risk, the institution shall increase its capital requirement calculated pursuant to paragraphs 6, 7 and 10 by a surcharge in the amount of either Ö of the following Õ:

(ia)         the specific risk portion of the value-at-risk measure which should be isolated according to supervisory guidelines; or, at the institution's option,

(iib)        the value-at-risk measures of sub-portfolios of debt and equity positions that contain specific risk.

Institutions using option (ii Ö b Õ) are required to identify their sub-portfolio structure beforehand and should not change it without the consent of the competent authorities.

ê 98/31/EC Art. 1.7 and Annex .5

9. The competent authorities may waive the requirement pursuant to paragraph 8 for a surcharge if the institution demonstrates that in line with agreed international standards its model accurately captures also the event risk and default risk for its traded debt and equity positions.

ê 98/31/EC Art. 1.7 and Annex .5 (adapted)

10. Each institution must meet a capital requirement expressed as the higher of:

(ia)         its previous day's value-at-risk number measured according to the parameters specified in this Annex;

(iib)        an average of the daily value-at-risk measures on each of the preceding 60 business days, multiplied by the factor mentioned in paragraph 6, adjusted by the factor mentioned Ö referred to Õ in paragraph 7.

ê 98/31/EC Art. 1.7 and Annex .5

11. The calculation of value-at-risk shall be subject to the following minimum standards:

(ia)         at least daily calculation of value-at-risk;

(iib)        a 99th percentile, one-tailed confidence interval;

(iiic)       a 10-day equivalent holding period;

(ivd)       an effective historical observation period of at least one year except where a shorter observation period is justified by a significant upsurge in price volatility;

(ve)        three-monthly data set updates.

12. The competent authorities shall require that the model captures accurately all the material price risks of options or option-like positions and that any other risks not captured by the model are covered adequately by own funds.

ê 98/31/EC Art. 1.7 and Annex .5 (adapted)

13. The competent authorities shall require that the risk-measurement model Ö shall Õ captures a sufficient number of risk factors, depending on the level of activity of the institution in the respective markets Ö and in particular the following Õ .

As a minimum, the following provisions shall be respected:

Ö Interest rate risk Õ

(i)         for interest rate risk, tThe risk-measurement system shall incorporate a set of risk factors corresponding to the interest rates in each currency in which the institution has interest rate sensitive on- or off-balance sheet positions. The institution shall model the yield curves using one of the generally accepted approaches. For material exposures to interest-rate risk in the major currencies and markets, the yield curve shall be divided into a minimum of six maturity segments, to capture the variations of volatility of rates along the yield curve. The risk-measurement system must also capture the risk of less than perfectly correlated movements between different yield curves;.

Ö Foreign-exchange risk Õ

(ii)        for foreign-exchange risk, tThe risk-measurement system shall incorporate risk factors corresponding to gold and to the individual foreign currencies in which the institution's positions are denominated;.

ò new

For CIUs the actual foreign exchange positions of the CIU shall be taken into account. Institutions may rely on third party reporting of the foreign exchange position in the CIU, where the correctness of this report is adequately ensured. If an institution is not aware of the foreign exchange positions in a CIU, it shall be assumed that the CIU is invested up to the maximum extent allowed under the CIU’s mandate in foreign exchange and institutions shall, for trading book positions, take account of the maximum indirect exposure that they could achieve by taking leveraged positions through the CIU when calculating their capital requirement for foreign exchange risk. This shall be done by proportionally increasing the position in the CIU up to the maximum exposure to the underlying investment items resulting from the investment mandate. The assumed position of the CIU in foreign exchange shall be treated as a separate currency according to the treatment of investments in gold. If, however, the direction of the CIU's investment is available, the total long position may be added to that the total long open foreign exchange position and the total short position may be added to the total short open foreign exchange position. There would be no netting allowed between such positions prior to the calculation.

ê 98/31/EC Art. 1.7 and Annex .5 (adapted)

Ö Equity risk Õ

(iii)       for equity risk, tThe risk-measurement system shall use a separate risk factor at least for each of the equity markets in which the institution holds significant positions;.

Ö Commodity risk Õ

(iv)       for commodity risk, tThe risk-measurement system shall use a separate risk factor at least for each commodity in which the institution holds significant positions. The risk-measurement system must also capture the risk of less than perfectly correlated movements between similar, but not identical, commodities and the exposure to changes in forward prices arising from maturity mismatches. It shall also take account of market characteristics, notably delivery dates and the scope provided to traders to close out positions;.

ê 98/31/EC Art. 1.7 and Annex .5

14. The competent authorities may allow institutions to use empirical correlations within risk categories and across risk categories if they are satisfied that the institution's system for measuring correlations is sound and implemented with integrity.

ê 93/6/EEC Annex VI (8) (2) second sentence (adapted)

ANNEX VI

Ö CALCULATING CAPITAL REQUIREMENTS FOR Õ LARGE EXPOSURES

1. The excess referred to in Article 29 Ö 31 Õ (b) shall be calculated by selecting those components of the total trading exposure to the client or group of clients in question which attract the highest specific-risk requirements in Annex I and/or requirements in Annex II, the sum of which equals the amount of the excess referred to in Article 29 Ö 31 Õ (a).

2. Where the excess has not persisted for more than 10 days, the additional capital requirement shall be 200 % of the requirements referred to in paragraph 1, on these components.

3. As from 10 days after the excess has occurred, the components of the excess, selected in accordance with paragraph 1, shall be allocated to the appropriate line in column 1 of Table I in ascending order of specific-risk requirements in Annex I and/or requirements in Annex II. The additional capital requirement shall be equal to the sum of the specific-risk requirements in Annex I and/or the Annex II requirements on these components multiplied by the corresponding factor in column 2 of Table I.

Ö Table 1 Õ

Excess over the limits (on the basis of a percentage of own funds) || Factors

Up to 40 % || 200 %

From 40 % to 60 % || 300 %

From 60 % to 80 % || 400 %

From 80 % to 100 % || 500 %

From 100 % to 250 % || 600 %

Over 250 % || 900 %

é

ò new

ANNEX VII

TRADING

Part A - Trading Intent

1. Positions/portfolios held with trading intent shall comply with the following requirements:

(a)     there must be a clearly documented trading strategy for the position/instrument or portfolios, approved by senior management, which shall include expected holding horizon;

(b)     there must be clearly defined policies and procedures for the active management of the position, which shall include the following:

(i)      positions entered into on a trading desk;

(ii)     position limits are set and monitored for appropriateness;

(iii)    dealers have the autonomy to enter into/manage the position within agreed limits and according to the agreed strategy;

(iv)    positions are reported to senior management as an integral part of the institution’s risk management process;

(v)     positions are actively monitored with reference to market information sources and an assessment made of the marketability or hedge-ability of the position or its component risks, including the assessment of, in particular, the quality and availability of market inputs to the valuation process, level of market turnover, sizes of positions traded in the market;

(c)     there must be clearly defined policy and procedures to monitor the position against the institution’s trading strategy including the monitoring of turnover and sale positions in the institution’s trading book.

Part B - Systems and Controls

1. Institutions shall establish and maintain systems and controls sufficient to provide prudent and reliable valuation estimates.

2. Systems and controls shall include at least the following elements:

(a)     documented policies and procedures for the process of valuation. This includes clearly defined responsibilities of the various areas involved in the determination of the valuation, sources of market information and review of their appropriateness, frequency of independent valuation, timing of closing prices, procedures for adjusting valuations, month end and ad-hoc verification procedures;

(b)     clear and independent (i.e. independent of front office) reporting lines for the department accountable for the valuation process.

The reporting line shall ultimately be to a main board executive director.

Prudent Valuation Methods

3. Marking to market is the at least daily valuation of positions at readily available close out prices that are sourced independently. Examples include exchange prices, screen prices, or quotes from several independent reputable brokers.

4. When marking to market, the more prudent side of bid/offer shall be used unless the institution is a significant market maker in the particular type of financial instrument or commodity in question and it can close out at mid market.

5. Where marking to market is not possible, institutions must mark to model their positions/portfolios before applying trading book capital treatment. Marking to model is defined as any valuation which has to be benchmarked, extrapolated or otherwise calculated from a market input.

6. The following requirements must be complied with when marking to model:

(a)          senior management shall be aware of the elements of the trading book which are subject to mark to model and shall understand the materiality of the uncertainty this creates in the reporting of the risk/performance of the business;

(b)          market inputs shall be sourced, where possible, in line with market prices, and the appropriateness of the market inputs of the particular position being valued and the parameters of the model shall be assessed on a daily basis;

(c)          where available, valuation methodologies which are accepted market practice for particular financial instruments or commodities shall be used;

(d)          where the model is developed by the institution itself, it shall be based on appropriate assumptions, which have been assessed and challenged by suitably qualified parties independent of the development process;

(e)          there shall be formal change control procedures in place and a secure copy of the model shall be held and periodically used to check valuations;

(f)          risk management shall be aware of the weaknesses of the models used and how best to reflect those in the valuation output;

(g)          the model shall be subject to periodic review to determine the accuracy of its performance (e.g. assessing the continued appropriateness of assumptions, analysis of P&L versus risk factors, comparison of actual close out values to model outputs).

For the purposes of point (d), the model shall be developed or approved independently of the front office. If shall be independently tested. This includes validating the mathematics, the assumptions and the software implementation

7. Independent price verification should be performed in addition to daily marking to market or marking to model. This is the process by which market prices or model inputs are regularly verified for accuracy and independence. While daily marking to market may be performed by dealers, verification of market prices and model inputs should be performed by a unit independent of the dealing room, at least monthly (or, depending on the nature of the market/trading activity, more frequently). Where independent pricing sources are not available or pricing sources are more subjective, prudent measures such as valuation adjustments may be appropriate.

Valuation adjustments or reserves

8. Institutions shall establish and maintain procedures for considering valuation adjustments/reserves.

General standards

9. The competent authorities shall require the following valuation adjustments/reserves to be formally considered: unearned credit spreads, close-out costs, operational risks, early termination, investing and funding costs, future administrative costs and, where relevant, model risk.

Standards for less liquid items

10. Less liquid positions could arise from both market events and institution-related situations e.g. concentrated positions and/or stale positions.

11. Institutions shall consider several factors when determining whether a valuation reserve is necessary for less liquid items. These factors include the amount of time it would take to hedge out the position/risks within the position, the volatility and average of bid/offer spreads, the availability of market quotes (number and identity of market makers) and the volatility and average of trading volumes.

12. When using third party valuations or marking to model, institutions shall consider whether to apply a valuation adjustment. In addition, institutions shall consider the need for establishing reserves for less liquid position and on an ongoing basis review their continued suitability.

13. When valuation adjustments/reserves give rise to material losses of the current financial year, these shall be deducted from an institution’s original own funds according to point (k) of Article 57 of Directive [2000/12/EC].

14. Other profits/losses originating from valuation adjustments/reserves shall be included in the calculation of “net trading book profits” mentioned in point (2)(b) of Article 13 and be added to/deducted from the additional own funds eligible to cover market risk requirements according to such provisions.

Part C – Internal Hedges

1. An internal hedge is a position that materially or completely offsets the component risk element of a non-trading book position or a set of positions. Positions arising from internal hedges are eligible for trading book capital treatment, provided that they are held with trading intent and that the general criteria on trading intent and prudent valuation specified in Parts A and B are met. In particular:

(a)     internal hedges shall not be primarily intended to avoid or reduce capital requirements;

(b)     internal hedges shall be properly documented and subject to particular internal approval and audit procedures;

(c)     the internal transaction shall be dealt with at market conditions;

(d)     the bulk of the market risk that is generated by the internal hedge shall be dynamically managed in the trading book within the authorised limits;

(e)     internal transactions shall be carefully monitored.

Monitoring must be ensured by adequate procedures.

2. The treatment referred to in paragraph 1 applies without prejudice to the capital requirements applicable to the “non-trading book leg” of the internal hedge.

ANNEX VIII

REPEALED DIRECTIVES

PART A

REPEALED DIRECTIVES TOGETHER WITH THEIR SUCCESSIVE AMENDMENTS

(referred to in Article 48)

Council Directive 93/6/EEC of 15 March 1993 on the capital adequacy of investments firms and credit institutions

Directive 98/31/EC of the European Parliament and of the Council of 22 June 1998 amending Council Directive 93/6/EEC on the capital adequacy of investment firms and credit institutions

Directive 98/33/EC of the European Parliament and of the Council of 22 June 1998 amending Article 12 of Council Directive 77/780/EEC on the taking up and pursuit of the business of credit institutions, Articles 2, 5, 6, 7, 8 of and Annexes II and III to Council Directive 89/647/EEC on a solvency ratio for credit institutions and Article 2 of and Annex II to Council Directive 93/6/EEC on the capital adequacy of investment firms and credit institutions

Directive 2002/87/EC of the European Parliament and of the Council of 16 December 2002 on the supplementary supervision of credit institutions, insurance undertakings and investment firms in a financial conglomerate and amending Council Directives 73/239/EEC, 79/267/EEC, 92/49/EEC, 92/96/EEC, 93/6/EEC and 93/22/EEC, and Directives 98/78/EC and 2000/12/EC of the European Parliament and of the Council,

Only Art. 26

Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on markets in financial instruments amending Council Directives 85/611/EEC and 93/6/EEC and Directive 2000/12/EC of the European Parliament and of the Council and repealing Council Directive 93/22/EEC

Only Art. 67

PART B

DEADLINES FOR IMPLEMENTATION

(referred to in Article 48)

Directive || || Deadline for implementation

Council Directive 93/6/EEC || || 1.7.1995

Directive 98/31/EC || || 21.7.2000

Directive 98/33/EC || || 21.7.2000

Directive 2002/87/EC || || 11.8.2004

Directive 2004/39/EC || || Not yet available

Directive 2004/xx/EC || || Not yet available

ò new

ANNEX IX

CORRESPONDANCE TABLE

This Directive || Directive 93/6/EEC || Directive 98/31/EC || Directive 98/33/EC || Directive 2002/87/EC || Directive 2004/39/EC

Article 1(1) first sentence || || || || ||

Article 1(1) second sentence and (2) || Article 1 || || || ||

Article 2(1) || || || || ||

Article 2(2) || Article 7(3) || || || ||

Article 3(1)(a) || Article 2(1) || || || ||

Article 3(1)(b) || Article 2(2) || || || || Article 67(1)

Article 3(1)(c) to (e) || Article 2(3) to (5) || || || ||

Article 3(1)(f) and (g) || || || || ||

Article 3(1)(h) || Article 2(10) || || || ||

Article 3(1)(i) || Article 2(11) || || Article 3(1) || ||

Article 3(1)(j) || Article 2(14) || || || ||

Article 3(1)(k) and (l) || Article 2(15) and (16) || Article 1(1)(b) || || ||

Article 3(1)(m) || Article 2(17) || Article 1(1)(c) || || ||

Article 3(1)(n) || Article 2(18) || Article 1(1)(d) || || ||

Article 3(1)(o) to (q) || Article 2(19) to (21) || || || ||

|| || || || ||

Article 3(1)(r) || Article 2(23) || || || ||

Article 3(1)(s) || Article 2(26) || || || ||

Article 3(2) || Article 2(7) and (8) || || || ||

Article 3(3)(a) and (b) || Article 7(3) || || || Article 26 ||

Article 3(3)(c) || Article 7(3) || || || ||

Article 4 || Article 2(24) || || || ||

Article 5 || Article 3(1) and (2) || || || ||

Article 6 || Article 3(4) || || || || Article 67(2)

Article 7 || Article 3(4a) || || || || Article 67(3)

Article 8 || Article 3(4b) || || || || Article 67(3)

Article 9 || Article 3(3) || || || ||

Article 10 || Article 3(5) to (8) || || || ||

Article 11 || Article 2(6) || || || ||

Article 12 first sub-paragraph || Article 2(25) || || || ||

Article 12 second sub-paragraph || || || || ||

Article 13(1) first sub-paragraph || Annex V(1) first sub-paragraph || || || ||

Article 13(1) second sub-paragraph and (2) to (5) || Annex V(1) second sub-paragraph and (2) to (5) || Article 1(7) and Annex 4(a)(b) || || ||

Article 14 || Annex V(6) and (7) || Annex 4(c) || || ||

Article 15 || Annex V(8) || || || ||

Article 16 || Annex V(9) || || || ||

Article 17 || || || || ||

Article 18(1) first sub-paragraph || Article 4(1) first sub-paragraph || || || ||

Article 18(1)(a) and (b) || Article 4(1)(i) and (ii) || Article 1(2) || || ||

Article 18(2) to (4) || Article 4(6) to (8) || || || ||

Article 19(1) || || || || ||

Article 19(2) || Article 11(2) || || || ||

Article 19(3) || || || || ||

Article 20 || || || || ||

Article 21 || Annex IV || || || ||

Article 22 || || || || ||

Article 23 first and second sub-paragraph || Article 7(5) and (6) || || || ||

Article 23 third sub-paragraph || || || || ||

Article 24 || || || || ||

Article 25 || || || || ||

Article 26(1) || Article 7(10) || Article 1(4) || || ||

Article 26(2) to (4) || Article 7(11) to (13) || || || ||

Article 27 || Article 7(14) and (15) || || || ||

Article 28(1) || Article 5(1) || || || ||

Article 28(2) || Article 5(2) || Article 1(3) || || ||

Article 28(3) || || || || ||

Article 29(1)(a) to (c) and next two sub-paragraphs || Annex VI(2) || || || ||

Article 29(1) last sub-paragraph || || || || ||

Article 29(2) || Annex VI(3) || || || ||

Article 30(1) and (2) first sub-paragraph || Annex VI(4) and (5) || || || ||

Article 30(2) second sub-paragraph || || || || ||

Article 30(3) and (4) || Annex VI(6) and (7) || || || ||

Article 31 || Annex VI(8)(1), (2) first sentence, (3) to (5) || || || ||

Article 32 || Annex VI(9) and (10) || || || ||

Article 33(1) and (2) || || || || ||

Article 33(3) || Article 6(2) || || || ||

Article 34 || || || || ||

Article 35(1) to (4) || Article 8(1) to (4) || || || ||

Article 35(5) || Article 8(5) first sentence || Article 1(5) || || ||

Article 36 || Article 9(1) to (3) || || || ||

Article 37 || || || || ||

Article 38 || Article 9(4) || || || ||

Article 39 || || || || ||

Article 40 || Article 2(9) || || || ||

Article 41 || || || || ||

Article 42(1)(a) to (c) || Article 10 first, second and third indents || || || ||

Article 42(1)(d) and (e) || || || || ||

Article 42(1)(f) || Article 10 fourth indent || || || ||

Article 42(1)(g) || || || || ||

Article 43 || || || || ||

Article 44 || || || || ||

Article 45 || || || || ||

Article 46 || Article 12 || || || ||

Article 47 || || || || ||

Article 48 || || || || ||

Article 49 || || || || ||

Article 50 || Article 15 || || || ||

|| || || || ||

Annex I(1) to (4) || Annex I(1) to (4) || || || ||

Annex I(4) last sub-paragraph || Article 2(22) || || || ||

Annex I(5) to (7) || Annex I(5) to (7) || || || ||

Annex I(8) || || || || ||

Annex I(9) to (11) || Annex I(8) to (10) || || || ||

Annex I(12) to (14) || Annex I(12) to (14) || || || ||

Annex I(15) and (16) || Article 2(12) || || || ||

Annex I(17) to (41) || Annex I(15) to (39) || || || ||

Annex I(42) to (56) || || || || ||

Annex II(1) and (2) || Annex II(1) and (2) || || || ||

Annex II(3) to (11) || || || || ||

Annex III(1) || Annex III(1) first sub-paragraph || Article 1(7) and Annex 3(a) || || ||

Annex III(2) || Annex III(2) || || || ||

Annex III(2.1) first to third sub-paragraphs || Annex III(3.1) || Article 1(7) and Annex 3(b) || || ||

Annex III(2.1) fourth sub-paragraph || || || || ||

Annex III(2.1) fifth sub-paragraph || Annex III(3.2) || Article 1(7) and Annex 3(b) || || ||

Annex III(2.2), (3), (3.1) || Annex III(4) to (6) || Article 1(7) and Annex 3(c) || || ||

Annex III(3.2) || Annex III(8) || || || ||

Annex III(4) || Annex III(11) || || || ||

Annex IV(1) to (20) || Annex VII(1) to (20) || Article 1(7) and Annex 5 || || ||

Annex IV(21) || Article 11a || Article 1(6) || || ||

Annex V(1) to (13) third sub-paragraph || Annex VIII(1) to (13)(ii) || Article 1(7) and Annex 5 || || ||

Annex V(13) fourth sub-paragraph || || || || ||

Annex V(13) fifth sub-paragraph to (14) || Annex VIII(13)(iii) to (14) || Article 1(7) and Annex 5 || || ||

Annex VI || Annex VI(8)(2) after the first sentence || || || ||

Annex VII || || || || ||

Annex VIII || || || || ||

Annex IX || || || || ||

[1]               OJ C […], […], p. […].

[2]               OJ C

[3]               OJ C […], […], p. […].

[4]               OJ C […], […], p. […].

[5]               OJ C […], […], p. […].

[6]               OJ L No 141, 11.6.1993 p.1, as last amended by Directive 2004/xx/EC, OJ […]

[7]               OJ L No 141, 11.06.1993 p. 0027, as last amended by Directive [2004/…/EC (OJ ………..)]

[8]               OJ No 126, 26.5.2000, p.1

[9]               OJ L No 145, 30.04.2004, p. 1

[10]             OJ No L 386, 30. 12. 1989, p. 14. Directive as amended by Directive 92/30/EEC (OJ No L 110, 28. 4. 1992, p. 52).

[11]             OJ No L 29, 5. 2. 1993, p. 1.

[12]             OJ No L 124, 5. 5. 1989, p. 16. Directive as last amended by Directive 92/30/EEC (OJ No L 110, 24. 9. 1992, p. 52).

[13]             OJ No L 110, 28. 4. 1992, p. 52.

[14]             OJ L 184, 17.7.1999, p. 23.

[15]             OJ No L 197, 18. 7. 1987, p. 33.

[16]             OJ L 35, 11.2.2003, p.1

[17]             OJ No L 322, 17. 12. 1977, p. 30. Directive as amended by Directive 89/646/EEC (OJ No L 386, 30. 12. 1989, p. 1).

[18]             OJ L 35, 11.2.2003, p.1

[19]             OJ L 9, 15.1.2003, p. 3.

EN

|| COMMISSION OF THE EUROPEAN COMMUNITIES

Brussels, 14.7.2004

COM(2004) 486 final

2004/0155 (COD) 2004/0159 (COD) Annexes techniques

 

Proposal for

DIRECTIVES OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL

Re-casting Directive 2000/12/EC of the European Parliament and of the Council of 20 March 2000 relating to the taking up and pursuit of the business of credit institutions and Council Directive 93/6/EEC of 15 March 1993 on the capital adequacy of investment firms and credit institutions.

(presented by the Commission) {SEC(2004) 921}

EXPLANATORY MEMORANDUM

-

Proposal for a

COUNCIL DIRECTIVE

on […]

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community, and in particular Article […] thereof,

Having regard to the proposal from the Commission[1],

Having regard to the opinion of the European Parliament[2],

Having regard to the opinion of the European Economic and Social Committee[3],

Having regard to the opinion of the Committee of the Regions[4],

Whereas:

(1) [Initial capital…].

(2) [Initial capital…],

HAS ADOPTED THIS DIRECTIVE:

Article 1

[…]

Article […]

Member States shall bring into force the laws, regulations and administrative provisions necessary to comply with this Directive by […] at the latest. They shall forthwith inform the Commission thereof.

When Member States adopt those provisions, they shall contain a reference to this Directive or be accompanied by such a reference on the occasion of their official publication. Member States shall determine how such reference is to be made.

Article […]

This Directive shall enter into force on the […] day following that of its publication in the Official Journal of the European Union.

Article […]

This Directive is addressed to the Member States.

Done at Brussels, […]

                                                                       For the Council

                                                                       The President

                                                                       […]

ANNEX

ò new

Annex V - Technical criteria on organisation and treatment of risks

1. Governance

1. Arrangements shall be defined by the management body referred to in Article 11 concerning the segregation of duties in the organisation and the prevention of conflicts of interest.

2. Treatment of risks

2. The management body referred to in Article 11 shall approve and periodically review the strategies and policies for taking up, managing, monitoring and mitigating the risks the credit institution is or might be exposed to, including those posed by the macroeconomic environment in which it operates in relation to the status of the business cycle.

3. Credit and counterparty risk

3. Credit-granting shall be based on sound and well-defined criteria. The process for approving, amending, renewing, and re-financing credits shall be clearly established.

4. The ongoing administration and monitoring of their various credit risk-bearing portfolios and exposures, including for identifying and managing problem credits and for making adequate value adjustments and provisions, shall be operated through effective systems.

5. Diversification of credit portfolios shall be adequate given the credit institution’s target markets and overall credit strategy.

4. Residual risk

6. The risk that recognised credit risk mitigation techniques used by the credit institution prove less effective than expected shall be addressed and controlled by means of written policies and procedures.

5. Concentration risk

7. The concentration risk arising from exposures to counterparties, groups of connected counterparties, and counterparties in the same economic sector, geographic region or from the same activity or commodity, the application of credit risk mitigation techniques, and including in particular risks associated with large indirect credit exposures (e.g. to a single collateral issuer), shall be addressed and controlled by means of written policies and procedures.

6. Securitisation risks

8. The risks arising from securitisation transactions in relation to which the credit institutions are originator or sponsor shall be evaluated and addressed through appropriate policies and procedures, to ensure in particular that the economic substance of the transaction is fully reflected in the risk assessment and management decisions.

9. Liquidity plans to address the implications of both scheduled and early amortization shall exist at credit institutions which are originators of revolving securitisation transactions involving early amortisation provisions.

7. Interest rate risk arising from non-trading activities

10. Systems shall be implemented to evaluate and manage the risk arising from potential changes in interest rates as they affect a credit institution’s non-trading activities.

8. Operational risk

11. Policies and processes to evaluate and manage the exposure to operational risk, including to low-frequency high-severity events, shall be implemented. Without prejudice to the definition laid down in Article 4(22), credit institutions shall articulate what constitutes operational risk for the purposes of those policies and procedures.

12. Contingency and business continuity plans shall be in place to ensure a credit institutions' ability to operate on an ongoing basis and limit losses in the event of severe business disruption.

9. Liquidity risk

13. Policies and processes for the measurement and management of their net funding position and requirements on an ongoing and forward-looking basis shall exist. Alternative scenarios shall be considered and the assumptions underpinning decisions concerning the net funding position shall be reviewed regularly.

14. Contingency plans to deal with liquidity crises shall be in place.

ANNEX VI Standardised Approach Part 1 - Risk weights

1. EXPOSURES TO CENTRAL GOVERNMENTS OR CENTRAL BANKS 1.1. Treatment

1. Without prejudice to paragraphs 2 to 8, exposures to central governments and central banks shall receive a 100% risk weight.

2. Exposures to central governments and central banks for which a credit assessment by a nominated ECAI is available shall be assigned a risk weight according to Table 1 in accordance with the assignment by the competent authorities of the credit assessments of eligible ECAIs to six steps in a credit quality assessment scale.

Table 1

Credit quality step || 1 || 2 || 3 || 4 || 5 || 6

Risk weight || 0% || 20% || 50% || 100% || 100% || 150%

3. Exposures to the European Central Bank shall be assigned a 0% risk weight.

1.2. Exposures in the national currency of the borrower

4. Subject to the discretion of competent authorities, exposures to their central government and central bank denominated and funded in the domestic currency may be assigned a risk weight which is lower than that indicated in paragraph 2.

5. When the discretion in paragraph 4 is exercised by the competent authorities of one Member State, the competent authorities of another Member State may also allow their credit institutions to apply the same risk weight to exposures to that central government or central bank denominated and funded in that currency.

6. When the competent authorities of a third country which apply supervisory and regulatory arrangements at least equivalent to those applied in the Community assigns a risk weight which is lower than that indicated in paragraph 1 to 2 to exposures to its central government and central bank denominated and funded in the domestic currency, Member States may allow their credit institutions to risk weight such exposures in the same manner.

1.3. Use of credit assessments by Export Credit Agencies

7. A credit assessment by an Export Credit Agency may be recognised only if either of the following conditions are met:

(a)     the credit assessment is a consensus risk score from an Export Credit Agency participating in the OECD “Arrangement on Guidelines for Officially Supported Export Credits”

(b)     the Export Credit Agency publishes its credit assessments, and the Export Credit Agency subscribes to the OECD agreed methodology, and the credit assessment is associated with one of the seven minimum export insurance premiums (MEIP) that the OECD agreed methodology establishes.

8. Exposures for which a credit assessment by an Export Credit Agency is recognised for risk weighting purposes shall be assigned a risk weight according to Table 2.

Table 2

MEIP || 1 || 2 || 3 || 4 || 5 || 6 || 7

Risk weight || 0% || 20% || 50% || 100% || 100% || 100% || 150%

2. EXPOSURES TO REGIONAL GOVERNMENTS OR LOCAL AUTHORITIES

9. Without prejudice to paragraphs 10 to 12, exposures to regional governments and local authorities shall be risk weighted as exposures to institutions. Exercise of this discretion by competent authorities is independent of the exercise of discretion by competent authorities as specified in Article 80. The preferential treatment for short-term exposures specified in paragraphs 30, 31and 36 shall not be applied.

10. Subject to the discretion of competent authorities, exposures to regional governments and local authorities may be treated as exposures to the central government in whose jurisdiction they are established where there is no difference in risk between such exposures because of the specific revenue-raising powers of the former, and the existence of specific institutional arrangements the effect of which is to reduce their risks of default.

11. When the discretion of paragraph 10 is exercised by the competent authorities of one Member State, the competent authorities of another Member States may also allow their credit institutions to apply the same risk weight to exposures to those regional governments and local authorities.

12. When competent authorities of a third country jurisdiction which apply supervisory and regulatory arrangements at least equivalent to those applied in the Community treat exposures to regional governments and local authorities as exposures to their central government, Member States may allow their credit institutions to risk weight exposures to such regional governments and local authorities in the same manner.

3. EXPOSURES ON ADMINISTRATIVE BODIES AND NON-COMMERCIAL UNDERTAKINGS 3.1. Treatment

13. Without prejudice to paragraphs 14 to 18, exposures to administrative bodies and non-commercial undertakings shall receive a 100% risk weight.

3.2. Public Sector Entities

14. Without prejudice to paragraphs 15 to 17, exposures to public sector entities shall receive a 100% risk weight.

15. Subject to the discretion of competent authorities, exposures to public sector entities may be treated as exposures to institutions. Exercise of this discretion by competent authorities is independent of the exercise of discretion by competent authorities as specified in Article 80. The preferential treatment for short-term exposures specified in paragraphs 30, 31 and 36 shall not be applied.

16. When the discretion to treat exposures to public sector entities as exposures to institutions is exercised by the competent authorities of one Member State, the competent authorities of another Member State may allow their credit institutions to risk weight exposures to such public sector entities in the same manner.

17. When competent authorities of a third country jurisdiction, which apply supervisory and regulatory arrangements at least equivalent to those applied in the Community, treat exposures to public sector entities as exposures to institutions, Member States may allow their credit institutions to risk weight exposures to such public sector entities in the same manner.

3.3. Churches and religious communities

18. Exposures to churches and religious communities constituted in the form of a legal person under public law shall, in so far as they raise taxes in accordance with legislation conferring on them the right to do so, be treated as exposures to public sector entities.

4. EXPOSURES TO MULTILATERAL DEVELOPMENT BANKS 4.1. Scope

19. For the purposes of Articles 78 to 83, the Inter-American Investment Corporation is considered to be a Multilateral Development Bank (MDB).

4.2. Treatment

20. Without prejudice to paragraphs 21 and 22, exposures to multilateral development banks shall be treated in the same manner as exposures to credit institutions in accordance with paragraphs 28 to 31. The preferential treatment for short-term exposures as specified in paragraph 30, 31 and 36 shall not apply.

21. Exposures to the following multilateral development banks shall attract a 0% risk weight:

(a) the International Bank for Reconstruction and Development;

(b) the International Finance Corporation;

(c) the Inter-American Development Bank;

(d) the Asian Development Bank;

(e) the African Development Bank;

(f) the Council of Europe Development Bank

(g) the Nordic Investment Bank;

(h) the Caribbean Development Bank;

(i) the European Bank for Reconstruction and Development;

(j) the European Investment Bank;

(k) the European Investment Fund;

(l) the Multilateral Investment Guarantee Agency

22. A risk weight of 20% shall be applied to the portion of unpaid capital subscribed to the European Investment Fund.

5. EXPOSURES TO INTERNATIONAL ORGANISATIONS

23. Exposures to the following international organisations shall be assigned a 0% risk weight:

(a) the European Community;

(b) the International Monetary Fund;

(c) the Bank for International Settlements.

6. EXPOSURES TO INSTITUTIONS 6.1. Treatment

24. One of the two methods described in paragraphs 26 to 27 and 28 to 31 shall apply in determining the risk weights for exposures to institutions.

6.2. Risk-weight floor on exposures to unrated institutions

25. Exposures to an unrated institution shall not receive a risk weight lower than that applied to exposures to its central government.

6.3. Central government risk weight based method

26. Exposures to institutions shall be assigned a risk weight according to the credit quality step to which exposures to the central government of the jurisdiction in which the institution is incorporated are assigned in accordance with Table 3.

Table 3

Credit quality step to which central government is assigned || 1 || 2 || 3 || 4 || 5 || 6

Risk weight of exposure || 20% || 50% || 100% || 100% || 100% || 150%

27. For exposures to institutions incorporated in countries where the central government is unrated, the risk weight shall be not more than 100%.

6.4. Credit assessment based method

28. Exposures to institutions with an original effective maturity of more than three months for which a credit assessment by a nominated ECAI is available shall be assigned a risk weight according to Table 4 in accordance with the assignment by the competent authorities of the credit assessments of eligible ECAIs to six steps in a credit quality assessment scale.

Table 4

Credit quality step || 1 || 2 || 3 || 4 || 5 || 6

Risk weight || 20% || 50% || 50% || 100% || 100% || 150%

29. Exposures to unrated institutions shall be assigned a risk weight of 50%.

30. Exposures to an institution with an original effective maturity of three months or less for which a credit assessment by a nominated ECAI is available shall receive a risk weight according to Table 5 in accordance with the assignment by the competent authorities of the credit assessments of eligible ECAIs to six steps in a credit quality assessment scale:

Table 5

Credit quality step || 1 || 2 || 3 || 4 || 5 || 6

Risk weight || 20% || 20% || 20% || 50% || 50% || 150%

31. Exposures to unrated institutions having an original effective maturity of three months or less shall be assigned a 20% risk weight.

6.5. Interaction with short-term credit assessments

32. If the method specified in paragraphs 28 to 31 is applied to exposures to institutions, then the interaction with specific short-term assessments shall be the following.

33. If there is no short-term exposure assessment, the general preferential treatment for short-term exposures as specified in paragraph 30 shall apply to all exposures to institutions of up to three months initial maturity.

34. If there is a short-term assessment and such an assessment determines the application of a more favourable or identical risk weight than the use of the general preferential treatment for short-term exposures, as specified in paragraph 30, then the short-term assessment shall be used for that specific exposure only. Other short-term exposures shall follow the general preferential treatment for short-term exposures, as specified in paragraph 30.

35. If there is a short-term assessment and such an assessment determines a less favourable risk weight than the use of the general preferential treatment for short-term exposures, as specified in paragraph 30, then the general preferential treatment for short-term exposures shall not be used and all unrated short-term claims shall receive the same risk weight as that applied by the specific short-term assessment.

6.6. Short-term exposures in the national currency of the borrower

36. When competent authorities have adopted for exposures to central governments and central banks the method described in paragraphs 4 to 6, subject to their discretion, exposures to institutions of an original effective maturity of 3 months or less denominated and funded in the national currency may be assigned, under both methods described in paragraphs 26 to 27 and 28 to 31, a risk weight that is one category less favourable than the preferential risk weight, as described in paragraphs 4 to 6, assigned to exposures to its central government.

37. No exposures of an original effective maturity of 3 months or less denominated and funded in the national currency of the borrower shall be assigned a risk weight less than 20%.

6.7     Investments in regulatory capital instruments

38. Investments in equity or regulatory capital instruments issued by institutions shall be risk weighted at 100%, unless deducted from the own funds.

7. EXPOSURES TO CORPORATES 7.1. Treatment

39. Exposures for which a credit assessment by a nominated ECAI is available shall be assigned a risk weight according to Table 5 in accordance with the assignment by the competent authorities of the credit assessments of eligible ECAIs to six steps in a credit quality assessment scale.

Table 5

Credit quality step || 1 || 2 || 3 || 4 || 5 || 6

Risk weight || 20% || 50% || 100% || 100% || 150% || 150%

40. Exposures for which such a credit assessment is not available shall receive a 100% risk weight or the risk weight of its central government, whichever is the higher.

8. RETAIL EXPOSURES

41. Exposures that comply with the criteria listed in Article 79(2) may, subject to the discretion of competent authorities, be assigned a risk weight of 75%.

9. EXPOSURES SECURED BY REAL ESTATE PROPERTY

42. Without prejudice to paragraphs 43 to 57, exposures fully secured by real estate property shall be assigned a risk weight of 100%.

9.1. Exposures secured by mortgages on residential property

43. Exposures fully and completely secured, to the satisfaction of the competent authorities, by mortgages on residential property which is or shall be occupied or let by the owner shall be assigned a risk weight of 35%.

44. Exposures fully and completely secured, to the satisfaction of the competent authorities, by shares in Finnish residential housing companies, operating in accordance with the Finnish Housing Company Act of 1991 or subsequent equivalent legislation, in respect of residential property which is or shall be occupied or let by the owner shall be assigned a risk weight of 35%.

45. In the exercise of their judgement, competent authorities shall be satisfied only if the following conditions are met:

(a)     the value of the property does not materially depend upon the credit quality of the obligor. This requirement does not preclude situations where purely macro-economic factors affect both the value of the property and the performance of the borrower;

(b)     the risk of the borrower does not materially depend upon the performance of the underlying property or project, but rather on the underlying capacity of the borrower to repay the debt from other sources. As such, repayment of the facility does not materially depend on any cash flow generated by the underlying property serving as collateral;

(c)     the minimum requirements set out in Annex VIII, Part 2, paragraph 8 and the valuation rules set out in Annex VIII, Part 3, paragraphs 63 to 66 are met;

(d)     the value of the property exceeds by a substantial margin the exposures.

46. Competent authorities may dispense with the condition contained in paragraph 45(b) for exposures fully and completely secured by mortgages on residential property which is situated within their territory, if they have evidence that a well-developed and long-established residential real estate market is present in their territory with loss rates which are sufficiently low to justify such treatment.

47. When the discretion contained in paragraph 46 is exercised by the competent authorities of a Member State, the competent authorities of another Member State may allow their credit institutions to apply a risk weight of 35% to such exposures fully and completely secured by mortgages on residential property.

9.2. Exposures secured by mortgages on commercial real estate

48. Subject to the discretion of competent authorities, exposures fully and completely secured, to the satisfaction of the competent authorities, by mortgages on offices or other commercial premises situated within their territory may be assigned a risk weight of 50%.

49. Subject to the discretion of competent authorities, exposures fully and completely secured, to the satisfaction of the competent authorities, by shares in Finnish housing companies, operating in accordance with the Finnish Housing Company Act of 1991 or subsequent equivalent legislation, in respect of offices or other commercial premises may be assigned a risk weight of 50%.

50. Subject to the discretion of competent authorities, exposures related to property leasing transactions concerning offices or other commercial premises situated in their territory and governed by statutory provisions whereby the lessor retains full ownership of the rented assets until the tenant exercises his option to purchase, may be assigned a risk weight of 50%.

51. The application of paragraphs 48 to 50 is subject to the following conditions:

(a)     the value of the property must not materially depend upon the credit quality of the obligor. This requirement does not preclude situations where purely macro-economic factors affect both the value of the property and the performance of the borrower;

(b)     the risk of the borrower must not materially depend upon the performance of the underlying property or project, but rather on the underlying capacity of the borrower to repay the debt from other sources. As such, repayment of the facility must not materially depend on any cash flow generated by the underlying property serving as collateral;

(c)     the minimum requirements set out in Annex VIII, Part 2, paragraph 8, and the valuation rules set out in Annex VIII, Part 3, paragraphs 63 to 66 are met.

52. The 50 % risk weight shall apply to the part of the loan that does not exceed a limit calculated according to either of the following conditions:

(a)     50% of the market value of the property in question;

(b)     50% of the market value of the property or 60 % of the mortgage lending value, whichever is lower, in those Member States that have laid down rigorous criteria for the assessment of the mortgage lending value in statutory or regulatory provisions.

53. A 100% risk weigh shall apply to the part of the loan that exceeds the limits set out in paragraph 52.

54. When the discretion contained in paragraph 48 to 50 is exercised by the competent authorities of one Member State, the competent authorities of another Member State may allow their credit institutions to risk weight at 50% such exposures fully and completely secured by mortgages on commercial property.

55. Competent authorities may dispense with the condition contained in paragraph 51(b) for exposures fully and completely secured by mortgages on commercial property which is situated within their territory, if they have evidence that a well-developed and long-established commercial real estate market is present in their territory with loss-rates which do not exceed the following limits:

(a)     up to 50% of the market value (or where applicable and if lower 60 % of the mortgage lending value (MLV)) must not exceed 0.3 % of the outstanding loans in any given year;

(b)     overall losses stemming from commercial real estate lending must not exceed 0.5% of the outstanding loans in any given year.

56. If either of the limits referred to in paragraph 55 is not satisfied in a given year, the eligibility to use this treatment shall cease and the second condition contained in paragraph 51(b) shall need to be satisfied again before it can be applied any more.

57. When the discretion contained in paragraph 55 is exercised by the competent authorities of a Member State, the competent authorities of another Member State may allow their credit institutions to apply a risk weight of 50% to such exposures fully and completely secured by mortgages on commercial property.

10. PAST DUE ITEMS

58. Without prejudice to the provisions contained in paragraphs 59 to 62, the unsecured portion of any item that is past due for more than 90 days shall be assigned a risk weight of:

(a)     150% if value adjustments are less than 20% of the unsecured part of the exposure gross of value adjustments value;

(b)     100% if value adjustments are no less than 20% of the unsecured part of the exposure gross of value adjustments;

(c)     50%, subject to the discretion of competent authorities, if value adjustments are no less than 50% of the unsecured part of the exposure gross of value adjustments.

59. For the purpose of defining the secured portion of the past due item, eligible collateral and guarantees shall be those eligible for credit risk mitigation purposes.

60. Nonetheless, where a past due item is fully secured by forms of collateral other then those eligible for credit risk mitigation purposes, a 100% risk weight may apply subject to the discretion of competent authorities based upon strict operational criteria to ensure the good quality of the collateral when value adjustments reach 15% of the exposure gross of value adjustments.

61. Exposures indicated in paragraphs 43 to 47 shall be assigned a risk weight of 100% net of value adjustments if they are past due for more than 90 days. If value adjustments are no less than 20% of the exposures gross of value adjustments, the risk weight applicable to the remainder of the exposure may be reduced to 50% at the discretion of competent authorities.

62. Exposures indicated in paragraphs 48 to 57 shall be assigned a risk weight of 100% if they are past due for more than 90 days.

11. ITEMS BELONGING TO REGULATORY HIGH-RISK CATEGORIES

63. Subject to the discretion of competent authorities, exposures associated with particularly high risks such as investments in venture capital firms and private equity investments shall be assigned a risk weight of 150%.

64. Competent authorities may permit non past due items receiving a 150% risk weight according to the provisions of the previous sections and for which value adjustments have been established to be assigned a risk weight of:

(a)     100% if value adjustments are no less than 20% of the exposure value gross of value adjustments;

(b)     50%, if value adjustments are no less than 50% of the exposure value gross of value adjustments.

12. EXPOSURES IN THE FORM OF COVERED BONDS

65. ‘Covered bonds’, shall mean bonds as defined in Article 22(4) of Directive  85/611/EEC and collateralised by any of the following eligible assets:

(a)     exposures to or guaranteed by central governments, central banks, multilateral development banks, international organisations that qualify for the credit quality assessment step 1 as set out in this Annex;

(b)     exposures to or guaranteed by public sector entities, regional governments and local authorities that are risk weighted as exposures to institutions or central governments and central banks according to paragraphs 15, 9 or 10 respectively and that qualify for the credit quality assessment step 1 as set out in this Annex;

(c)     exposures to institutions that qualify for the credit quality assessment step 1 as set out in this Annex. The total exposure of this kind shall not exceed 10% of the nominal amount of outstanding covered bonds of the issuing credit institution. Exposures caused by transmission of payments from the obligors of loans secured by real estate to the holders of covered bonds shall not be comprised by the 10% limit;

(d)     loans secured by residential real estate or shares in Finnish residential housing companies as referred to in paragraph 44 where only liens that are combined with any prior liens within 80% of the value of the pledged property;

(e)     loans secured by commercial real estate or shares in Finnish housing companies as referred to in paragraph 49 where only liens that are combined with any prior liens within 60% of the value of the pledged property. The competent authorities may recognise loans secured by commercial real estate as eligible where the Loan to Value ratio of 60% is exceeded up to a maximum level of 70% if the value of the total assets pledged as collateral for the covered bonds exceed the nominal amount outstanding on the covered bond by at least 10%, and the bondholders' claim meets the legal certainty requirements set out in Annex IX. The bondholders' claim must take priority over all other claims on the collateral.

66. Credit institutions shall for real estate collateralising covered bonds meet the minimum requirements set out in Annex VIII part 2, paragraph 8 and the valuation rules set out in Annex VIII, Part 3, paragraphs 63 to 66.

67. Notwithstanding paragraphs 65 and 66, covered bonds meeting the definition of Article 22(4) of Directive 85/611/EEC and issued before 31 December 2007 are also eligible for the preferential treatment until their maturity.

68. Covered bonds shall be assigned a risk weight on the basis of the risk weight attributed to senior unsecured exposures to the credit institution which issues them. The following correspondence between risk weights shall apply:

(a)     if the exposures to the institution receive a risk weight of 20%, the covered bond shall receive a risk weight of 10%;

(b)     if the exposures to the institution receive a risk weight of 50%, the covered bond shall receive a risk weight of 20%;

(c)     if the exposures to the institution receive a risk weight of 100%, the covered bond shall receive a risk weight of 50%;

(d)     if the exposures to the institution receive a risk weight of 150%, the covered bond shall receive a risk weight of 100%;

13. ITEMS REPRESENTING SECURITISATION POSITIONS

69. Risk weights exposure amounts for securitisation positions shall be determined in accordance with the provisions of Articles 94 to 101.

14. SHORT-TERM EXPOSURES oN CREDIT INSTITUTIONS AND CORPORATES

70. Short-term exposures on an institution or corporate for which a credit assessment by a nominated ECAI is available shall be assigned a risk weight according to Table 6 in accordance with the mapping by the competent authorities of the credit assessments of eligible ECAIs to six steps in a credit quality assessment scale:

Table 6

Credit Quality Step || 1 || 2 || 3 || 4 || 5 || 6

Risk weight || 20% || 50% || 100% || 150% || 150% || 150%

15. EXPOSURES IN THE FORM OF COLLECTIVE INVESTMENT UNDERTAKINGS (CIUS)

71. Without prejudice to paragraphs 72 to 78, exposures in collective investment undertakings (CIUs) shall be assigned a risk weight of 100%.

72. Exposures in the form of CIUs for which a credit assessment by a nominated ECAI is available shall be assigned a risk weight according to Table 7 in accordance with the assignment by the competent authorities of the credit assessments of eligible ECAIs to six steps in a credit quality assessment scale.

Table 7

Credit quality step || 1 || 2 || 3 || 4 || 5 || 6

Risk weight || 20% || 50 || 100% || 100% || 150% || 150%

73. Where competent authorities consider that a position in a CIU is associated with particularly high risks they shall require that that position is assigned a risk weight of 150%.

74. Credit institutions may determine the risk weight for a CIU as set out in paragraphs 76 to 78, if the following eligibility criteria are met:

(a)     the CIU is managed by a company which is subject to supervision in a Member State or, subject to approval of the credit institution's competent authority, if:

(i)      they are managed by a company which is subject to supervision that is considered equivalent to that laid down in Community law; and

(ii)     co-operation between competent authorities is sufficiently ensured;

(b)     the CIU’s prospectus or equivalent document includes:

– the categories of assets the CIU is authorised to invest in,

– if investment limits apply, the relative limits and the methodologies to calculate them;

(c)     the business of the CIU is reported on at least an annual basis to enable an assessment to be made of the assets and liabilities, income and operations over the reporting period.

75. If a competent authority approves a third country CIU as eligible, as set out in paragraph 74, point (a), then a competent authority in another Member State may make use of this recognition without conducting their own assessment.

76. Where the credit institution is aware of the underlying exposures of a CIU, it may look though to those underlying exposures in order to calculate an average risk weight for the CIU in accordance with the methods set out in Article 78 to 83.

77. Where the credit institution is not aware of the underlying exposures of a CIU, it may calculate an average risk weight for the CIU in accordance with the methods set out in Articles 78 to 83 subject to the following rules: it will be assumed that the CIU first invests, to the maximum extent allowed under its mandate, in the exposure classes attracting the highest capital requirement, and then continues making investments in descending order until the maximum total investment limit is reached.

78. Credit institutions may rely on a third party to calculate and report, in accordance with the methods set out in paragraphs 76 and 77, a risk weight for the CIU provided that the correctness of the calculation and report shall be adequately ensured.

16. OTHER ITEMS 16.1. Treatment

79. Tangible assets within the meaning of Article 4(10) of Directive 86/635/EEC shall be assigned a risk weight of 100%.

80. Prepayments and accrued income for which an institution is unable to determine the counterparty in accordance with Directive 86/635/EEC, shall be assigned a risk weight of 100%.

81. Cash items in the process of collection shall receive a 20% risk weight. Cash in hand and equivalent cash items shall receive a 0% risk weight;

82. Member States may allow a risk weight of 10% for exposures to institutions specialising in the inter-bank and public-debt markets in their home Member States and subject to close supervision by the competent authorities where those asset items are fully and completely secured, to the satisfaction of the competent authorities of the home Member States, by a items assigned a 0% or a 20% risk weight and recognised by the latter as constituting adequate collateral.

83. Holdings of equity and other participations except where deducted from own funds shall be assigned a risk weight of at least 100%.

84. Gold bullion held in own vaults or on an allocated basis to the extent backed by bullion liabilities shall receive a 0% risk weight.

85. In the case of asset sale and repurchase agreements and outright forward purchases, the risk weight shall be those attached to the assets in question and not to the counterparties to the transactions.

86. Where a credit institution provides credit protection for a number of exposures under terms that the nth default among the exposures shall trigger payment and that this credit event shall terminate the contract, if the product has an external credit assessment from an eligible ECAI the risk weights prescribed Articles 78 to 83 shall be applied. If the product is not rated by an eligible ECAI, the risk weights of the exposures included in the basket will be aggregated, excluding n-1 exposures, up to a maximum of 1250% and multiplied by the nominal amount of the protection provided by the credit derivative to obtain the risk weighted asset amount. The n-1 exposures to be excluded from the aggregation shall be determined on the basis that they shall include those exposures each of which produces a lower risk-weighted exposure amount than the risk-weighted exposure amount of any of the exposures included in the aggregation.

Part 2 - Recognition of ECAIs and mapping of their credit assessments

1. METHODOLOGY 1.1. Objectivity

1. Competent authorities shall verify that the methodology for assigning credit assessments is rigorous, systematic, continuous and subject to validation based on historical experience.

1.2. Independence

2. Competent authorities shall verify that the methodology is free from external political influences or constraints, and from economic pressures that may influence the credit assessment.

3. Independence of the ECAI’s methodology shall be assessed by competent authorities according to factors such as the following:

(a)     ownership and organisation structure of the ECAI;

(b)     financial resources of the ECAI;

(c)     staffing and expertise of the ECAI;

(d)     corporate governance of the ECAI.

1.3. Ongoing review

4. Competent authorities shall verify that ECAI’s credit assessments are subject to ongoing review and shall be responsive to changes in the financial conditions. Such review shall take place after all significant events and at least annually.

5. Before any recognition, competent authorities shall verify that the assessment methodology for each market segment is established according to standards such as the following:

(a)     the backtesting must be established for at least one year;

(b)     the regularity of the review process by the ECAI must be monitored by the competent authorities;

(c)     the competent authorities must be able to receive from the ECAI the extent of its contacts with the senior management of the entities which it rates.

6. Competent authorities shall take the necessary measures to be promptly informed by ECAIs of any material changes in the methodology they use for assigning credit assessments.

1.4. Transparency and disclosure

7. Competent authorities shall take the necessary measures to assure that the principles of the methodology employed by the ECAI for the formulation of its credit assessments are publicly available as to allow all potential users to decide whether they are derived in a reasonable way.

2. INDIVIDUAL CREDIT ASSESSMENTS 2.1. Credibility and market acceptance:

8. Competent authorities shall verify that ECAIs’ individual credit assessments are recognised in the market as credible and reliable by the users of such credit assessments.

9. Credibility shall be assessed by competent authorities according to factors such as the following:

(a)     market share of the ECAI;

(b)     revenues generated by the ECAI, and more in general financial resources of the ECAI;

(c)     whether there is any pricing on the basis of the rating.

2.2. Transparency and Disclosure

10. Competent authorities shall verify that individual credit assessments are accessible at equivalent terms at least to all parties having a legitimate interest in these individual credit assessments.

11. In particular, competent authorities shall verify that individual credit assessments are available to non-domestic parties on equivalent terms as to domestic parties having a legitimate interest in these individual credit assessments.

3. ‘MAPPING’

12. In order to differentiate between the relative degrees of risk expressed by each credit assessment, competent authorities shall consider quantitative factors such as the long-term default rate associated with all items assigned the same credit assessment. For recently established ECAIs and for those that have compiled only a short record of default data, competent authorities shall ask the ECAI what it believes to be the long-term default rate associated with all items assigned the same credit assessment.

13. In order to differentiate between the relative degrees of risk expressed by each credit assessment, competent authorities shall consider qualitative factors such as the pool of issuers that the ECAI covers, the range of credit assessments that the ECAI assigns, each credit assessment meaning and the ECAI’s definition of default.

14. Competent authorities shall compare default rates experienced for each credit assessment of a particular ECAI and compare them with a benchmark built on the basis of default rates experienced by other ECAIs on a population of issuers that the competent authorities believes to present an equivalent level of credit risk.

15. When competent authorities believe that the default rates experienced for the credit assessment of a particular ECAI are materially and systematically higher then the benchmark, competent authorities shall assign a higher risk step in the credit quality assessment scale to the ECAI credit assessment.

16. When competent authorities have increased the associated risk weight for a specific credit assessment of a particular ECAI, if the ECAI demonstrates that the default rates experienced for its credit assessment are no longer materially and systematically higher than the benchmark, competent authorities may decide to restore the original step in the credit quality assessment scale for the ECAI credit assessment.

Part 3 - Use of ECAIs’ credit assessments for the determination of risk weights

1. treatment

1. An institution may nominate one or more eligible ECAIs to be used for the determination of risk weights applicable to asset and off-balance sheet items.

2. A credit institution which decides to use the credit assessments produced by an eligible ECAI for a certain class of items must use those credit assessments consistently for all exposures belonging to that class.

3. An institution which decides to use the credit assessments produced by an eligible ECAI must use them in a continuous and consistent way over time.

4. A credit institution can only use ECAIs credit assessments that take into account all amounts both in principal and in interest owed to it.

5. If only one credit assessment is available from a nominated ECAI for a rated item, that credit assessment shall be used to determine the risk weight for that item.

6. If two credit assessments are available from nominated ECAIs and the two correspond to different risk weights for a rated item, the higher risk weight shall be applied.

7. If more than two credit assessments are available from nominated ECAIs for a rated item, the two assessments generating the two lowest risk weights shall be referred to. If the two lowest risk weights are different, the higher risk weight shall be applied. If the two lowest risk weights are the same, that risk weight shall be applied.

8. Credit institutions shall use solicited credit assessments. The competent authorities may allow credit institutions to use unsolicited credit assessments.

2. Issuer and issue credit assessment

9. Where a credit assessment exists for a specific issuing program or facility to which the item constituting the exposure belongs, this credit assessment shall be used to determine the risk weight applicable to that item.

10. Where no directly applicable credit assessment exists for a certain item, but a credit assessment exists for a specific issuing program or facility to which the item constituting the exposure does not belong or a general credit assessment exists for the issuer, then that credit assessment shall be used if it produces a higher risk weight than would other wise be the case or if it produces a lower risk weight and the exposure in question ranks pari passu or senior in all respects to the specific issuing program or facility or to senior unsecured exposures of that issuer as relevant.

11. Paragraphs 9 and 10 are not to prevent the application of paragraphs 65 to 68 of Part 1 of this Annex.

12. Credit assessments for issuers within a corporate group cannot be used as credit assessment of another issuer within the same corporate group.

3. Long-term and short-term credit assessments

13. Short-term credit assessments may only be used for short-term asset and off-balance sheet items constituting exposures to institutions and corporates.

14. Any short-term credit assessment shall only apply to the item the short-term credit assessment refers to, and it shall not be used to derive risk weights for any other item.

15. Notwithstanding paragraph 14, if a short-term rated facility receives a 150% risk weight, then all unrated unsecured exposures on that obligor whether short-term or long-term shall also receive a 150% risk weight.

16. Notwithstanding paragraph 14, if a short-term rated facility attracts a 50% risk-weight, no unrated short-term exposure shall attract a risk weight lower than 100%.

4. Domestic and foreign currency items

17. A credit assessment that refers to an item denominated in the obligor’s domestic currency cannot be used to derive a risk weight for another exposure on that same obligor that is denominated in a foreign currency.

18. Notwithstanding paragraph 17, when an exposure arises through a bank's participation in a loan that has been extended by a Multilateral Development Bank whose preferred creditor status is recognised in the market, competent authorities may allow the credit assessment on the obligor’s domestic currency item to be used for risk weighting purposes.

ANNEX VII Internal Ratings based Approach Part 1 - Risk weighted exposure amounts and expected loss amounts

1. Calculation of risk weighted exposure amounts for credit risk

1. Unless noted otherwise, the input parameters probability of default (PD), loss given default (LGD), and maturity value (M) shall be determined as set out in Part 2, the exposure value shall be determined as set out in Part 3.

2. The risk weighted exposure amount for each exposure shall be calculated in accordance with the following formulas:

1.1. Risk weighted exposure amounts for exposures to corporates, institutions and central governments and central banks.

3. Subject to paragraphs 4 to 8 the risk weighted exposure amounts for exposures to corporates, institutions and central governments and central banks shall be calculated according to the following formulas:

Correlation (R) =     

Maturity factor (b) =

Risk weight (RW) =

N() denotes the cumulative distribution function for a standard normal random variable (i.e. the probability that a normal random variable with mean zero and variance of one is less than or equal to x).  denotes the inverse cumulative distribution function for a standard normal random variable (i.e. the value x such that = z).

Risk-weighted exposure amount =   RW * exposure value

4. For exposures to companies where the total annual sales for the consolidated group of which the firm is a part is less than EUR 50 million credit institutions may use the following correlation formula for the calculation of risk weights for corporate exposures. In this formula S is expressed as total annual sales in millions of Euros with EUR 5 million <= S <= EUR 50 million. Reported sales of less than EUR 5 million shall be treated as if they were equivalent to EUR 5 million. For purchased receivables the total annual sales shall be the weighted average by individual exposures of the pool.

Correlation (R) =

Credit institutions shall substitute total assets of the consolidated group for total annual sales when total annual sales are not a meaningful indicator of firm size and total assets are a more meaningful indicator than total annual sales.

5. For specialised lending exposures that a credit institution cannot demonstrate that its PD estimates meet the minimum requirements set out in Part 4 it shall assign risk weights to these exposures according to table 1.

Table 1:

Remaining Maturity || category1 || category 2 || category 3 || category 4 || category 5

Less than 2.5 years || 50% || 70% || 115% || 250% || 0%

Equal or more than 2.5 years || 70% || 90% || 115% || 250% || 0%

The competent authorities may authorise a credit institution to generally assign preferential risk weights of 50% to exposures in category 1, and a 70% risk weight to exposures in category 2, provided the credit institutions’ underwriting characteristics and other risk characteristics are substantially strong for the relevant category.

In assigning risk weights to specialised lending exposures institutions shall take into account the following factors: Financial strength, political and legal environment, transaction and/or asset characteristics, strength of the sponsor and developer including any public private partnership income stream, security package.

6. To be eligible for the corporate treatment purchased corporate receivables shall comply with the minimum requirements set out in Part 4, paragraphs 104 to 108. For purchased corporate receivables that comply in addition with the conditions set out in paragraph 12, and where it would be unduly burdensome for a credit institution to use the risk quantification standards for corporate exposures as set out in Part 4 for these receivables, the risk quantification standards for retail exposures as set out in Part 4 may be used.

7. For purchased corporate receivables, refundable purchase discounts, collateral or partial guarantees that provide first-loss protection for default losses, or both, may be treated as first-loss positions under the IRB securitisation framework.

8. Where an institution provides credit protection for a number of exposures under terms that the nth default among the exposures shall trigger payment and that this credit event shall terminate the contract, if the product has an external credit assessment from an eligible ECAI the risk weights set out in Articles 94-101 will be applied. If the product is not rated by an eligible ECAI, the risk weights of the exposures included in the basket will be aggregated, excluding n-1 exposures where the sum of the expected loss amount multiplied by 12.5 and the risk weighted exposure amount shall not exceed the nominal amount of the protection provided by the credit derivative multiplied by 12.5. The n-1 exposures to be excluded from the aggregation shall be determined on the basis that they shall include those exposures each of which produces a lower risk-weighted exposure amount than the risk-weighted exposure amount of any of the exposures included in the aggregation.

1.2. Risk weighted exposure amounts for retail exposures:

9. Subject to paragraphs 10 and 11 the risk weighted exposure amounts for retail exposures shall be calculated according to the following formulas:

Correlation (R) =

Risk weight:

N() denotes the cumulative distribution function for a standard normal random variable (i.e. the probability that a normal random variable with mean zero and variance of one is less than or equal to x).  denotes the inverse cumulative distribution function for a standard normal random variable (i.e. the value x such that = z).

Risk-weighted exposure amount =   RW * exposure value

10. For retail exposures secured by real estate collateral a correlation (R) of 0.15 shall replace the figure produced by the correlation formula in paragraph 9.

11. For qualifying revolving retail exposures as defined in (a) to (e), a correlation (R) of 0.04 shall replace the figure produced by the correlation formula in paragraph 9.

Exposures shall qualify as qualifying revolving retail exposures if they meet the following conditions:

(a)     The exposures are to individuals

(b)     The exposures are revolving, unsecured, and to the extent they are not drawn immediately and unconditionally cancellable by the credit institution (In this context revolving exposures are defined as those where customers outstanding balances are permitted to fluctuate based on their decisions to borrow and repay, up to a limit established by the credit institution). Undrawn commitments may be considered as unconditionally cancellable if the terms permit the credit institution to cancel them to the full extent allowable under consumer protection and related legislation.

(c)     The maximum exposure to a single individual in the sub-portfolio is EUR 100,000 or less.

(d)     The credit institution can demonstrate that the use of the correlation formula of this paragraph is constrained to portfolios that have exhibited low volatility of loss rates, relative to their average level of loss rates, especially within the low PD bands. Supervisors shall review the relative volatility of loss rates across the qualifying revolving retail subportfolios, as well the aggregate qualifying revolving retail portfolio, and intend to share information on the typical characteristics of qualifying revolving retail loss rates across jurisdictions.

(e)     The competent authority concurs that treatment as a qualifying revolving retail exposure is consistent with the underlying risk characteristics of the sub-portfolio.

12. To be eligible for the retail treatment purchased receivables shall comply with the minimum requirements set out in Part 4, paragraphs 104 to 108 and the following conditions:

(a)     The credit institution has purchased the receivables from unrelated, third party sellers, and its exposure to the obligor of the receivable does not include any exposures that are directly or indirectly originated by the credit institution itself.

(b)     The purchased receivables shall be generated on an arm’s-length basis between the seller and the obligor. As such, intercompany accounts receivables and receivables subject to contra-accounts between firms that buy and sell to each other are ineligible.

(c)     The purchasing credit institution has a claim on all proceeds from the purchased receivables or a pro-rata interest in the proceeds.

(d)     The portfolio of purchased receivables is sufficiently diversified.

13. For purchased receivables, refundable purchase discounts, collateral or partial guarantees that provide first-loss protection for default losses, dilution losses, or both, may be treated as first-loss positions under the IRB securitisation framework.

14. For hybrid pools of purchased retail receivables where purchasing credit institutions cannot separate exposures secured by real estate collateral and qualifying revolving retail exposures from other retail exposures, the retail risk weight function producing the highest capital requirements for those exposures shall apply.

1.3. Risk weighted exposure amounts for equity exposures:

15. Subject to approval of the competent authorities, a credit institution may employ different approaches to different portfolios where the credit institution itself uses different approaches internally. Where a credit institution is permitted to use different approaches, the credit institution shall demonstrate to the competent authorities that the choice is made consistently and is not determined by regulatory arbitrage considerations.

16. Notwithstanding paragraph 15 competent authorities may allow the attribution of risk weighted exposure amounts for equity exposures to ancillary services undertakings according to the treatment of other non credit-obligation assets.

1.3.1. Simple Risk Weight Approach

17. The risk weighted exposure amounts shall be calculated according to the following formula:

Risk weight (RW) = 190% for private equity exposures in sufficiently diversified portfolios.

Risk weight (RW) = 290% for exchange traded equity exposures.

Risk weight (RW) = 370% for all other equity exposures.

Risk-weighted exposure amount =   RW * exposure value

18. Short cash positions and derivative instruments held in the non-trading book are permitted to offset long positions in the same individual stocks provided that these instruments have been explicitly designated as hedges of specific equity exposures and that they provide a hedge for at least another year. Other short positions are to be treated as if they are long positions with the relevant risk weight applied to the absolute value of each position. In the context of maturity mismatched positions, the method is that for corporate exposures.

19. Credit institutions may recognise unfunded credit protection obtained on an equity exposure in accordance with the methods set out in Articles 90 to 93.

1.3.2. PD/LGD Approach

20. The risk weighted exposure amounts shall be calculated according to the formulas in paragraph 3. If institutions do not have sufficient information to use the definition of default set out in Part 4, paragraphs 44 to 48, a scaling factor of 1.5 shall be applied to the risk weights.

21. At the individual exposure level the sum of the expected loss amount multiplied by 12.5 and the risk weighted exposure amount shall not exceed the exposure value multiplied by 12.5.

22. Credit institutions may recognise unfunded credit protection obtained on an equity exposure in accordance with the methods set out in of Articles 90 to 93. This shall be subject to an LGD of 90% on the exposure to the provider of the hedge. For private equity exposures in sufficiently diversified portfolios an LGD of 65% may be used. For these purposes M shall be 5 years.

1.3.3. Internal Models Approach

23. The risk weighted exposure amounts shall be the potential loss on the institution’s equity exposures as derived using internal value-at-risk models subject to the 99th percentile, one-tailed confidence interval of the difference between quarterly returns and an appropriate risk-free rate computed over a long-term sample period, multiplied by 12.5. The risk weighted exposure amounts at the individual exposure level shall not be less than the sum of minimum risk weighted exposure amounts required under the PD/LGD Approach and the corresponding expected loss amounts multiplied by 12.5.

24. Credit institutions may recognise unfunded credit protection obtained on an equity position.

1.4. Risk weighted exposure amounts for other non credit-obligation assets

25. The risk weighted exposure amounts shall be calculated according to the formula:

Risk-weighted exposure amount = 100% * exposure value

2. Calculation of risk weighted exposure amounts for dilution risk of purchased receivables

26. Risk weights for dilution risk of purchased corporate and retail receivables:

The risk weights shall be calculated according to the formula in paragraph 3. The input parameters PD and LGD shall be determined as set out in Part 2, the exposure value shall be determined as set out in Part 3 and M shall be 1 year. If credit institutions can demonstrate to the competent authorities that dilution risk is immaterial, it need not be recognised.

3. Calculation of expected loss amounts

27. Unless noted otherwise, the input parameters PD and LGD shall be determined as set out in Part 2, the exposure value shall be determined as set out in Part 3.

28. The expected loss amounts for exposures to corporates, institutions, central governments and central banks and retail exposures shall be calculated according to the following formulas:

Expected loss (EL) =            PD × LGD

Expected loss amount =       EL × exposure value

Premiums on purchased exposures shall be treated as EL.

29. The EL values for specialised lending exposures where credit institutions use the methods set out in paragraph 5 for assigning risk weights shall be assigned according to table 2.

Table 2

Remaining Maturity || category 1 || category 2 || category 3 || category 4 || category 5

Less than 2.5 years || 0% || 5% || 35% || 100% || 625%

Equal or more than 2.5 years EL || 5% || 10% || 35% || 100% || 625%

Where competent authorities have authorised a credit institution to generally assign preferential risk weights of 50% to exposures in category 1, and 70% to exposures in category 2, the EL value for exposures in category 1 shall be 0%, and for exposures in category 2 shall be 5%.

30. The expected loss amounts for equity exposures where the risk weighted exposure amounts are calculated according to the methods set out in paragraphs 17 to 19, shall be calculated according to the following formula:

Expected loss amount =       EL × exposure value

The EL values shall be the following:

Expected loss (EL) =            10% for private equity exposures in sufficiently diversified portfolios

Expected loss (EL) =            10% for exchange traded equity exposures.

Expected loss (EL) =            30% for all other equity exposures.

31. The expected loss amounts for equity exposures where the risk weighted exposure amounts are calculated according to the methods set out paragraphs 20 to 22 shall be calculated according to the following formulas:

Expected loss (EL) =            PD × LGD

Expected loss amount =       EL × exposure value

32. The expected loss amounts for equity exposures where the risk weighted exposure amounts are calculated according to the methods set out in paragraphs 23 to 24 shall be 0%.

33. The expected loss amounts for dilution risk of purchased receivables shall be calculated according to the following formula:

Expected loss (EL) =            PD × LGD

Expected loss amount =       EL × exposure value

4. Treatment of expected loss amounts

34. The expected loss amounts calculated in accordance with paragraphs 28, 29 and 33 shall be subtracted from the sum of value adjustments and provisions related to these exposures. Discounts on purchased exposures according to Part 3, paragraph 1 shall be treated in the same manner as value adjustments, premiums on purchased exposures according to Part 3, paragraph 1 shall be added to the expected loss amounts. Expected loss amounts for securitised exposures and value adjustments and provisions related to these exposures shall not be included in this calculation.

Part 2 - PD, LGD and Maturity

1. The input parameters probability of default (PD), loss given default (LGD) and maturity value (M) into the calculation of risk weighted exposure amounts and expected loss amounts specified in Part 1 shall be those estimated by the credit institution in accordance with Part 4 subject to the following provisions.

1. Exposures to Corporates, Institutions and Central Governments and Central Banks 1.1. PD

2. The PD of an exposure to a corporate or an institution shall be at least 0.03%.

3. For purchased corporate receivables in respect of which a credit institution cannot demonstrate that its PD estimates meet the minimum requirements set out in Part 4, the PDs for these exposures shall be determined according to the following methods: for senior claims on purchased corporate receivables PD shall be the credit institutions estimate of EL divided by LGD for these receivables. For subordinated claims on purchased corporate receivables PD shall be the credit institutions estimate of EL. If a credit institution is permitted to use own LGD estimates for corporate exposures and it can decompose its EL estimates for purchased corporate receivables into PDs and LGDs in a reliable manner, the PD estimate may be used.

4. The PD of obligors in default shall be 100%.

5. Credit institutions may recognise unfunded credit protection in the PD in accordance with the provisions of Articles 90 to 93

6. Credit institutions using own LGD estimates may recognise unfunded credit protection by adjusting PDs subject to paragraph 11.

7. For dilution risk of purchased corporate receivables PD shall be set equal to EL estimate for dilution risk. If a credit institution is permitted to use own LGD estimates for corporate exposures and it can decompose its EL estimates for dilution risk of purchased corporate receivables into PDs and LGDs in a reliable manner, the PD estimate may be used.

1.2. LGD

8. Credit institutions shall use the following LGD values:

(a)     Senior exposures without eligible collateral: 45%.

(b)     Subordinated exposures without eligible collateral: 75%.

(c)     Credit institutions may recognise funded and unfunded credit protection in the LGD in accordance with the provisions of Articles 90 to 93.

(d)     Covered bonds as defined in Annex VI, Part 1, paragraphs 65 to 67 may be assigned an LGD value of 12.5%.

(e)     For senior purchased corporate receivables exposures where a credit institution cannot demonstrate that its PD estimates meet the minimum requirements set out in Part 4, 45%.

(f)     For subordinated purchased corporate receivables exposures where a credit institution cannot demonstrate that its PD estimates meet the minimum requirements set out in Part 4, 100%.

(g)     For dilution risk of purchased corporate receivables: 75%

9. Notwithstanding paragraph 8, for dilution and default risk if a credit institution is permitted to use own LGD estimates for corporate exposures and it can decompose its EL estimates for purchased corporate receivables into PDs and LGDs in a reliable manner, the LGD estimate for purchased corporate receivables may be used.

10. Notwithstanding paragraph 8, if a credit institution is permitted to use own LGD estimates for exposures to corporates, institutions, central governments and central banks, unfunded credit protection may be recognised by adjusting PD or LGD estimates subject to minimum requirements as specified in Part 4 and approval of competent authorities. A credit institution shall not assign guaranteed exposures an adjusted PD or LGD such that the adjusted risk weight would be lower than that of a comparable, direct exposure to the guarantor.

1.3. Maturity

11. Subject to paragraph 12, credit institutions shall assign to exposures arising from repurchase transactions or securities or commodities lending or borrowing transactions a maturity value (M) of 0.5 years and to all other exposures an M of 2.5 years. Competent authorities may require all credit institutions in their jurisdiction to use M for each exposure as set out under paragraph 12.

12. Credit institutions permitted to use own LGDs or own conversion factors for exposures to corporates, institutions or central governments and central banks shall calculate M for each of these exposures as set out in (a) to (e) and subject to paragraphs 13 to 15. In all cases, M shall be no greater than 5 years.

(a)     For an instrument subject to a cash flow schedule M shall be calculated according to the following formula:

M = MAX{1; MIN{ ; 5}}

where CFt denotes the cash flows (principal, interest payments and fees) contractually payable by the obligor in period t.

(b)     For derivatives subject to a master netting agreement M shall be the weighted average remaining maturity of the exposure, where M shall be at least 1 year. The notional amount of each exposure shall be used for weighting the maturity.

(c)     For exposures arising from repurchase transactions or securities or commodities lending or borrowing transactions which are subject to a master netting agreement M shall be the weighted average remaining maturity of the transactions where M shall be at least 5 days. The notional amount of each transaction shall be used for weighting the maturity.

(d)     If a credit institution is permitted to use own PD estimates for purchased corporate receivables, for drawn amounts M shall equal the purchased receivables exposure weighted average maturity, where M shall be at least 1 year. This same value of M shall also be used for undrawn amounts under a committed purchase facility provided the facility contains effective covenants, early amortisation triggers, or other features that protect the purchasing credit institution against a significant deterioration in the quality of the future receivables it is required to purchase over the facility’s term. Absent such effective protections, M for undrawn amounts shall be calculated as the sum of the longest-dated potential receivable under the purchase agreement and the remaining maturity of the purchase facility, where M shall be at least 1 year.

(e)     For any other instrument than mentioned in this paragraph or when a credit institution is not in a position to calculate M as set out in (a), M shall be the maximum remaining time (in years) that the obligor is permitted to take to fully discharge its contractual obligations, where M shall be at least 1 year.

13. Notwithstanding paragraph 12 (a), (b), (d) and (e), for short-term exposures specified by the competent authorities with a remaining maturity below one year and which are not part of the credit institutions ongoing financing of the obligor M shall be at least one-day.

14. The competent authorities may allow for exposures to corporates situated in the Community and having consolidated sales and consolidated assets of less than EUR 500 million the use of M as set out in paragraph 11.

15. Maturity mismatches shall be treated as specified in Articles 90-93.

2. Retail Exposures 2.1. PD

16. The PD of an exposure shall be at least 0.03%.

17. The PD of obligors or where an obligation approach is used those of exposures in default shall be 100%.

18. For dilution risk of purchased receivables PD shall be set equal to EL estimates for dilution risk. If a credit institution can decompose its EL estimates for dilution risk of purchased receivables into PDs and LGDs in a reliable manner, the PD estimate may be used.

19. Unfunded credit protection may be recognised by adjusting PDs subject to paragraph 21.

2.2. LGD

20. Credit institutions shall provide own estimates of LGDs subject to minimum requirements as specified in Part 4 and approval of competent authorities. For dilution risk of purchased receivables an LGD value of 75% shall be used. If a credit institution can decompose its EL estimates for dilution risk of purchased receivables into PDs and LGDs in a reliable manner, the PD estimate may be used.

21. Unfunded credit protection may be recognised by adjusting PD or LGD estimates subject to minimum requirements as specified in Part 4, paragraphs 95 to 103 and approval of competent authorities either in support of an individual exposure or a pool of exposures. A credit institution shall not assign guaranteed exposures an adjusted PD or LGD such that the adjusted risk weight would be lower than that of a comparable, direct exposure to the guarantor.

3. Equity Exposures subject to PD/LGD Method 3.1. PD

22. PDs shall be determined according to the methods for corporate exposures.

The following minimum PDs shall apply:

(a)     0.09% for exchange traded equity exposures where the investment is part of a long-term customer relationship;

(b)     0.09% for non-exchange traded equity exposures where the returns on the investment are based on regular and periodic cash flows not derived from capital gains;

(c)     0.40% for exchange traded equity exposures including other short positions as set out in Part 1, paragraph 17;

(d)     1.25% for all other equity exposures including other short positions as set out in Part 1, paragraph 17.

3.2. LGD

23. Private equity exposures in sufficiently diversified portfolios may be assigned an LGD of 65 %.

24. All other exposures shall be assigned an LGD of 90 %.

3.3. Maturity

25. M assigned to all exposures shall be 5 years.

Part 3 - Exposure value

1. Exposures to corporates, institutions, central governments and central banks and retail exposures.

1. Unless noted otherwise the exposure value of on-balance sheet exposures shall be measured gross of value adjustments. This rule also applies to assets purchased at a price different than the amount owed. For purchased assets, the difference between the amount owed and the net value recorded on the balance-sheet of credit institutions is denoted discount if the amount owed is larger, and premium if it is smaller.

2. Where credit institutions use Master netting agreements in relation to repurchase transactions/security lending or borrowing transactions the exposure value shall be calculated in accordance with Articles 90 to 93

3. For on-balance sheet netting of loans and deposits credit institutions shall apply for the calculation of the exposure value the methods set out in Articles 90 to 93.

4. The exposure value for leases shall be the discounted lease payment stream.

5. In the case of any item listed in Annex IV, the exposure value shall be determined by means of one of the two methods set out in Annex III.

6. The exposure value for the calculation of risk weighted exposure amounts of purchased receivables shall be the outstanding amount minus the capital requirements for dilution risk prior to credit risk mitigation.

7. Notwithstanding paragraph 5, contracts traded on recognised exchanges, and foreign-exchange contracts (except contracts concerning gold) with an original maturity of 14 calendar days or less are exempt from the application of the methods set out in Annex III, and will be attributed an exposure value of zero.

8. Notwithstanding paragraph 5, competent authorities may exempt from the application of the methods set out in Annex III and attribute an exposure value of zero to over-the-counter (OTC) contracts cleared by a clearing house where the latter acts as the legal counterparty and all participants fully collateralise on a daily basis the exposure they present to the clearing house, thereby providing a protection covering both the current replacement cost and the potential future exposure.

The posted collateral shall either:

(a)     qualify for a 0% risk weight

(b)     be cash deposits placed with the lending credit institution

(c)     be certificates of deposit or similar instruments issued by and lodged with the latter

The competent authority shall be satisfied that the risk of a build-up of the clearing house's exposures beyond the market value of posted collateral is eliminated.

9. The exposure value for undrawn purchased commitments of revolving purchased corporate receivables exposures shall be calculated as the committed but undrawn amount multiplied by 75%.

10. Where an exposure takes the form of securities sold, posted or lent under a repurchase transaction or securities or commodities lending or borrowing transaction, the exposure value shall be the value of the securities or commodities determined in accordance with Article 74. Where the Financial Collateral Comprehensive Method as set out under Annex VIII, Part 3 is used, the exposure value shall be increased by the volatility adjustment appropriate to such securities or commodities as set out therein.

11. The exposure value for the following items, shall be calculated as the committed but undrawn amount multiplied by a conversion factor.

Credit institutions shall use the following conversion factors:

(a)     For credit lines which are uncommitted, that are unconditionally cancellable, or that effectively provide for automatic cancellation, at any time by the institution without prior notice, a conversion factor of 0 % shall apply. To apply a conversion factor of 0% credit institutions shall actively monitor the financial condition of the obligor, and their internal control systems shall enable them to immediately detect a deterioration in the credit quality of the obligor. Undrawn retail credit lines may be considered as unconditionally cancellable if the terms permit the credit institution to cancel them to the full extent allowable under consumer protection and related legislation.

(b)     For short-term letters of credit arising from the movement of goods, a conversion factor of 20% shall apply for both the issuing and confirming institutions.

(c)     For other credit lines, note issuance facilities (NIFs), and revolving underwriting facilities (RUFs), a conversion factor of 75% shall apply.

(d)     Credit institutions which meet the minimum requirements for the use of own estimates of conversion factors as specified in Part 4 may use their own estimates of conversion factors across different product types, subject to approval of the competent authorities.

12. Where a commitment refers to the extension of another commitment, the lower of the two conversion factors associated with the individual commitment shall be used.

13. For all other off-balance sheet items than mentioned in paragraphs 1 to 11, the exposure value shall be determined according to Annex II.

2. Equity exposures

14. The exposure value shall be the value presented in the financial statements. Admissible equity exposure measures are the following:

(a)     For investments held at fair value with changes in value flowing directly through income and into own funds, the exposure value is the fair value presented in the balance sheet.

(b)     For investments held at fair value with changes in value not flowing through income but into a tax-adjusted separate component of equity, the exposure value is the fair value presented in the balance sheet.

(c)     For investments held at cost or at the lower of cost or market, the exposure value is the cost or market value presented in the balance sheet.

3. Other non credit-obligation assets

15. The exposure value of other non credit-obligation assets shall be the value presented in the financial statements.

Part 4 - Minimum Requirements for IRB Approach

1. Rating Systems

1. A ‘rating system’ shall comprise all of the methods, processes, controls, data collection and IT systems that support the assessment of credit risk, the assignment of exposures to grades or pools (rating), and the quantification of default and loss estimates for a certain type of exposure.

2. If a credit institution uses multiple rating systems, the rationale for assigning an obligor or a transaction to a rating system shall be documented and applied in a manner that appropriately reflects the level of risk.

3. Assignment criteria and processes shall be periodically reviewed to determine whether they remain appropriate for the current portfolio and external conditions.

1.1. Structure of rating systems

4. Where a credit institution uses direct estimates of risk parameters these may be seen as the outputs of grades on a continuous rating scale.

1.1.1. Exposures to corporates, institutions and central governments and central banks

5. A rating system shall take into account obligor and transaction risk characteristics.

6. A rating system shall have an obligor rating scale which reflects exclusively quantification of the risk of obligor default. The obligor rating scale shall have a minimum of 7 grades for non-defaulted obligors and one for defaulted obligors.

7. An ‘obligor grade’ shall mean a risk category within a rating system’s obligor rating scale, to which obligors are assigned on the basis of a specified and distinct set of rating criteria, from which estimates of PD are derived. A credit institution shall document the relationship between obligor grades in terms of the level of default risk each grade implies and the criteria used to distinguish that level of default risk.

8. Credit institutions with portfolios concentrated in a particular market segment and range of default risk shall have enough obligor grades within that range to avoid undue concentrations of obligors in a particular grade. Significant concentrations within a single grade shall be supported by convincing empirical evidence that the obligor grade covers a reasonably narrow PD band and that the default risk posed by all obligors in the grade falls within that band.

9. To qualify for recognition by the competent authorities of the use for capital requirement calculation of own estimates of LGDs a rating system shall incorporate a distinct facility rating scale which exclusively reflects LGD related transaction characteristics.

10. To qualify for recognition by the competent authorities of the use for capital requirement calculation of own estimates of conversion factors a rating system shall incorporate a distinct facility rating scale which exclusively reflects conversion factor related transaction characteristics.

11. A ‘facility grade’ shall mean a risk category within a rating system’s facility scale, to which exposures are assigned on the basis of a specified and distinct set of rating criteria from which own estimates of either LGDs or conversion factors are derived. The grade definition shall include both a description of how exposures are assigned to the grade and of the criteria used to distinguish the level of risk across grades.

12. Significant concentrations within a single facility grade shall be supported by convincing empirical evidence that the facility grade covers a reasonably narrow LGD or conversion factor band, respectively, and that the risk posed by all exposures in the grade falls within that band.

13. Credit institutions using the methods set out in Part 1, paragraph 5 for assigning risk weights for specialised lending exposures are exempt from the requirement to have an obligor rating scale which reflects exclusively quantification of the risk of obligor default for these exposures. Notwithstanding paragraph 6, these institutions shall have for these exposures at least 4 grades for non-defaulted obligors and at least one grade for defaulted obligors.

1.1.2. Retail exposures

14. Rating systems shall reflect both obligor and transaction risk, and shall capture all relevant obligor and transaction characteristics.

15. The level of risk differentiation shall ensure that the number of exposures in a given grade or pool is sufficient to allow for meaningful quantification and validation of the loss characteristics at the grade or pool level. The distribution of exposures and obligors across grades or pools shall be such as to avoid excessive concentrations.

16. Credit institutions shall demonstrate that the process of assigning exposures to grades or pools provides for a meaningful differentiation of risk, provides for a grouping of sufficiently homogenous exposures, and allows for accurate and consistent estimation of loss characteristics at grade or pool level. For purchased receivables the grouping shall reflect the seller’s underwriting practices and the heterogeneity of their customers.

17. Credit institutions shall consider the following risk drivers when assigning exposures to grades or pools:

Obligor risk characteristics

(a)     Transaction risk characteristics, including product or collateral types or both. Credit institutions shall explicitly address cases where several exposures benefit from the same collateral

(b)     Delinquency, unless the credit institution demonstrates to its competent authority that delinquency is not a material driver of risk for the exposure

(c)     Assignment to grades or pools

18. A credit institution shall have specific definitions, processes and criteria for assigning exposures to grades or pools within a rating system.

(a)     The grade or pool definitions and criteria shall be sufficiently detailed to allow those charged with assigning ratings to consistently assign obligors or facilities posing similar risk to the same grade or pool. This consistency shall exist across lines of business, departments and geographic locations.

(b)     The documentation of the rating process shall allow third parties to understand the assignments of exposures to grades or pools, to replicate grade and pool assignments and to evaluate the appropriateness of the assignments to a grade or a pool.

(c)     The criteria shall also be consistent with the credit institution’s internal lending standards and its policies for handling troubled obligors and facilities.

19. A credit institution shall take all relevant information into account in assigning obligors and facilities to grades or pools. Information shall be current and shall enable the credit institution to forecast the future performance of the exposure. The less information a credit institution has, the more conservative shall be its assignments of exposures to obligor and facility grades or pools. If a credit institution uses an external rating as a primary factor determining an internal rating assignment, the credit institution shall ensure that it considers other relevant information.

1.2. Assignment of exposures 1.2.1. Exposures to corporates, institutions and central governments and central banks

20. Each obligor shall be assigned to an obligor grade as part of the credit approval process.

21. For those credit institutions permitted to use own estimates of LGDs or conversion factors, each exposure shall also be assigned to a facility grade as part of the credit approval process.

22. Credit institutions using the methods set out in Part 1, paragraph 5 for assigning risk weights for specialised lending exposures shall assign each of these exposures to a grade in accordance with paragraph 13.

23. Each separate legal entity to which the credit institution is exposed shall be separately rated. A credit institution shall demonstrate to its competent authority that it has acceptable policies regarding the treatment of individual obligor clients and groups of connected clients.

24. Separate exposures to the same obligor shall be assigned to the same obligor grade, irrespective of any differences in the nature of each specific transaction. Exceptions, where separate exposures are allowed to result in multiple grades for the same obligor are:

(a)     country transfer risk, this being dependent on whether the exposures are denominated in local or foreign currency

(b)     where the treatment of associated guarantees to an exposure may be reflected in an adjusted assignment to an obligor grade

1.2.2. Retail exposures

25. Each exposure shall be assigned to a grade or a pool as part of the credit approval process.

1.2.3. Overrides

26. For grade and pool assignments credit institutions shall document the situations in which human judgement may override the inputs or outputs of the assignment process and the personnel that are responsible for approving these overrides. Credit institutions shall document these overrides and the personnel responsible. Credit institutions shall analyse the performance of the exposures whose assignments have been overridden. This analysis shall include assessment of the performance of exposures whose rating has been overridden by a particular person, accounting for all the responsible personnel.

1.3. Integrity of assignment process 1.3.1. Exposures to corporates, institutions and central governments and central banks

27. Assignments and periodic reviews of assignments shall be completed or approved by an independent party that does not directly benefit from decisions to extend the credit.

28. Credit institutions shall update assignments at least annually. High risk obligors and problem exposures shall be subject to more frequent review. Credit institutions shall undertake a new assignment if material information on the obligor or exposure becomes available.

29. A credit institution shall have an effective process to obtain and update relevant information on obligor characteristics that affect PDs, and on transaction characteristics that affect LGDs and conversion factors.

1.3.2. Retail exposures

30. A credit institution shall at least annually update obligor and facility assignments or review the loss characteristics and delinquency status of each identified risk pool whichever applicable. A credit institution shall also at least annually review in a representative sample the status of individual exposures within each pool as a means of ensuring that exposures continue to be assigned to the correct pool.

1.4. Use of models

31. If a credit institution uses statistical models and other mechanical methods to assign exposures to obligors or facilities grades or pools, then:

(a)     The credit institution shall demonstrate to its competent authority that the model has good predictive power and that capital requirements are not distorted as a result of its use. The input variables shall form a reasonable and effective basis for the resulting predictions. The model shall not have material biases.

(b)     The credit institution shall have in place a process for vetting data inputs into the model which includes an assessment of the accuracy, completeness and appropriateness of the data.

(c)     The credit institution shall demonstrate that the data used to build the model is representative of the population of the credit institution’s actual obligors or exposures.

(d)     The credit institution shall have a regular cycle of model validation that includes monitoring of model performance and stability; review of model specification; and testing of model outputs against outcomes.

(e)     The credit institution shall complement the statistical model by human judgement and human oversight to review model-based assignments and to ensure that the models are used appropriately. Review procedures shall aim at finding and limiting errors associated with model weaknesses. Human judgements shall take into account all relevant information not considered by the model. The credit institution shall document how human judgement and model results are to be combined.

1.5. Documentation of rating systems

32. The credit institutions shall document the design and operational details of its rating systems. The documentation shall evidence compliance with the minimum requirements in this Part, and address topics including portfolio differentiation, rating criteria, responsibilities of parties that rate obligors and exposures, frequency of assignment reviews, and management oversight of the rating process.

33. The credit institution shall document the rationale for and analysis supporting its choice of rating criteria. A credit institution shall document all major changes in the risk rating process, and such documentation shall support identification of changes made to the risk rating process subsequent to the last review by the competent authorities. The organisation of rating assignment including the rating assignment process and the internal control structure shall also be documented.

34. The credit institutions shall document the specific definitions of default and loss used internally and demonstrate consistency with the definitions set out in this Directive.

35. If the credit institution employs statistical models in the rating process, the credit institution shall document their methodologies. This material shall:

(a)     provide a detailed outline of the theory, assumptions and/or mathematical and empirical basis of the assignment of estimates to grades, individual obligors, exposures, or pools, and the data source(s) used to estimate the model;

(b)     establish a rigorous statistical process (including out-of-time and out-of-sample performance tests) for validating the model; and

(c)     indicate any circumstances under which the model does not work effectively

36. Use of a model obtained from a third-party vendor that claims proprietary technology is not a justification for exemption from documentation or any other of the requirements for rating systems. The burden is on the credit institution to satisfy competent authorities.

1.6. Data maintenance

37. Credit institutions shall collect and store data on aspects of their internal ratings as required under Articles 145 to 149.

1.6.1. Exposures to corporates, institutions and central governments and central banks

38. Credit institutions shall collect and store:

(a)     Complete rating histories on obligors and recognised guarantors,

(b)     The dates the ratings were assigned,

(c)     The key data and methodology used to derive the rating,

(d)     The person responsible for the rating assignment,

(e)     The identity of obligors and exposures that defaulted,

(f)     The date and circumstances of such defaults,

(g)     Data on the PDs and realised default rates associated with rating grades and ratings migration.

(h)     Credit institutions not using own estimates of LGDs and/or conversion factors shall collect and store data on comparisons of realised LGDs to the values as set out in Part 2, paragraph 8 and realised conversion factors to the values as set out in Part 3, paragraph 11.

39. Credit institutions using own estimates of LGDs and/or conversion factors shall collect and store:

(a)     Complete histories of data on the facility ratings and LGD and conversion factor estimates associated with each rating scale,

(b)     The dates the ratings were assigned and the estimates were done,

(c)     The key data and methodology used to derive the facility ratings and LGD and conversion factor estimates,

(d)     The person who assigned the facility rating and the person who provided LGD and conversion factor estimates.

(e)     Data on the estimated and realised LGDs and conversion factors associated with each defaulted exposure.

(f)     Data on the LGD of the exposure before and after evaluation of the effects of a guarantee/ or credit derivative, for those credit institutions that reflect the credit risk mitigating effects of guarantees or credit derivatives through LGD.

(g)     Data on the components of loss for each defaulted exposure.

1.6.2. Retail exposures

40. Credit institutions shall collect and store:

(a)     Data used in the process of allocating exposures to grades or pools,

(b)     Data on the estimated PDs, LGDs and conversion factors associated with grades or pools of exposures,

(c)     The identity of obligors and exposures that defaulted,

(d)     For defaulted exposures, data on the grades or pools to which the exposure was assigned over the year prior to default and the realised outcomes on LGD and conversion factor.

(e)     Data on loss rates and margin income for qualifying revolving retail exposures.

1.7. Stress tests used in assessment of capital adequacy

41. A credit institution shall have in place sound stress testing processes for use in the assessment of its capital adequacy. Stress testing shall involve identifying possible events or future changes in economic conditions that could have unfavourable effects on a credit institution’s credit exposures and assessment of the credit institution’s ability to withstand such changes.

42. A credit institution shall regularly perform a credit risk stress test to assess the effect of certain specific conditions on its total capital requirements for credit risk. The test to be employed shall be one chosen by the credit institution, subject to supervisory review. The test to be employed shall be meaningful and reasonably conservative, considering at least the effect of mild recession scenarios. A credit institution shall assess migration in its ratings under the stress test scenarios. Stressed portfolios shall contain the vast majority of a credit institution's total exposure.

2. Risk Quantification

43. In determining the risk parameters to be associated with rating grades or pools, credit institutions shall apply the following requirements:

2.1. Definition of default

44. A ‘default’ shall be considered to have occurred with regard to a particular obligor when either or both of the two following events has taken place:

(a)     The credit institution considers that the obligor is unlikely to pay its credit obligations to the credit institution, the parent undertaking or any of its subsidiaries in full, without recourse by the credit institution to actions such as realising security (if held).

(b)     The obligor is past due more than 90 days on any material credit obligation to the credit institution, the parent undertaking or any of its subsidiaries.

Days past due commence once an obligor has breached an advised limit, has been advised a limit smaller than current outstandings, or has drawn credit without authorisation.

An advised limit shall mean a limit which has been brought to the knowledge of the obligor.

In the case of retail exposures and exposures to public sector entities (PSE) the competent authorities shall set a number of days past due as specified in paragraph 48.

In the case of corporate exposures the competent authorities may set a number of days past due as specified in Article 154, paragraph 4.

In the case of retail exposures credit institutions may apply this definition at a facility level.

45. Elements to be taken as indications of unlikeliness to pay shall include:

(a)     The credit institution puts the credit obligation on non-accrued status.

(b)     The credit institution makes a value adjustment resulting from a significant perceived decline in credit quality subsequent to the credit institution taking on the exposure.

(c)     The credit institution sells the credit obligation at a material credit-related economic loss.

(d)     The credit institution consents to a distressed restructuring of the credit obligation where this is likely to result in a diminished financial obligation caused by the material forgiveness, or postponement, of principal, interest or (where relevant) fees. This includes in the case of equity exposures assessed under a PD/LGD Approach, distressed restructuring of the equity itself.

(e)     The credit institution has filed for the obligor’s bankruptcy or a similar order in respect of an obligor’s credit obligation to the credit institution, the parent undertaking or any of its subsidiaries.

(f)     The obligor has sought or has been placed in bankruptcy or similar protection where this would avoid or delay repayment of a credit obligation to the credit institution, the parent undertaking or any of its subsidiaries.

46. Credit institutions that use external data that is not itself consistent with the definition of default, shall demonstrate to their competent authorities that appropriate adjustments have been made to achieve broad equivalence with the definition of default.

47. If the credit institution considers that a previously defaulted exposure is such that no trigger of default continues to apply, the credit institution shall rate the obligor or facility as they would for a non-defaulted exposure. Should the definition of default subsequently be triggered, another default would be deemed to have occurred.

48. For Retail and PSE exposures, the competent authorities of each Member States shall set the exact number of days past due that all credit institutions in its jurisdiction shall abide by under the definition of default set out in paragraph 44, for exposures to such counterparts situated within this Member State. The specific number shall fall within 90-180 days and may differ across product lines. For exposures to such counterparts situated in the territories of other Member States, the competent authorities shall set a number of days past due which is not higher than the number set by the competent authority of the respective Member State.

2.2. Overall requirements for estimation

49. A credit institution’s own estimates of the risk parameters PD, LGD, conversion factor and EL shall incorporate all relevant data, information and methods. The estimates shall be derived using both historical experience and empirical evidence, and not based purely on judgemental considerations. The estimates shall be plausible and intuitive and shall be based on the material drivers of the respective risk parameters. The less data a credit institution has, the more conservative it shall be in its estimation.

50. The credit institution shall be able to provide a breakdown of its loss experience in terms of default frequency, LGD, conversion factor, or loss where EL estimates are used, by the factors it sees as the drivers of the respective risk parameters. The credit institution shall demonstrate that its estimates are representative of long run experience.

51. Any changes in lending practice or the process for pursuing recoveries over the observation periods referred to in paragraphs 66, 71, 81, 85, 92 and 94 shall be taken into account. A credit institution’s estimates shall reflect the implications of technical advances and new data and other information, as it becomes available. Credit institutions shall review their estimates when new information comes to light but at least on an annual basis.

52. The population of exposures represented in the data used for estimation, the lending standards used when the data was generated and other relevant characteristics shall be comparable with those of the credit institution’s exposures and standards. The credit institution shall also demonstrate that the economic or market conditions that underlie the data is relevant to current and foreseeable conditions. The number of exposures in the sample and the data period used for quantification shall be sufficient to provide the credit institution with confidence in the accuracy and robustness of its estimates.

53. For purchased receivables the estimates shall reflect all relevant information available to the purchasing credit institution regarding the quality of the underlying receivables, including data for similar pools provided by the seller, by the purchasing credit institution, or by external sources. The purchasing credit institution shall evaluate any data relied upon from the seller.

54. A credit institution shall add to its estimates a margin of conservatism that is related to the expected range of estimation errors. Where methods and data are less satisfactory and the expected range of errors is larger, the margin of conservatism shall be larger.

55. If credit institutions use different estimates for the calculation of risk weights and internal purposes it shall be documented and their reasonableness shall be demonstrated to the competent authority.

56. If credit institutions can demonstrate to its competent authorities that for data that have been collected prior to the date of implementation of this Directive appropriate adjustments have been made to achieve broad equivalence with the definitions of default or loss, competent authorities may allow the credit institutions some flexibility in the application of the required standards for data.

57. If a credit institution uses data that is pooled across credit institutions it shall demonstrate that:

(a)     The rating systems and criteria of other credit institutions in the pool are similar with its own;

(b)     The pool shall be representative for the portfolio for which the pooled data is used;

(c)     The pooled data is used consistently over time by the credit institution for its permanent estimates.

58. If a credit institution uses data that is pooled across credit institutions, it shall remain responsible for the integrity of its rating systems. The credit institution shall demonstrate to the competent authority that it has sufficient in-house understanding of its rating systems, including effective ability to monitor and audit the rating process.

2.2.1. Requirements specific to PD estimation

Exposures to corporates, institutions and central governments and central banks

59. Credit institutions shall estimate PDs by obligor grade from long run averages of one-year default rates.

60. For purchased corporate receivables credit institutions may estimate ELs by obligor grade from long run averages of one-year realised default rates.

61. If a credit institution derives long run average estimates of PDs and LGDs for purchased corporate receivables from an estimate of EL, and an appropriate estimate of PD or LGD, the process for estimating total losses shall meet the overall standards for estimation of PD and LGD set out in this Part, and the outcome shall be consistent with the concept of LGD as set out in paragraph 73.

62. Credit institutions shall use PD estimation techniques only with supporting analysis. Credit institutions shall recognise the importance of judgmental considerations in combining results of techniques and in making adjustments for limitations of techniques and information.

63. To the extent that a credit institution uses data on internal default experience for the estimation of PDs it shall demonstrate in its analysis that the estimates are reflective of underwriting standards and of any differences in the rating system that generated the data and the current rating system. Where underwriting standards or rating systems have changed, the credit institution shall add a greater margin of conservatism in its estimate of PD

64. To the extent that a credit institution associates or maps its internal grades to the scale used by an ECAI or similar organisations and then attributes the default rate observed for the external organisation’s grades to the credit institution’s grades, mappings shall be based on a comparison of internal rating criteria to the criteria used by the external organisation and on a comparison of the internal and external ratings of any common obligors. Biases or inconsistencies in the mapping approach or underlying data shall be avoided. The external organisation’s criteria underlying the data used for quantification shall be oriented to default risk only and not reflect transaction characteristics. The credit institution’s analysis shall include a comparison of the default definitions used, subject to the requirements in paragraphs 44 to 48. The credit institution shall document the basis for the mapping.

65. To the extent that a credit institution uses statistical default prediction models it is allowed to estimate PDs as the simple average of default-probability estimates for individual obligors in a given grade. The credit institution’s use of default probability models for this purpose shall meet the standards specified in paragraph 31.

66. Irrespective of whether a credit institution is using external, internal, or pooled data sources, or a combination of the three, for its PD estimation, the length of the underlying historical observation period used shall be at least five years for at least one source. If the available observation period spans a longer period for any source, and this data is relevant, this longer period shall be used. This paragraph also applies to the PD/LGD Approach to equity.

Retail exposures

67. Credit institutions shall estimate PDs by obligor grade or pool from long run averages of one-year default rates.

68. Notwithstanding paragraph 67, PD estimates may also be derived from realised losses and appropriate estimates of LGDs.

69. Credit institutions shall regard internal data for assigning exposures to grades or pools as the primary source of information for estimating loss characteristics. Credit institutions are permitted to use external data (including pooled data) or statistical models for quantification provided a strong link can be demonstrated between:

(a)     the credit institution’s process of assigning exposures to grades or pools and the process used by the external data source

(b)     the credit institution’s internal risk profile and the composition of the external data.

For purchased retail receivables credit institutions may use external and internal reference data. Credit institutions shall use all relevant data sources as points of comparison.

70. If a credit institution derives long run average estimates of PD and LGD for retail from an estimate of total losses, and an appropriate estimate of PD or LGD, the process for estimating total losses shall meet the overall standards for estimation of PD and LGD set out in this Part, and the outcome shall be consistent with the concept of LGD as set out in paragraph 73.

71. Irrespective of whether a credit institution is using external, internal, pooled data sources or a combination of the three, for their estimation of loss characteristics, the length of the underlying historical observation period used shall be at least five years for at least one source. If the available observation spans a longer period for any source, and these data are relevant, this longer period shall be used. A credit institution need not give equal importance to historic data if it can convince its competent authority that more recent data is a better predictor of loss rates.

72. Credit institutions shall identify and analyse expected changes of risk parameters over the life of credit exposures (seasoning effects).

2.2.2. Requirements specific to own-LGD estimates

73. Credit institutions shall estimate LGDs by facility grade or pool on the basis of the average realised LGDs by facility grade or pool using all observed defaults within the data sources (default weighted average).

74. Credit institutions shall use LGD estimates that are appropriate for an economic downturn if those are more conservative than the long-run average. To the extent a rating system is expected to deliver constant realised LGDs by grade or pool over time, credit institutions shall make adjustments to their estimates of risk parameters by grade or pool to limit the capital impact of an economic downturn.

75. A credit institution shall consider the extent of any dependence between the risk of the obligor with that of the collateral or collateral provider. Cases where there is a significant degree of dependence shall be addressed in a conservative manner.

76. Currency mismatches between the underlying obligation and the collateral shall be treated conservatively in the credit institution’s assessment of LGD.

77. To the extent, that LGD estimates take into account the existence of collateral, these estimates shall not solely be based on the collateral’s estimated market value. LGD estimates shall take into account the effect of the potential inability of credit institutions to expeditiously gain control of their collateral and liquidate it.

78. To the extent, that a credit institution does not meet the minimum requirements for collateral set out in Annex VIII any amount expected to be recovered from such collateral shall not be taken into account in its LGD estimates.

79. For the specific case of exposures already in default, the credit institution shall use its best estimate of expected loss for each exposure given current economic circumstances and exposure status.

80. To the extent that unpaid late fees have been capitalised in the credit institution’s income statement, they shall be added to the credit institution’s measure of exposure and loss.

Exposures to corporates, institutions and central governments and central banks

81. Estimates of LGD shall be based on data over a minimum of seven years for at least one data source. If the available observation period spans a longer period for any source, and the data is relevant, this longer period shall be used.

Retail exposures

82. Notwithstanding paragraph 73, LGD estimates may be derived from realised losses and appropriate estimates of PDs.

83. Notwithstanding paragraph 88, credit institutions may reflect future drawings either in its conversion factor or in its LGD estimates.

84. For purchased retail receivables credit institutions may use external and internal reference data to estimate LGDs.

85. Estimates of LGD shall be based on data over a minimum of five years. Notwithstanding paragraph 73, a credit institution needs not give equal importance to historic data if it can demonstrate to its competent authority that more recent data is a better predictor of loss rates.

2.2.3. Requirements specific to own-conversion factor estimates

86. Credit institutions shall estimate conversion factors by facility grade or pool on the basis of the average realised conversion factors by facility grade or pool using all observed defaults within the data sources (default weighted average).

87. Credit institutions shall use conversion factor estimates that are appropriate for an economic downturn if those are more conservative than the long-run average. To the extent a rating system is expected to deliver constant realised conversion factors by grade or pool over time, credit institutions shall make adjustments to their estimates of risk parameters by grade or pool to limit the capital impact of an economic downturn.

88. Credit institutions estimates of conversion factor shall reflect the possibility of additional drawings by the obligor up to and after the time a default event is triggered.

The conversion factor estimate shall incorporate a larger margin of conservatism where a stronger positive correlation can reasonably be expected between the default frequency and the magnitude of conversion factor.

89. In arriving at estimates of conversion factors credit institutions shall consider their specific policies and strategies adopted in respect of account monitoring and payment processing. Credit institutions shall also consider their ability and willingness to prevent further drawings in circumstances short of payment default, such as covenant violations or other technical default events.

90. Credit institutions shall have adequate systems and procedures in place to monitor facility amounts, current outstandings against committed lines and changes in outstandings per obligor and per grade. The credit institution shall be able to monitor outstanding balances on a daily basis.

91. If credit institutions use different estimates of conversion factors for the calculation of risk weighted exposure amounts and internal purposes it shall be documented and their reasonableness shall be demonstrated to the competent authority.

Exposures to corporates, institutions and central governments and central banks

92. Estimates of conversion factor shall be based on data over a minimum of seven years for at least one data source. If the available observation period spans a longer period for any source, and the data is relevant, this longer period shall be used.

Retail exposures

93. Notwithstanding paragraph 88, credit institutions may reflect future drawings either in their conversion factors or in their LGD estimates.

94. Estimates of conversion factors shall be based on data over a minimum of five years. Notwithstanding paragraph 86, a credit institution need not give equal importance to historic data if it can demonstrate to its competent authority that more recent data is a better predictor of draw downs.

2.2.4. Minimum requirements for assessing the effect of guarantees and credit derivatives

Exposures to corporates, institutions and central governments and central banks where own estimates of LGD are used and retail exposures.

95. The requirements in paragraphs 96 to 103 shall not apply for guarantees provided by institutions and central governments and central banks if the credit institution has received approval to apply the rules of Articles 78 to 83 for exposures to such entities. In this case the requirements of Articles 90 to 93 shall apply.

96. For retail guarantees, these requirements also apply to the assignment of exposures to grades or pools, and the estimation of PD.

Eligible guarantors and guarantees

97. Credit institutions shall have clearly specified criteria for the types of guarantors they recognise for the calculation of risk weighted exposures.

98. For recognised guarantors the same rules as for obligors as set out in paragraphs 18 to 30 shall apply.

99. The guarantee shall be evidenced in writing, non-cancellable on the part of the guarantor, in force until the obligation is satisfied in full (to the extent of the amount and tenor of the guarantee) and legally enforceable against the guarantor in a jurisdiction where the guarantor has assets to attach and enforce a judgement. Guarantees prescribing conditions under which the guarantor may not be obliged to perform (conditional guarantees) may be recognised subject to approval of competent authorities. The credit institution shall demonstrate that the assignment criteria adequately address any potential reduction in the risk mitigation effect.

Adjustment criteria

100. A credit institution shall have clearly specified criteria for adjusting grades, pools or LGD estimates, and in the case of retail and eligible purchased receivables, the process of allocating exposures to grades or pools, to reflect the impact of guarantees for the calculation of risk weighted assets. These criteria shall comply with the minimum requirements set out in paragraphs 18 to 30.

101. The criteria shall be plausible and intuitive. They shall address the guarantor’s ability and willingness to perform under the guarantee, the likely timing of any payments from the guarantor, the degree to which the guarantor’s ability to perform under the guarantee is correlated with the obligor’s ability to repay, and the extent to which residual risk to the obligor remains.

Credit derivatives

102. The minimum requirements for guarantees in this Part shall apply also for single-name credit derivatives. In relation to a mismatch between the underlying obligation and the reference obligation of the credit derivative or the obligation used for determining whether a credit event has occurred the requirements set out under Annex VIII Part 2, paragraph 20 shall apply. For retail exposures and eligible purchased receivables, this paragraph applies to the process of allocating exposures to grades or pools.

103. The criteria shall address the payout structure of the credit derivative and conservatively assess the impact this has on the level and timing of recoveries. The credit institution shall consider the extent to which other forms of residual risk remain.

2.2.5. Minimum requirements for purchased receivables

Legal certainty

104. The structure of the facility shall ensure that under all foreseeable circumstances the credit institution has effective ownership and control of all cash remittances from the receivables. When the obligor makes payments directly to a seller or servicer the credit institution shall verify regularly that payments are forwarded completely and within the contractually agreed terms. Servicer shall mean an entity that manages a pool of purchased receivables or the underlying credit exposures on a day-to-day basis. Credit institutions shall have procedures to ensure that ownership over the receivables and cash receipts is protected against bankruptcy stays or legal challenges that could materially delay the lender’s ability to liquidate or assign the receivables or retain control over cash receipts.

Effectiveness of monitoring systems

105. The credit institution shall monitor both the quality of the purchased receivables and the financial condition of the seller and servicer. In particular:

(a)     The credit institution shall assess the correlation among the quality of the purchased receivables and the financial condition of both the seller and servicer, and have in place internal policies and procedures that provide adequate safeguards to protect against such contingencies, including the assignment of an internal risk rating for each seller and servicer.

(b)     The credit institution shall have clear and effective policies and procedures for determining seller and servicer eligibility. The credit institution or its agent shall conduct periodic reviews of sellers and servicers in order to verify the accuracy of reports from the seller or servicer, detect fraud or operational weaknesses, and verify the quality of the seller’s credit policies and servicer’s collection policies and procedures. The findings of these reviews shall be documented.

(c)     The credit institution shall assess the characteristics of the purchased receivables pools, including over-advances; history of the seller’s arrears, bad debts, and bad debt allowances; payment terms, and potential contra accounts.

(d)     The credit institution shall have effective policies and procedures for monitoring on an aggregate basis single-obligor concentrations both within and across purchased receivables pools.

(e)     The credit institution shall ensure that it receives from the servicer timely and sufficiently detailed reports of receivables ageings and dilutions to ensure compliance with the credit institution’s eligibility criteria and advancing policies governing purchased receivables, and provide an effective means with which to monitor and confirm the seller’s terms of sale and dilution.

Effectiveness of work-out systems

106. The credit institution shall have systems and procedures for detecting deteriorations in the seller’s financial condition and purchased receivables quality at an early stage, and for addressing emerging problems pro-actively. In particular the credit institution shall have clear and effective policies, procedures, and information systems to monitor covenant violations, and clear and effective policies and procedures for initiating legal actions and dealing with problem purchased receivables.

Effectiveness of systems for controlling collateral, credit availability, and cash

107. The credit institution shall have clear and effective policies and procedures governing the control of purchased receivables, credit, and cash. In particular, written internal policies shall specify all material elements of the receivables purchase programme, including the advancing rates, eligible collateral, necessary documentation, concentration limits, and the way cash receipts are to be handled. These elements shall take appropriate account of all relevant and material factors, including the seller’s and servicer’s financial condition, risk concentrations, and trends in the quality of the purchased receivables and the seller’s customer base, and internal systems shall ensure that funds are advanced only against specified supporting collateral and documentation.

Compliance with the credit institution’s internal policies and procedures

108. The credit institution shall have an effective internal process for assessing compliance with all internal policies and procedures. The process shall include regular audits of all critical phases of the credit institution’s receivables purchase programme, verification of the separation of duties between firstly the assessment of the seller and servicer and the assessment of the obligor and secondly between the assessment of the seller and servicer and the field audit of the seller and servicer , and evaluations of back office operations, with particular focus on qualifications, experience, staffing levels, and supporting automation systems.

3. Validation of Internal Estimates

109. Credit institutions shall have robust systems in place to validate the accuracy and consistency of rating systems, processes, and the estimation of all relevant risk parameters. A credit institution shall demonstrate to its competent authority that the internal validation process enables it to assess the performance of internal rating and risk estimation systems consistently and meaningfully.

110. Credit institutions shall regularly compare realised default rates with estimated PDs for each grade and where realised default rates are outside the expected range for that grade credit institutions shall specifically analyse the reasons for the deviation. Credit institutions using own estimates of LGDs or conversion factors shall also perform analogous analysis for these estimates. Such comparisons shall make use of historical data that cover as long a period as possible. The credit institution shall document the methods and data used in such comparisons. This analysis and documentation shall be updated at least annually.

111. Credit institutions shall also use other quantitative validation tools and comparisons with relevant external data sources. The analysis shall be based on data that are appropriate to the portfolio, are updated regularly, and cover a relevant observation period. Credit institutions’ internal assessments of the performance of their rating systems shall be based on as long a period as possible.

112. The methods and data used for quantitative validation shall be consistent through time. Changes in estimation and validation methods and data (both data sources and periods covered) shall be documented.

113. Credit institutions shall have sound internal standards for situations where deviations in realised PDs, LGDs, conversion factors and total losses where EL is used from expectations become significant enough to call the validity of the estimates into question. These standards shall take account of business cycles and similar systematic variability in default experience. Where realised values continue to be higher than expected values, credit institutions shall revise estimates upward to reflect their default and loss experience.

4. Calculation of risk weighted exposure amounts for equity exposures under the Internal Models Approach 4.1. Capital requirement and risk quantification

114. Credit institutions shall meet for the purpose of calculating capital requirements the following standards:

(a)     The estimate of potential loss shall be robust to adverse market movements relevant to the long-term risk profile of the credit institution’s specific holdings. The data used to represent return distributions shall reflect the longest sample period for which data is available and meaningful in representing the risk profile of the credit institution’s specific equity exposures. The data used shall be sufficient to provide conservative, statistically reliable and robust loss estimates that are not based purely on subjective or judgmental considerations. Credit institutions shall demonstrate to competent authorities that the shock employed provides a conservative estimate of potential losses over a relevant long-term market or business cycle. The credit institution shall combine empirical analysis of available data with adjustments based on a variety of factors in order to attain model outputs that achieve appropriate realism and conservatism. In constructing Value at Risk (VaR) models estimating potential quarterly losses, credit institutions may use quarterly data or convert shorter horizon period data to a quarterly equivalent using an analytically appropriate method supported by empirical evidence and through a well-developed and documented thought process and analysis. Such an approach shall be applied conservatively and consistently over time. Where only limited relevant data is available the credit institution shall add appropriate margins of conservatism.

(b)     The models used shall be able to capture adequately all of the material risks embodied in equity returns including both the general market risk and specific risk exposure of the credit institution’s equity portfolio. The internal models shall adequately explain historical price variation, capture both the magnitude and changes in the composition of potential concentrations, and be robust to adverse market environments. The population of risk exposures represented in the data used for estimation shall be closely matched to or at least comparable with those of the credit institution’s equity exposures.

(c)     The internal model shall be appropriate for the risk profile and complexity of a credit institution's equity portfolio. Where a credit institution has material holdings with values that are highly non-linear in nature the internal models shall be designed to capture appropriately the risks associated with such instruments.

(d)     Mapping of individual positions to proxies, market indices, and risk factors shall be plausible, intuitive, and conceptually sound.

(e)     Credit institutions shall demonstrate through empirical analyses the appropriateness of risk factors, including their ability to cover both general and specific risk.

(f)     The estimates of the return volatility of equity exposures shall incorporate relevant and available data, information, and methods. Independently reviewed internal data or data from external sources (including pooled data) shall be used.

(g)     A rigorous and comprehensive stress-testing programme shall be in place.

4.2. Risk management process and controls

115. With regard to the development and use of internal models for capital requirement purposes, credit institutions shall establish policies, procedures, and controls to ensure the integrity of the model and modelling process. These policies, procedures, and controls shall include the following:

(a)     Full integration of the internal model into the overall management information systems of the credit institution and in the management of the banking book equity portfolio. Internal models shall be fully integrated into the credit institution’s risk management infrastructure if they are particularly used in: measuring and assessing equity portfolio performance (including the risk-adjusted performance); allocating economic capital to equity exposures and evaluating overall capital adequacy and the investment management process.

(b)     Established management systems, procedures, and control functions for ensuring the periodic and independent review of all elements of the internal modelling process, including approval of model revisions, vetting of model inputs, and review of model results, such as direct verification of risk computations. These reviews shall assess the accuracy, completeness, and appropriateness of model inputs and results and focus on both finding and limiting potential errors associated with known weaknesses and identifying unknown model weaknesses. Such reviews may be conducted by an internal independent unit, or by an independent external third party.

(c)     Adequate systems and procedures for monitoring investment limits and the risk exposures of equity exposures.

(d)     The units responsible for the design and application of the model shall be functionally independent from the units responsible for managing individual investments.

(e)     Parties responsible for any aspect of the modelling process shall be adequately qualified. Management shall allocate sufficient skilled and competent resources to the modelling function.

4.3. Validation and documentation

116. Credit institutions shall have a robust system in place to validate the accuracy and consistency of their internal models and modelling processes. All material elements of the internal models and the modelling process and validation shall be documented.

117. Credit institutions shall use the internal validation process to assess the performance of its internal models and processes in a consistent and meaningful way.

118. The methods and data used for quantitative validation shall be consistent through time. Changes in estimation and validation methods and data (both data sources and periods covered) shall be documented.

119. Credit institutions shall regularly compare actual equity returns (computed using realised and unrealised gains and losses) with modelled estimates. Such comparisons shall make use of historical data that is over as long a period as possible. The credit institution shall document the methods and data used in such comparisons. This analysis and documentation shall be updated at least annually.

120. Credit institutions shall make use of other quantitative validation tools and comparisons with external data sources. The analysis shall be based on data that are appropriate to the portfolio, are updated regularly, and cover a relevant observation period. Credit institutions’ internal assessments of the performance of their models shall be based on as long a period as possible.

121. Credit institutions shall have sound internal standards for situations where comparison of actual equity returns with the models estimates calls the validity of the estimates or of the models as such into question. These standards shall take account of business cycles and similar systematic variability in equity returns. All adjustments made to internal models in response to model reviews shall be documented and consistent with the credit institution’s model review standards.

122. The internal model and the modelling process shall be documented, including the responsibilities of parties involved in the modelling, and the model approval and model review processes.

5. Corporate Governance and Oversight 5.1. Corporate Governance

123. All material aspects of the rating and estimation processes shall be approved by the credit institution’s board of directors or a designated committee thereof and senior management. These parties shall possess a general understanding of the credit institution’s rating systems and detailed comprehension of its associated management reports.

124. Senior management shall provide notice to the board of directors or a designated committee thereof of material changes or exceptions from established policies that will materially impact the operations of the credit institution’s rating systems.

125. Senior management shall have a good understanding of the rating systems designs and operations. Senior management shall ensure, on an ongoing basis that the rating systems are operating properly. Senior management shall be regularly informed by the credit risk control units about the performance of the rating process, areas needing improvement, and the status of efforts to improve previously identified deficiencies.

126. Internal ratings-based analysis of the credit institution's credit risk profile shall be an essential part of the management reporting to these parties. Reporting shall include at least risk profile by grade, migration across grades, estimation of the relevant parameters per grade, and comparison of realised default rates and own estimates of LGDs and conversion factors against expectations and stress-test results. Reporting frequencies shall depend on the significance and type of information and the level of the recipient.

5.2. Credit risk control

127. The credit risk control unit shall be independent from the personal and management functions responsible for originating or renewing exposures and that reports directly to senior management. The unit shall be responsible for the design or selection, implementation, oversight and performance of the rating systems. It shall regularly produce and analyse reports on the output of the rating systems.

128. The areas of responsibility for the credit risk control unit(s) shall include:

(a)     Testing and monitoring grades and pools;

(b)     Production and analysis of summary reports from the credit institution’s rating systems;

(c)     Implementing procedures to verify that grade and pool definitions are consistently applied across departments and geographic areas;

(d)     Reviewing and documenting any changes to the rating process, including the reasons for the changes;

(e)     Reviewing the rating criteria to evaluate if they remain predictive of risk. Changes to the rating process, criteria or individual rating parameters shall be documented and retained;

(f)     Active participation in the design or selection, implementation and validation of models used in the rating process;

(g)     Oversight and supervision of models used in the rating process;

(h)     Ongoing review and alterations to models used in the rating process.

129. Notwithstanding paragraph 128, credit institutions using pooled data according to paragraphs 57 and 58 may outsource the following tasks:

(a)     Production of information relevant to testing and monitoring grades and pools;

(b)     Production of summary reports from the credit institution’s rating systems;

(c)     Production of information relevant to review of the rating criteria to evaluate if they remain predictive of risk;

(d)     Documentation of changes to the rating process, criteria or individual rating parameters;

(e)     Production of information relevant to ongoing review and alterations to models used in the rating process.

Credit institutions making use of this paragraph shall ensure that the competent authorities have access to all relevant information from the third party that is necessary for examining compliance with the minimum requirements and that the competent authorities may perform on-site examinations to the same extend as within the credit institution.

5.3. Internal Audit

130. Internal audit shall review at least annually the credit institution’s rating systems and its operations, including the operations of the credit function and the estimation of PDs, LGDs, ELs and conversion factors. Areas of review shall include adherence to all applicable minimum requirements.

Annex VIII – Credit risk mitigation Part 1- Eligibility

1. This Part sets out eligible forms of credit risk mitigation for the purposes of Article 92.

2. For the purposes of this Annex:

‘Secured lending transaction’ shall mean any transaction giving rise to an exposure secured by collateral which does not include a provision conferring upon the credit institution the right to receive margin frequently.

‘Capital market-driven transaction’ shall mean any transaction giving rise to an exposure secured by collateral which includes a provision conferring upon the credit institution the right to receive margin frequently.

1. Funded credit protection 1.1. On-balance sheet netting

3. The on-balance sheet netting of mutual claims between the credit institution and its counterparty may be recognised.

4. Without prejudice to paragraph 5, eligibility is limited to reciprocal cash balances between the credit institution and the counterparty. Only loans and deposits of the lending credit institution may be subject to a modification of risk-weighted exposure amounts and, as relevant, expected loss amounts as a result of an on-balance sheet netting agreement.

1.2. Master netting agreements covering repurchase transactions and/or securities or commodities lending or borrowing transactions and/or other capital market-driven transactions

5. For credit institutions adopting the Financial Collateral Comprehensive Method under Part 3 of this Annex, the effects of bilateral netting contracts covering repurchase transactions, securities or commodities lending or borrowing transactions, and/or other capital market-driven transactions with a counterparty may be recognised. Without prejudice to Annex II of Directive [93/6/EEC] to be recognised the collateral taken and securities or commodities borrowed within such agreements must comply with the eligibility requirements for collateral set out at paragraphs 7 to 11.

1.3. Collateral

6. Where the credit risk mitigation technique used relies on the right of the credit institution to liquidate or retain assets, eligibility depends upon whether risk-weighted exposure amounts, and, as relevant, expected loss amounts, are calculated under Articles 78 to 83 or Articles 84 to 89. Eligibility further depends upon whether the Financial Collateral Simple Method is used or the Financial Collateral Comprehensive Method under Part 3. In relation to repurchase transactions and securities or commodities lending or borrowing transactions, eligibility also depends upon whether the transaction is booked in the non-trading book or the trading book.

1.3.1. Eligibility under all approaches and methods

7. The following financial items may be recognised as eligible collateral under all approaches and methods:

(a)     Cash on deposit with, or cash assimilated instruments held by, the lending credit institution.

(b)     Debt securities issued by central governments or central banks which securities have a credit assessment by an ECAI or export credit agency recognised as eligible for the purposes of Articles 78 to 83 which has been determined by the competent authority to be associated with credit quality step 4 or above under the rules for the risk weighting of exposures to central governments and central banks under Articles 78 to 83.

(c)     Debt securities issued by institutions which securities have a credit assessment by an eligible ECAI which has been determined by the competent authority to be associated with credit quality step 3 or above under the rules for the risk weighting of exposures to credit institutions under Articles 78 to 83.

(d)     Debt securities issued by other entities which securities have a credit assessment by an eligible ECAI which has been determined by the competent authority to be associated with credit quality step 3 or above under the rules for the risk weighting of exposures to corporates under Articles 78 to 83;

(e)     Debt securities with a short-term credit assessment by an eligible ECAI which has been determined by the competent authority to be associated with credit quality step 3 or above under the rules for the risk weighting of short term exposures under Articles 78 to 83;

(f)     Equities or convertible bonds that are included in a main index;

(g)     Gold.

For the purposes of sub-paragraph (b), ‘debt securities issued by central governments or central banks shall be deemed to include –

(i)      debt securities issued by regional governments or local authorities exposures to which are treated as exposures to the central government in whose jurisdiction they are established under Annex VI;

(ii)     debt securities issued by multilateral development banks to which a 0% risk weight is applied under Articles 78 to 83;

(iii)    debt securities issued by international organisations which are assigned a 0% risk weight under Articles 78 to 83;

For the purposes of sub-paragraph (c), ‘debt securities issued by institutions’ include

(i)      ebt securities issued by regional governments or local authorities other than those exposures to which are treated as exposures to the central government in whose jurisdiction they are established under Articles 78 to 83;

(ii)     debt securities issued by public sector entities, exposures to which are treated as exposures to credit institutions under Articles 78 to 83;

(iii)    debt securities issued by multilateral development banks other than those to which a 0% risk weight is applied under;

8. Debt securities issued by institutions which securities do not have a credit assessment by an eligible ECAI may be recognised as eligible collateral if they fulfil the following criteria:

(a)     they are listed on a recognised exchange;

(b)     they qualify as senior debt;

(c)     all other rated issues by the issuing institution of the same seniority having a credit assessment by a recognised ECAI have a credit assessment by an eligible ECAI which has been determined by the competent authorities to be associated with credit quality step 3 or above under the rules for the risk weighting of exposures to institutions or short term exposures under Articles 78 to 83.

(d)     the lending credit institution has no information to suggest that the issue would justify a credit assessment below that indicated in (c);

(e)     the credit institution can demonstrate to the competent authorities that the market liquidity of the instrument is sufficient for these purposes.

9. Units in collective investment undertakings may be recognised as eligible collateral if the following conditions are satisfied:

(a)     they have a daily public price quote;

(b)     the collective investment undertaking is limited to investing in instruments that are eligible for recognition under paragraphs 7 and 8.

The use (or potential use) by a collective investment undertaking of derivative instruments to hedge permitted investments shall not prevent units in that undertaking from being eligible.

10. In relation to points (b) to (e) of Paragraph 7, where a security has two credit assessments by eligible ECAIs, the less favourable assessment shall be deemed to apply. In cases where a security has more than two credit assessments by eligible ECAIs, the two most favourable assessments shall be deemed to apply. If the two most favourable credit assessments are different, the less favourable of the two shall be deemed to apply.

1.3.2. Additional eligibility under the Financial Collateral Comprehensive Method

11. In addition to the collateral set out in paragraphs 7 to 10, where a credit institution uses the Financial Collateral Comprehensive Method under Part 3, the following financial items may be recognised as eligible collateral:

(a)     Equities or convertible bonds not included in a main index but traded on a recognised exchange.

(b)     Units in collective investment undertakings if the following conditions are met:

(i)      they have a daily public price quote; and

(ii)     the collective investment undertaking is limited to investing in instruments that are eligible for recognition under paragraph 7 and 8 and the items mentioned in the point (a) of this paragraph.

The use (or potential use) by a collective investment undertaking of derivative instruments to hedge permitted investments shall not prevent units in that undertaking from being eligible.

1.3.3. Additional eligibility for calculations underArticles 84 to 89

12. In addition to the collateral set out above the provisions of paragraphs 13 to 22 apply where a credit institution calculates risk-weighted exposure amounts and expected loss amounts under the approach set out in Articles 84 to 89:

(a)      Real estate collateral

13. Residential real estate property which is or will be occupied or let by the owner and commercial real estate i.e. offices and other commercial premises may be recognised as eligible collateral where the following conditions are met:

(a)     The value of the property does not materially depend upon the credit quality of the obligor. This requirement is not intended to preclude situations where purely macro-economic factors affect both the value of the property and the performance of the borrower.

(b)     The risk of the borrower does not materially depend upon the performance of the underlying property or project, but rather on the underlying capacity of the borrower to repay the debt from other sources. As such, repayment of the facility does not materially depend on any cash flow generated by the underlying property serving as collateral.

14. Credit institutions may also recognise as eligible collateral shares in Finnish residential housing companies operating in accordance with the Finnish Housing Company Act of 1991 or subsequent equivalent legislation in respect of residential property which is or will be occupied or let by the owner, as residential real estate collateral, provided that these conditions are met.

15. The competent authorities may also authorise their credit institutions to recognise as eligible collateral shares in Finnish housing companies operating in accordance with the Finnish Housing Company Act of 1991 or subsequent equivalent legislation as commercial real estate collateral, provided that these conditions are met.

16. The competent authorities may waive the requirement for their credit institutions to comply with condition (b) in paragraph 13 for exposures secured by residential real estate property situated within the territory of that Member State, if the competent authorities have evidence that the relevant market is well-developed and long-established with loss-rates which are sufficiently low to justify such action. This shall not prevent the competent authorities of a Member State, which do not use this waiver from recognising as eligible residential real estate property recognised as eligible in another Member State by virtue of the waiver. Member States shall disclose publicly the use they make of this waiver.

17. The competent authorities of the Member States may waive the requirement for their institutions to comply with condition (b) in paragraph 13 for commercial real estate property situated within the territory of that Member State, if the competent authorities have evidence that the relevant market is well-developed and long-established and that loss-rates stemming from lending secured by commercial real estate propery satisfy the following conditions:

(a)     up to 50 % of the market value (or where applicable and if lower 60 % of the mortgage-lending-value) does not exceed 0.3 % of the outstanding loans secured by commercial real estate property in any given year.

(b)     overall losses stemming from lending secured by commercial real estate does not exceed 0.5 % of the outstanding loans in any given year.

18. If either of these conditions is not satisfied in a given year, the eligibility to use this treatment will cease until the conditions are satisfied in a subsequent year.

19. The competent authorities of a Member State, which do not use the waiver in paragraph 17, may recognise as eligible commercial real estate property recognised as eligible in another Member State by virtue of the waiver.

(b)     Receivables

20. The competent authorities may recognise as eligible collateral amounts receivable linked to a commercial transaction or transactions with an original maturity of less than or equal to one year. Eligible receivables do not include those associated with securitisations, sub-participations or credit derivatives or amounts owed by affiliated parties.

(c)      Other physical collateral

21. The competent authorities may recognise as eligible collateral physical items of a type other than those types indicated in paragraphs 13 to 19 if satisfied as to the following:

(a)     the existence of liquid markets for disposal of the collateral in an expeditious and economically efficient manner; and

(b)     the existence of well-established, publicly available market prices for the collateral. The institution must be able to demonstrate that there is no evidence that the net prices it receives when collateral is realised deviates significantly from these market prices.

(d)     Leasing

22. Subject to the provisions of Part 3, Paragraph 73, where the requirements set out in Part 2, paragraph 11 are met, exposures arising from transactions whereby a credit institution leases property to a third party will be treated the same as loans collateralised by the type of property leased.

1.4. Other funded credit protection 1.4.1. Cash on deposit with, or cash assimilated instruments held by, a third party institution.

23. Cash on deposit with, or cash assimilated instruments held by, a third party institution in a non-custodial arrangement and pledged to the lending credit institution may be recognised as eligible credit protection.

1.4.2. Life insurance policies pledged to the lending credit institution

24. Life insurance policies pledged to the lending credit institution may be recognised as eligible credit protection.

1.4.3. Institution instruments repurchased on request

25. Instruments issued by third party institutions which will be repurchased by that institution on request may be recognised as eligible credit protection.

2. Unfunded Credit Protection 2.1. Eligibility of protection providers under all approaches

26. The following parties may be recognised as eligible providers of unfunded protection:

(a)     Central governments and central banks;

(b)     regional governments or local authorities;

(c)     multi-lateral development banks;

(d)     international organisations exposures to which receive a 0% risk weight under Articles 78 to 83;

(e)     public sector entities, claims on which are treated by the competent authorities as claims on institutions under Articles 78 to 83;

(f)     institutions;

(g)     Other corporate entities, including parent, subsidiary and affiliate corporate entites of the credit institution, that

(i)      have a credit assessment by a recognised ECAI which has been determined by the competent authorities to be associated with credit quality step 2 or above under the rules for the risk weighting of exposures to corporates under Articles 78 to 83;

(ii)     in the case of credit institutions calculating risk-weighted exposure amounts and expected loss amounts under Articles 84 to 89, do not have a credit assessment by a recognised ECAI and are internally rated as having a probability of default equivalent to that associated with the credit assessments of ECAIs determined by the competent authorities to be associated with credit quality step 2 or above under the rules for the risk weighting of exposures to corporates under Articles 78 to 83.

27. Where risk-weighted exposure amounts and expected loss amounts are calculated under Articles 84o 89, to be eligible a guarantor must be internally rated by the credit institution in accordance with the provisions of Annex VII, Part 4.

28. By way of derogation from paragraph 26, the Member States may also recognise as eligible providers of unfunded protection, other financial institutions authorised and supervised by the competent authorities responsible for the authorisation and supervision of credit institutions and subject to prudential requirements equivalent to those applied to credit institutions.

3. Types of credit derivatives

29. The following types of credit derivatives, and instruments that may be composed of such credit derivatives or that are economically effectively similar, may be recognised as eligible.

(a)     credit default swaps

(b)     total return swaps

(c)     credit linked notes to the extent of their cash funding

30. Where a credit institution buys credit protection through a total return swap and records the net payments received on the swap as net income, but does not record offsetting deterioration in the value of the asset that is protected (either through reductions in fair value or by an addition to reserves), the credit protection shall not be recognised.

3.1. Internal hedges

31. When a credit institution conducts an internal hedge using a credit derivative - i.e. hedges the credit risk of an exposure in the non-trading book with a credit derivative booked in the trading book - in order for the protection to be recognised for the purposes of this Annex the credit risk transferred to the trading book shall be transferred out to a third party or parties. In such circumstances, subject to the compliance of such transfer with the requirements for the recognition of credit risk mitigation set out in this Annex, the rules for the calculation of risk-weighted exposure amounts and expected loss amounts where unfunded credit protection is acquired set out in Parts 3 to 6 shall be applied.

Part 2 - Minimum Requirements

1. The credit institution must satisfy the competent authorities that it has adequate risk management processes to control those risks to which the credit institution may be exposed as a result of carrying out credit risk mitigation practices.

2. Notwithstanding the presence of credit risk mitigation taken into account for the purposes of calculating risk-weighted exposure amounts and as relevant expected loss amounts, credit institutions shall continue to undertake full credit risk assessment of the underlying exposure and be in a position to demonstrate the fulfilment of this requirement to the competent authorities. In the case of repurchase transactions and/or securities or commodities lending or borrowing transactions the underlying exposure shall, for the purposes of this paragraph only, be deemed to be the net amount of the exposure.

1. Funded credit protection 1.1. On-balance sheet netting (other than master netting agreements covering repurchase transactions, securities or commodities lending or borrowing transactions and/or other capital market-driven transactions)

3. For on-balance sheet netting agreements - other than master netting agreements covering repurchase transactions, securities or commodities lending or borrowing transactions and/or other capital market-driven transactions - to be recognised for the purposes of Articles 90 to 93 the following conditions shall be satisfied:

(a)     they must have a well-founded legal basis and be legally enforceable under applicable law, including in the event of the insolvency or bankruptcy of a counterparty;

(b)     the credit institution must be able to determine at any time those assets and liabilities that are subject to the netting agreement;

(c)     the credit institution must monitor and control the risks associated with the termination of the credit protection;

(d)     the credit institution must monitor and control the relevant exposures on a net basis.

1.2. Master netting agreements covering repurchase transactions and/or securities or commodities lending or borrowing transactions and/or other capital market driven transactions

4. For master netting agreements covering repurchase transactions and/or securities or commodi.ties lending or borrowing transactions and/or other capital market driven transactions to be recognised for the purposes of Articles 90 to 93, they shall:

(a)     have a well founded legal basis and be legally enforceable under applicable law, including in the event of the bankruptcy or insolvency of the counterparty

(b)     give the non-defaulting party the right to terminate and close-out in a timely manner all transactions under the agreement upon the event of default, including in the event of the bankruptcy or insolvency of the counterparty

(c)     provide for the netting of gains and losses on transactions closed out under a master agreement so that a single net amount is owed by one party to the other.

5. In addition the minimum requirements for the recognition of financial collateral under the Financial Collateral Comprehensive Method set out in paragraph 6 shall be fulfilled.

1.3. Financial collateral 1.3.1. Minimum requirements for the recognition of financial collateral under all Approaches and Methods

6. For the recognition of financial collateral and gold, the following conditions shall be met:

(a)     Low correlation

The credit quality of the obligor and the value of the collateral must not have a material positive correlation.

Securities issued by the obligor, or any related group entity are not eligible.

(b)     Legal certainty

Credit institutions shall fulfil any contractual and statutory requirements in respect of, and take all steps necessary to ensure, the enforceability of the collateral arrangements under the law applicable to their interest in the collateral.

Credit institutions shall have conducted sufficient legal review confirming the enforceability of the collateral arrangements in all relevant jurisdictions. They shall re-conduct such review as necessary to ensure continuing enforceability.

(c)     Operational requirements

The collateral arrangements shall be properly documented, with a clear and robust procedure for the timely liquidation of collateral.

Credit institutions shall employ robust procedures and processes to control risks arising from the use of collateral – including risks of failed or reduced credit protection, valuation risks, risks associated with the termination of the credit protection, concentration risk arising from the use of collateral and the interaction with the credit institution’s overall risk profile.

The credit institution shall have documented policies and practices concerning the types and amounts of collateral accepted.

Credit institutions shall calculate the market value of the collateral, and revalue it accordingly, with a minimum frequency of once every six months and whenever the credit institution has reason to believe that there has occurred a significant decrease in its market value.

Where the collateral is held by a third party, credit institutions must take reasonable steps to ensure that the third party segregates the collateral from its own assets.

1.3.2. Additional minimum requirements for the recognition of financial collateral under the Financial Collateral Simple Method

7. In addition to the requirements set out in paragraph 6 above, for the recognition of financial collateral under the Financial Collateral Simple Method the residual maturity of the protection must be at least as long as the residual maturity of the exposure.

1.4. Minimum requirements for the recognition of real estate collateral

8. For the recognition of real estate collateral the following conditions shall be met:

(a)     Legal certainty

The mortgage or charge shall be legally enforceable in all relevant jurisdictions, and the mortgage or charge shall be properly filed on a timely basis. The arrangements shall reflect a perfected lien (i.e. all legal requirements for establishing the pledge shall been fulfilled). The protection agreement and the legal process underpinning it shall enable the credit institution to realise the value of the protection within a reasonable timeframe.

(b)     Monitoring of property values

The value of the property shall be monitored on a frequent basis and at a minimum once every year. More frequent monitoring shall be carried out where the market is subject to significant changes in conditions. Statistical methods may be used to monitor the value of the property and to identify property that needs revaluation. The property shall be valued by an independent valuer when information indicates that the value of the property may have declined materially relative to general market prices. For loans exceeding EUR 3 million or 5% of the own funds of the credit institution, the property shall be evaluated by an independent valuer at least every three years.

‘Independent valuer’ shall mean a person who possesses the necessary qualifications, ability and experience to execute a valuation and who is independent from the credit decision process.

(c)     Documentation

The types of residential and commercial real estate accepted by the credit institution and its lending policies in this regard shall be clearly documented.

(d)     Insurance

The credit institution shall have procedures to monitor that the property taken as protection is adequately insured against damage.

1.5. Minimum requirements for the recognition of receivables as collateral

9. For the recognition of receivables the following conditions shall be met:

(a)     Legal certainty

(i)      The legal mechanism by which the collateral is provided shall be robust and effective and ensure that the lender has clear rights over the proceeds.

(ii)     Credit institutions must take all steps necessary to fulfil local requirements in respect of the enforceability of security interest. There shall be a framework which allows the lender to have a first priority claim over the collateral subject to national discretion to allow such claims to be subject to the claims of preferential creditors provided for in legislative or implementing provisions.

(iii)    Credit institutions shall have conducted sufficient legal review confirming the enforceability of the collateral arrangements in all relevant jurisdictions.

(iv)    The collateral arrangements must be properly documented, with a clear and robust procedure for the timely collection of collateral. Credit institutions procedures shall ensure that any legal conditions required for declaring the default of the customer and timely collection of collateral are observed. In the event of the borrower’s financial distress or default, the credit institution shall have legal authority to sell or assign the receivables to other parties without consent of the receivables obligors.

(b)     Risk management

(i)      The credit institution must have a sound process for determining the credit risk associated with the receivables. Such a process shall include, among other things, analyses of the borrower’s business and industry and the types of customers with whom the borrower does business. Where the credit institution relies on the borrower to ascertain the credit risk of the customers, the credit institution must review the borrower’s credit practices to ascertain their soundness and credibility.

(ii)     The margin between the amount of the exposure and the value of the receivables must reflect all appropriate factors, including the cost of collection, concentration within the receivables pool pledged by an individual borrower, and potential concentration risk within the credit institution’s total exposures beyond that controlled by the credit institution’s general methodology. The credit institution must maintain a continuous monitoring process appropriate to the receivables. Observance of the credit institution’s overall concentration limits shall be monitored. Additionally, compliance with loan covenants, environmental restrictions, and other legal requirements shall be reviewed on a regular basis.

(iii)    The receivables pledged by a borrower shall be diversified and not be unduly correlated with the borrower. Where there is material positive correlation, the attendant risks shall be taken into account in the setting of margins for the collateral pool as a whole.

(iv)    Receivables from affiliates of the borrower (including subsidiaries and employees) shall not be recognised as risk mitigants.

(v)     The credit institution shall have a documented process for collecting receivable payments in distressed situations. The requisite facilities for collection shall be in place, even when the credit institution normally looks to the borrower for collections.

1.6. Minimum requirements for the recognition of other physical collateral

10. For the recognition of other physical collateral the following conditions shall be met:

(a)     The collateral arrangement shall be legally enforceable under all applicable laws and shall enable the credit institution to realise the value of the property within a reasonable timeframe.

(b)     With the sole exception of permissible prior claims referred to in paragraph 9(a)(ii), only first liens on, or charges over, collateral are permissible. As such, the credit institution shall have priority over all other lenders to the realised proceeds of the collateral.

(c)     The value of the property shall be monitored on a frequent basis and at a minimum once every year. More frequent monitoring shall be required where the market is subject to significant changes in conditions.

(d)     The loan agreement shall include detailed descriptions of the collateral plus detailed specifications of the manner and frequency of revaluation.

(e)     The types of physical collateral accepted by the credit institution and policies and practices in respect of the appropriate amount of each type of collateral relative to the exposure amount shall be clearly documented in internal credit policies and procedures available for examination.

(f)     The credit institution’s credit policies with regard to the transaction structure shall address appropriate collateral requirements relative to the exposure amount, the ability to liquidate the collateral readily, the ability to establish objectively a price or market value, the frequency with which the value can readily be obtained (including a professional appraisal or valuation), and the volatility of the value of the collateral.

(g)     Both initial valuation and revaluation shall take fully into account any deterioration or obsolescence of the collateral. Particular attention must be paid in valuation and revaluation to the effects of the passage of time on fashion- or date-sensitive collateral.

(h)     The credit institution must have the right to phsically inspect the property. It shall have policies and procedures addressing its exercise of the right to physical inspection.

(i)      The credit institution must have procedures to monitor that the property taken as protection is adequately insured against damage.

1.7. Minimum requirements for treating lease exposures as collateralised

11. For the exposures arising from leasing transactions to be treated as collateralised by the type of property leased, the following conditions shall be met:

(a)     The conditions set out in paragraphs 8 or 10 as appropriate for the recognition as collateral of the type of property leased shall be met;

(b)     There shall be robust risk management on the part of the lessor with respect to the location of the asset, the use to which it is put, its age, and planned obsolescence;

(c)     There shall be in place a robust legal framework establishing the lessor’s legal ownership of the asset and its ability to exercise its rights as owner in a timely fashion; and

(d)     The difference between the rate of depreciation of the physical asset and the rate of amortisation of the lease payments must not be so large as to overstate the credit risk mitigation attributed to the leased assets.

1.8. Minimum requirements for the recognition of other funded credit protection 1.8.1. Cash on deposit with, or cash assimilated instruments held by, a third party institution

12. To be eligible for the treatment set out at Part 3, Paragraph 80, the protection referred to in Part 1, paragraph 23 must satisfy the following conditions:

(a)     The borrower’s claim against the third party institution is openly pledged or assigned to the lending credit institution;

(b)     The third party institution is notified of the pledge or assignment;

(c)     As a result of the notification, the third party institution is able to make payments solely to the lending credit institution or to other parties with the lending credit institution’s consent.

(d)     The pledge or assignment is unconditional and irrevocable.

1.8.2. Life insurance policies pledged to the lending credit institution.

13. For life insurance policies pledged to the lending credit institution to be recognised the following conditions shall be met:

(a)     the company providing the life insurance may be recognised as an eligible unfunded protection provider under Part 1, paragraph 26;

(b)     the life insurance policy is openly pledged or assigned to the lending credit institution;

(c)     the company providing the life insurance is notified of the pledge or assignment and as a result may not cancel the contract or pay amounts payable under the contract without the consent of the lending credit institution;

(d)     the policy must have a declared surrender value which is a non-reducible amount;

(e)     the lending credit institution must have the right to cancel the policy and receive the surrender value in a timely way in the event of the default of the borrower;

(f)     the lending credit institution is informed of any non-payments under the policy by the policy-holder;

(g)     the credit protection must be provided for the maturity of the loan; and

(h)     the pledge must be legally enforceable in all relevant jurisdictions.

2. Unfunded credit protection and credit linked notes 2.1. Requirements common to guarantees and credit derivatives

14. Subject to paragraph 16, for the credit protection deriving from a guarantee or credit derivative to be recognised the following conditions shall be met:

(a)     The credit protection shall be direct.

(b)     The extent of the credit protection shall be clearly defined and incontrovertible.

(c)     The credit protection contract shall not contain any clause, the fulfilment of which is outside the direct control of the lender, that:

(i)      would allow the protection provider unilaterally to cancel the protection;

(ii)     would increase the effective cost of protection as a result of deteriorating credit quality of the protected exposure;

(iii)    could prevent the protection provider from being obliged to pay out in a timely manner in the event that the original obligor fails to make any payments due; or

(iv)    could allow the maturity of the credit protection to be reduced by the protection provider.

(d)     It must be legally enforceable in all relevant jurisdictions.

2.1.1. Operational requirements

15. The credit institution shall satisfy its supervisor that it has systems in place to manage potential concentration of risk arising from the credit institution’s use of guarantees or credit derivatives. The credit institution must be able to demonstrate how its strategy in respect of its use of credit derivatives and guarantees interacts with its management of its overall risk profile.

2.2. Sovereign and other public sector counter-guarantees

16. Where an exposure is protected by a guarantee which is counter-guaranteed by a central government or central bank, a regional government or local authority claims on which are treated as claims on the sovereign in whose jurisdiction they are established under Articles 78 to 83, a multi-lateral development bank to which a 0% risk weight is applied under or by virtue of Articles 78 to 83, or a public sector entity claims on which are treated as claims on credit institutions under Articles 78 to 83, the exposure may be treated as protected by a guarantee provided by the entity in question provided the following conditions are satisfied:

(a)     the counter-guarantee covers all credit risk elements of the claim;

(b)     both the original guarantee and the counter-guarantee meet the requirements for guarantees set out in paragraphs 14, 15 and 17, except that the counter-guarantee need not be direct;

(c)     the competent authority is satisfied that the cover is robust and that nothing in the historical evidence suggests that the coverage of the counter-guarantee is less than effectively equivalent to that of a direct guarantee by the entity in question.

2.3. Additional requirements for guarantees

17. For a guarantee to be recognised the following conditions shall also be met:

(a)     On the qualifying default/non-payment of the counterparty, the lending credit institution shall have the right to pursue, in a timely manner, the guarantor for any monies due under the claim in respect of which the protection is provided. Payment by the guarantor shall not be subject to the lending credit institution first having to pursue the oligor.

(b)     The guarantee shall be an explicitly documented obligation assumed by the guarantor.

(c)     Subject to the following sentence, the guarantee shall cover all types of payments the obligor is expected to make in respect of the claim. Where certain types of payment are excluded from the guarantee, the recognised value of the guarantee shall be adjusted to reflect the limited coverage.

18. In the case of guarantees provided in the context of mutual guarantee schemes recognised for these purposes by the competent authorities or provided by or counter-guaranteed by entities referred to in paragraph 16, the requirements in paragraph (a) may be considered to be satisfied where either of the following conditions are met:

(a)     the competent authorities are satisfied that the lending credit institution has the right to obtain in a timely manner a provisional payment by the guarantor calculated to represent a robust estimate of the amount of the economic loss, including losses resulting from the non-payment of interest and other types of payment which the borrower is obliged to make, likely to be incurred by the lending credit institution proportional to the coverage of the guarantee;

(b)     the competent authorities are otherwise satisfied as to the loss-protecting effects of the guarantee, including losses resulting from the non-payment of interest and other types of payment which the borrower is obliged to make.

2.4. Additional requirements for credit derivatives

19. For a credit derivative to be recognised the following conditions shall also be met:

(a)     Subject to (b), the credit events specified under the credit derivative shall at a minimum include:

(i)      the failure to pay the amounts due under the terms of the underlying obligation that are in effect at the time of such failure (with a grace period that is closely in line with or shorter than the grace period in the underlying obligation); and

(ii)     the bankruptcy, insolvency or inability of the obligor to pay its debts, or its failure or admission in writing of its inability generally to pay its debts as they become due, and analogous events.

(iii)    the restructuring of the underlying obligation involving forgiveness or postponement of principal, interest or fees that results in a credit loss event (i.e. value adjustment or other similar debit to the profit and loss account).

(b)     Where the credit events specified under the credit derivative do not include restructuring of the underlying obligation as described in the third indent of (a), the credit protection may nonetheless be recognised subject to a reduction in the recognised value as specified in Part 3, paragraph 84.

(c)     In the case of credit derivatives allowing for cash settlement a robust valuation process shall be in place in order to estimate loss reliably. There shall be a clearly specified period for obtaining post-credit-event valuations of the underlying obligation.

(d)     If the protection purchaser’s right and ability to transfer the underlying obligation to the protection provider is required for settlement, the terms of the underlying obligation shall provide that any required consent to such transfer may not be unreasonably withheld.

(e)     The identity of the parties responsible for determining whether a credit event has occurred shall be clearly defined. This determination shall not be the sole responsibility of the protection seller. The protection buyer shall have the right/ability to inform the protection provider of the occurrence of a credit event;

20. A mismatch between the underlying obligation and the reference obligation under the credit derivative (i.e. the obligation used for the purposes of determining cash settlement value or the deliverable obligation) or between the underlying obligation and the obligation used for purposes of determining whether a credit event has occurred is permissible only if the following conditions are met:

(a)     the reference obligation or the obligation used for purposes of determining whether a credit event has occurred, as the case may be, ranks pari passu with or is junior to the underlying obligation;

(b)     the underlying obligation and the reference obligation or the obligation used for purposes of determining whether a credit event has occurred, as the case may be, share the same obligor (i.e., the same legal entity) and there are in place legally enforceable cross-default or cross-acceleration clauses.

Part 3 - Calculating the effects of credit risk mitigation

1. Subject to Parts 4 to 6, where the provisions in Parts 1 and 2 are satisfied, the calculation of risk-weighted exposure amounts under Subsection 1 Articles 78 to 83 and the calculation of risk-weighted exposure amounts and expected loss amounts under Articles 84 to 89 may be modified in accordance with the provisions of this Part.

2. Cash, securities or commodities purchased, borrowed or received under a repurchase transaction or securities or commodities lending or borrowing transaction shall be treated as collateral.

1. Funded Credit rotection 1.1. Credit linked notes.

3. Investments in credit linked notes issued by the lending credit institution may be treated as cash collateral.

1.2. On-balance sheet netting

4. Loans and deposits with the lending credit institution subject to on-balance sheet netting are to be treated as cash collateral.

1.3. Master netting agreements covering repurchase transactions and/or securities or commodities lending or borrowing transactions and/or other capital market-driven transactions 1.3.1. Calculation Of the fully-adjusted exposure value

(a)          Using the ‘Supervisory’ volatility adjustments or the ‘Own Estimates’ volatility adjustments approaches

5. Subject to paragraphs 12 to 22, in calculating the ‘fully adjusted exposure value’ (E*) for the exposures subject to an eligible master netting agreement covering repurchase transactions and/or securities or commodities lending or borrowing transactions and/or other capital market-driven transactions, the volatility adjustments to be applied shall be calculated in the manner set out below either using the Supervisory volatility adjustments approach or the Own estimates volatility adjustments approach as set out in paragraphs 35 to 60 for the Financial Collateral Comprehensive Method. For the use of the Own estimates approach the same conditions and requirements shall apply as apply under the Financial Collateral Comprehensive Method.

6. The net position in each type of security shall be calculated by subtracting from the total value of the securities of that type lent, sold or provided under the master netting agreement, the total value of securities of that type borrowed, purchased or received under the agreement.

7. For the purposes of paragraph 6, type of security means securities which are issued by the same entity, have the same issue date, the same maturity and are subject to the same terms and conditions and are subject to the same liquidation periods as indicated in paragraphs 35 to 60.

8. The net position in each currency other than the settlement currency of the master netting agreement, shall be calculated by subtracting from the total value of securities denominated in that currency lent, sold or provided under the master netting agreement added to the amount of cash in that currency lent or transferred under the agreement, the total value of securities denominated in that currency borrowed, purchased or received under the agreement added to the amount of cash in that currency borrowed or received under the agreement.

9. The volatility adjustment appropriate to a given type of security or cash position shall be applied to the positive or negative net position in the securities of that type.

10. The foreign exchange risk (fx) volatility adjustment shall be applied to the net positive or negative position in each currency other than the settlement currency of the master netting agreement.

11. E* shall be calculated according to the following formula:

E* = max {0, [(∑(E) - ∑(C)) + ∑(|net position in each security| x Hsec) + + (∑|Efx| x Hfx)]}

Where risk-weighted exposure amounts are calculated under Articles 78 to 83, E is the exposure value for each separate exposure under the agreement that would apply in the absence of the credit protection.

Where risk-weighted exposure amounts and expected loss amounts are calculated under Articles 84 to 89, E is the exposure value for each separate exposure under the agreement that would apply in the absence of the credit protection.

C is the value of the securities or commodities borrowed, purchased or received or the cash borrowed or received in respect of each such exposure.

∑(E) is the sum of all Es under the agreement.

∑(C) is the sum of all Cs under the agreement.

Efx is the net position (positive or negative) in a given currency other than the settlement currency of the agreement as calculated under paragraph 8.

Hsec is the volatility adjustment appropriate to a particular type of security.

Hfx is the foreign exchange volatility adjustment.

E* is the fully adjusted exposure value.

(b)          Using the Internal Models approach

12. As an alternative to using the Supervisory volatility adjustments approach or the Own Estimates volatility adjustments approach in calculating the fully adjusted exposure value (E*) resulting from the application of an eligible master netting agreement covering repurchase transactions, securities or commodities lending or borrowing transactions, and/or other capital market driven transactions other than derivative transactions, credit institutions may be permitted to use an internal models approach which takes into account correlation effects between security positions subject to the master netting agreement as well as the liquidity of the instruments concerned. Internal models used in this approach shall provide estimates of the potential change in value of the unsecured exposure amount (∑E - ∑C).

13. A credit institution may choose to use an internal models approach independently of the choice it has made between the Standardised Approach and the IRB Foundation Approach to credit risk. However, if a credit institution seeks to use an internal models approach, it must do so for all counterparties and securities, excluding immaterial portfolios where it may use the Supervisory volatility adjustments approach or the Own estimates volatility adjustments approach as set out in paragraphs 5 to 11.

14. The internal models approach is available to credit institutions that have received recognition for an internal risk-management model under Annex V of Directive [93/6/EEC].

15. Credit institutions which have not received supervisory recognition for use of such a model under Directive 93/6/EEC, may apply to the competent authorities for recognition of an internal risk-measurement model for the purposes of these paragraphs.

16. Recognition shall only be given if the competent authority is satisfied that the credit institution's risk-management system for managing the risks arising on the transactions covered by the master netting agreement is conceptually sound and implemented with integrity and that, in particular, the following qualitative standards are met:

(a)     the internal risk-measurement model used for calculation of potential price volatility for the transactions is closely integrated into the daily risk-management process of the credit institution and serves as the basis for reporting risk exposures to senior management of the credit institution;

(b)     the credit institution has a risk control unit that is independent from business trading units and reports directly to senior management. The unit must be responsible for designing and implementing the credit institution's risk-management system. It shall produce and analyse daily reports on the output of the risk-measurement model and on the appropriate measures to be taken in terms of position limits;

(c)     the daily reports produced by the risk-control unit are reviewed by a level of management with sufficient authority to enforce reductions of positions taken and of overall risk exposure;

(d)     the credit institution has sufficient numbers of staff skilled in the use of sophisticated models in the risk control unit;

(e)     the credit institution has established procedures for monitoring and ensuring compliance with a documented set of internal policies and controls concerning the overall operation of the risk-measurement system;

(f)     the credit institution's models have a proven track record of reasonable accuracy in measuring risks demonstrated through the backtesting of its output using at least one year of data;

(g)     the credit institution frequently conducts a rigorous programme of stress testing and the results of these tests are reviewed by senior management and reflected in the policies and limits it sets;

(h)     the credit institution must conduct, as part of its regular internal auditing process, an independent review of its risk-measurement system. This review must include both the activities of the business trading units and of the independent risk-control unit;

(i)      at least once a year, the credit institution must conduct a review of its risk management system.

17. The calculation of potential change in value shall be subject to the following minimum standards:

(a)     at least daily calculation of potential change in value;

(b)     a 99th percentile, one-tailed confidence interval;

(c)     a 5-day equivalent liquidation period, except in the case of transactions other than repurchase transactions or securities or commodities lending or borrowing transactions when a 10-day equivalent liquidation period shall be used;

(d)     an effective historical observation period of at least one year except where a shorter observation period is justified by a significant upsurge in price volatility;

(e)     three-monthly data set updates.

18. The competent authorities shall require that the internal risk-measurement model captures a sufficient number of risk factors in order to capture all material price risks.

19. The competent authorities may allow credit institutions to use empirical correlations within risk categories and across risk categories if they are satisfied that the institution's system for measuring correlations is sound and implemented with integrity`.

20. A credit institution using the internal models approach shall be required to backtest the output of the model using a sample of 20 counterparties, identified on an annual basis. These counterparties shall include the 10 largest as determined by the credit institution according to its own exposure measurement approach and 10 others selected at random. For each day and for each counterparty, the credit institution should compare the actual change in the value of the exposure to the counterparty over a 1-day horizon with the estimated change in the exposure value using the internal models approach calculated as of the previous close of business. An exception occurs for each observation in which the actual change in exposure exceeds the internal model estimate. Depending on the number of exceptions in the observations for the 20 counterparties over the most recent 250 business days (encompassing 5000 observations), the estimate output of the internal model shall be increased using the multiplier set out in Table 1 .

Table 1

Zone || Number of exceptions || Multiplier

Green Zone ||             0-99 ||             1

||             100-119 ||             1.13

||             120-139 ||             1.17

Yellow Zone ||             140-159 ||             1.22

||             160-179 ||             1.25

||             180-199 ||             1.28

Red Zone ||             200 or more ||             1.33

As part of its backtesting, the credit institution shall confirm that exceptions are not concentrated in its exposures to one or more counterparties.

21. The fully adjusted exposure value (E*) for credit institutions using the Internal models approach shall be calculated according to the following formula:

E* = max {0, [(∑E - ∑C) + (estimate output of of the internal models x multiplier as appropriate)]}

Where risk-weighted exposure amounts are calculated under Subsection 1 Articles 78 to 83, E is the exposure value for each separate exposure under the agreement that would apply in the absence of the credit protection.

Where risk-weighted exposure amounts and expected loss amounts are calculated under Articles 84 to 89, E is the exposure value for each separate exposure under the agreement that would apply in the absence of the credit protection.

C is the current market value of the securities borrowed, purchased or received or the cash borrowed or received in respect of each such exposure.

∑(E) is the sum of all Es under the agreement

∑(C) is the sum of all Cs under the agreement.

22. In calculating capital requirements using internal models, credit institutions shall use the previous business day’s model output.

1.3.2. Calculating risk-weighted exposure amounts and expected loss amounts for repurchase transactions and/or securities or commodities lending or borrowing transactions and/or other capital market-driven transactions covered by master netting agreements

Standardised Approach

23. E* as calculated under paragraphs 5 to 22 shall be taken as the exposure value of the exposure to the counterparty arising from the transactions subject to the master netting agreement for the purposes of Article 80.

IRB Foundation Approach

24. E* as calculated under paragraphs 5 to 22 shall be taken as the exposure value of the exposure to the counterparty arising from the transactions subject to the master netting agreement for the purposes of Annex VII.

1.4. Financial collateral 1.4.1. Financial Collateral Simple Method

25. The Financial Collateral Simple Method shall be available only where risk-weighted exposure amounts are calculated under Articles 78 to 83. A credit institution shall not use both the Financial Collateral Simple Method and the Financial Collateral Comprehensive Method.

Valuation

26. Under this method, recognised financial collateral is assigned a value equal to its market value as determined in accordance with Part 2, paragraph 6.

Calculating risk-weighted exposure amounts

27. The risk weight that would apply under Articles 78 to 83 if the lender had a direct exposure to the collateral instrument shall apply to those portions of claims collateralised by the market value of recognised collateral. The risk weight on the collateralised portion shall be a minimum of 20% except as specified in paragraphs 28 to 30. The remainder of the exposure shall receive the risk weight that would be applied to an unsecured exposure to the counterparty under Articles 78 to 83.

Repurchase transactions and securities lending or borrowing transactions

28. A risk weight of 0% shall be applied to the collateralised portion of the exposure arising from transactions which fulfil the criteria enumerated in paragraphs 59 and 60. If the counterparty to the transaction is not a core market participant a risk weight of 10% shall be applied.

OTC derivative transactions subject to daily mark-to-market

29. A risk weight of 0% shall, to the extent of the collateralisation, be applied to the exposure values determined under Annex III for the derivative instruments listed in Annex IV and subject to daily marking-to-market, collateralised by cash or cash-assimilated instruments where there is no currency mismatch. A risk weight of 10% shall apply to the extent of the collateralisation to the exposure values of such transactions collateralised by debt securities issued by central governments or central banks which receive a 0% risk weight under Articles 78 to 83.

For the purposes of this paragraph ‘debt securities issued by central governments or central banks shall be deemed to include –

(a)     debt securities issued by regional governments or local authorities exposures to which are treated as exposures to the central government in whose jurisdiction they are established under Articles 78 to 83;

(b)     debt securities issued by multilateral development banks to which a 0% risk weight is applied under or by virtue of Articles 78 to 83;

(c)     debt securities issued by international organisations which are assigned a 0% risk weight under Articles 78 to 83.

Other transactions

30. A 0% risk weight may be applied where the exposure and the collateral are denominated in the same currency, and either:

(a)     the collateral is cash on deposit or a cash assimilated instrument; or

(b)     the collateral is in the form of debt securities issued by central governments or central banks eligible for a 0% risk weight under Articles 78 to 83, and its market value has been discounted by 20%.

For the purposes of this paragraph ‘debt securities issued by central governments or central banks shall be deemed to include those indicated under the previous heading.

1.4.2. Financial Collateral Comprehensive Method

31. In valuing financial collateral for the purposes of the Financial Collateral Comprehensive Method, ‘volatility adjustments’ shall be applied to the market value of collateral, as set out in paragraphs 35 to 60 below, in order to take account of price volatility.

32. Subject to the treatment for currency mismatches in the case of OTC derivatives transactions set out in paragraph 33, where collateral is denominated in a currency that differs from that in which the underlying exposure is denominated, an adjustment reflecting currency volatility shall be added to the volatility adjustment appropriate to the collateral as set out in paragraphs 35 to 60.

33. In the case of OTC derivatives transactions covered by netting agreements recognised by the competent authorities under Annex III, a volatility adjustment reflecting currency volatility shall be applied when there is a mismatch between the collateral currency and the settlement currency. Even in the case where multiple currencies are involved in the transactions covered by the netting agreement, only a single volatility adjustment shall be applied.

(a)          Calculating adjusted values

34. The volatility-adjusted value of the collateral to be taken into account is calculated as follows in the case of all transactions except those transactions subject to recognised master netting agreements to which the provisions set out in paragraphs 5 to 24 are be applied:

CVA = C x (1-HC-HFX)

The volatility-adjusted value of the exposure to be taken into account is calculated as follows:

EVA = E x (1+HE), and in the case of OTC derivative transactions EVA = E.

The fully adjusted value of the exposure, taking into account both volatility and the risk-mitigating effects of collateral is calculated as follows:

E* = max {0, [EVA - CVAM]}

Where

E is the exposure value as would be determined under Articles 78 to 83 or Articles 84 to 89 as appropriate if the exposure was not collateralised.

EVA is the volatility-adjusted exposure amount.

CVA is the volatility-adjusted value of the collateral.

CVAM is CVA further adjusted for any maturity mismatch in accordance with the provisions of Part 4.

HE is the volatility adjustment appropriate to the exposure (E), as calculated under paragraphs 35 to 60.

HC is the volatility adjustment appropriate for the collateral, as calculated under paragraphs 35 to 60.

HFX is the volatility adjustment appropriate for currency mismatch, as calculated under paragraphs 35 to 60.

E* is the fully adjusted exposure value taking into account volatility and the risk-mitigating effects of the collateral.

(b)          Calculation of volatility adjustments to be applied

35. Volatility adjustments may be calculated in two ways: the Supervisory volatility adjustments approach and the Own estimates of volatility adjustments approach (the ‘Own estimates’ approach).

36. A credit institution may choose to use the Supervisory volatility adjustments approach or the Own estimates approach independently of the choice it has made between the Articles 78 to 83 and Articles 84 to 89 for the calculation of risk-weighted exposure amounts. However, if credit institutions seek to use the Own estimates approach, they must do so for the full range of instrument types, excluding immaterial portfolios where they may use the Supervisory volatility adjustments approach.

Where the collateral consists of a number of recognised items, the volatility adjustment shall be , where ai is the proportion of an item to the collateral as a whole and Hi is the volatility adjustment applicable to that item.

(i)           Supervisory volatility adjustments

37. The volatility adjustments to be applied under the Supervisory volatility adjustments approach (assuming daily revaluation) shall be those set out in tables 2 to 5.

VOLATILITY ADJUSTMENTS

Table 2

Credit quality step with which the credit assessment of the debt security is associated || Residual Maturity || Volatility adjustments for debt securities issued by entities described in Part 1, paragraph 7 (b) || Volatility adjustments for debt securities issued by entities described in Part 1, paragraph 7 (c) and (d)

|| || 20 day liquid- ation period (%) || 10 day liquid- ation period (%) || 5 day liquid- ation period (%) || 20 day liquid- ation period (%) || 10 day liquid- ation period (%) || 5 day liquid- ation period (%)

1 || ≤ 1 year || 0.707 || 0.5 || 0.354 || 1.414 || 1 || 0.707

|| >1 ≤ 5 years || 2.828 || 2 || 1.414 || 5.657 || 4 || 2.828

|| > 5 years || 5.657 || 4 || 2.828 || 11.314 || 8 || 5.657

2-3 || ≤ 1 year || 1.414 || 1 || 0.707 || 2.828 || 2 || 1.414

|| >1 ≤ 5 years || 4.243 || 3 || 2.121 || 8.485 || 6 || 4.243

|| > 5 years || 8.485 || 6 || 4.243 || 16.971 || 12 || 8.485

4 || ≤ 1 year || 21.213 || 15 || 10.607 || N/A || N/A || N/A

|| >1 ≤ 5 years || 21.213 || 15 || 10.607 || N/A || N/A || N/A

|| > 5 years || 21.213 || 15 || 10.607 || N/A || N/A || N/A

Table 3

Credit quality step with which the credit assessment of a short term debt security is associated || Volatility adjustments for debt securities issued by entities described in Part 1, paragraph 7 (b) with short-term credit assessments || Volatility adjustments for debt securities issued by entities described in Part 1, paragraph 7 (c) and (d) with short-term credit assessments

|| 20 day liquidation period (%) || 10 day liquidation period (%) || 5 day liquidation period (%) || 20 day liquidation period (%) || 10 day liquidation period (%) || 5 day liquidation period (%)

1 || 0.707 || 0.5 || 0.354 || 1.414 || 1 || 0.707

2-3 || 1.414 || 1 || 0.707 || 2.828 || 2 || 1.414

Table 4

Other collateral or exposure types

|| 20 day liquidation period (%) || 10 day liquidation period (%) || 5 day liquidation period (%)

Main Index Equities, Main Index Convertible Bonds || 21.213 || 15 || 10.607

Other Equities or Convertible Bonds listed on a recognised exchange || 35.355 || 25 || 17.678

Cash || 0 || 0 || 0

Gold || 21.213 || 15 || 10.607

Table 5

Volatility adjustment for currency mismatch

20 day liquidation period (%) || 20 day liquidation period (%) || 5 day liquidation period (%)

11.314 || 8 || 5.657

38. For secured lending transactions the liquidation period shall be 20 business days. For repurchase transactions (except insofar as such transactions involve the transfer of commodities or guaranteed rights relating to title to commodities) and securities lending or borrowing transactions the liquidation period shall be 5 business days. For other capital market driven transactions, the liquidation period shall be 10 business days.

39. In tables 2 to 5 and in paragraphs 40 to 42, the credit quality step with which a credit assessment of the debt security is associated is the credit quality step with which the external credit assessment is determined by the competent authorities to be associated under Articles 78 to 83. For these purposes Part 1, paragraph 10 also applies.

40. For non-eligible securities lent or sold under repurchase transactions or securities lending or borrowing transactions, the volatility adjustment is the same as for non-main index equities listed on a recognised exchange.

41. For eligible units in collective investment undertakings the volatility adjustment is the highest volatility adjustment that would be apply, having regard to the liquidation period of the transaction as specified in paragraph 38, to any of the assets in which the fund has the right to invest.

42. For unrated debt securities issued by institutions and satisfying the eligibility criteria in Part 1, paragraph 8 the volatility adjustments shall be the same as for securities issued by institutions or corporates with an external credit assessment associated with credit quality steps 2 or 3.

(ii)          Own estimates of volatility adjustments

43. The competent authorities may permit institutions complying with the requirements set out in paragraphs 48 to 57 to use their own estimates of volatility for calculating the volatility adjustments to be applied to collateral and exposures.

44. When debt securities have a credit assessment from a recognised ECAI equivalent to investment grade or better, the competent authorities may allow credit institutions to calculate a volatility estimate for each category of security.

45. In determining relevant categories, credit institutions shall take into account the type of issuer of the security the external credit assessment of the securities, their residual maturity, and their modified duration. Volatility estimates must be representative of the securities included in the category by the credit institution.

46. For debt securities having a credit assessment from a recognised ECAI equivalent to below investment grade and for other eligible collateral the volatility adjustments must be calculated for each individual item.

47. Credit institutions using the Own estimates approach must estimate volatility of the collateral or foreign exchange mismatch without taking into account any correlations between the unsecured exposure, collateral and/or exchange rates.

Quantitative Criteria

48. In calculating the volatility adjustments, a 99th percentile one-tailed confidence interval$ shall be used.

49. The liquidation period shall be 20 business days for secured lending transactions; 5 business days for repurchase transactions except insofar as such transactions involve the transfer of commodities or guaranteed rights relating to title to commodities and securities lending or borrowing transactions; and 10 business days for other capital market driven transactions.

50. Credit institutions may use volatility adjustment numbers calculated according to shorter or longer liquidation periods, scaled up or down to the liquidation period set out in paragraph 49 for the type of transaction in question, using the square root of time formula:

where TM is the relevant liquidation period;

HM is the volatility adjustment under the relevant liquidation period;

HN is the volatility adjustment based on the liquidation period TN;

51. Credit institutions shall take into account the illiquidity of lower-quality assets. The liquidation period shall be adjusted upwards in cases where there is doubt concerning the liquidity of the collateral. They shall also identify where historical data may understate potential volatility, e.g. a pegged currency. Such cases shall be dealt with by means of a stress scenario.

52. The historical observation period (sample period) for calculating volatility adjustments shall be a minimum length of one year. For credit institutions that use a weighting scheme or other methods for the historical observation period, the effective observation period shall be at least one year (that is, the weighted average time lag of the individual observations shall not be less than 6 months). The competent authorities may also require a credit institution to calculate its volatility adjustments using a shorter observation period if, in the competent authorities’ judgement, this is justified by a significant upsurge in price volatility.

53. Credit institutions shall update their data sets no less frequently than once every three months and shall also reassess them whenever market prices are subject to material changes. This implies that volatility adjustments shall be computed at least every three months.

Qualitative Criteria

54. The volatility estimates shall be used in the day-to-day risk management process of the credit institution including in relation to its internal exposure limits.

55. If the liquidation period used by the credit institution in its day-to-day risk management process is longer than that set out in this Part for the type of transaction in question, the credit institution’s volatility adjustments shall be scaled up in accordance with the square root of time formula set out in paragraph 50.

56. The credit institution shall have established procedures for monitoring and ensuring compliance with a documented set of policies and controls for the operation of its system for the estimation of volatility adjustments and for the integration of such estimations into its risk management process.

57. An independent review of the credit institution’s system for the estimation of volatility adjustments shall be carried out regularly in the credit institution´s own internal auditing process. A review of the overall system for the estimation of volatility adjustments and for integration of those adjustments into the credit institution’s risk management process shall take place at least once a year and shall specifically address, at a minimum:

(a)     the integration of estimated volatility adjustments into daily risk management;

(b)     the validation of any significant change in the process for the estimation of volatility adjustments;

(c)     the verification of the consistency, timeliness and reliability of data sources used to run the system for the estimation of volatility adjustments, including the independence of such data sources;

(d)     the accuracy and appropriateness of the volatility assumptions.

(iii)         Scaling up of volatility adjustments

58. The volatility adjustments set out in paragraphs 37 to 42 are the volatility adjustments to be applied where there is daily revaluation. Similarly where an credit institution uses its own estimates of the volatility adjustments in accordance with paragraphs 43 to 57, these must be calculated in the first instance on the basis of daily revaluation. If the frequency of revaluation is less than daily, larger volatility adjustments shall be applied. These shall be calculated by scaling up the daily revaluation volatility adjustments, using the following ‘square root of time’ formula :

where

H is the volatility adjustment to be applied

HM     is the volatility adjustment where there is daily revaluation

NR is the actual number of business days between revaluation

TM is the liquidation period for the type of transaction in question.

(iv)         Conditions for applying a 0% volatility adjustment

59. In relation to repurchase transactions and securities lending or borrowing transactions, where a credit institution uses the Supervisory volatility adjustments approach or the Own Estimates approach and where the conditions set out in points (a) to (h) are satisfied, the competent authorities may allow credit institutions not to apply the volatility adjustments calculated under paragraphs 35 to 58 and to instead apply a 0% volatility adjustment. This option is not available in respect of credit institutions using the internal models approach set out in paragraphs 12 to 22.

(a)     Both the exposure and the collateral are cash or securities falling within Part 1, paragraph 7(b);

(b)     Both the exposure and the collateral are denominated in the same currency.

(c)     Either the maturity of the transaction is no more than one day or both the exposure and the collateral are subject to daily marking-to-market or daily remargining;

(d)     It is considered that the time between the last marking-to-market before a failure to remargin by the counterparty and the liquidation of the collateral shall be no more than four business days;

(e)     The transaction is settled across a settlement system proven for that type of transaction;

(f)     The documentation covering the agreement is standard market documentation for repurchase transactions or securities lending or borrowing transactions in the securities concerned;

(g)     The transaction is governed by documentation specifying that if the counterparty fails to satisfy an obligation to deliver cash or securities or to deliver margin or otherwise defaults, then the transaction is immediately terminable;

(h)     The counterparty is considered a ‘core market participant’ by the competent authorities. Core market participants may include the following entities :

– The entities mentioned in paragraph 7(b) of Part 1 exposures to which receive a 0% risk weight under Articles 78 to 83;

– institutions;

– other financial companies (including insurance companies) exposures to which receive a 20 % risk weight under Articles 78 to 83 or which, in the case of credit institutions calculating risk-weighted exposure amounts and expected loss amounts under Articles 83 to 89, do not have a credit assessment by a recognised ECAI and are internally rated as having a probability of default equivalent to that associated with the credit assessments of ECAIs determined by the competent authorities to be associated with credit quality step 2 or above under the rules for the risk weighting of exposures to corporates under Articles 78 to 83.

– regulated collective investment undertakings that are subject to capital or leverage requirements;

– regulated pension funds; and

– recognised clearing organisations.

60. Where a competent authority permits the treatment set out in paragraph 59 to be applied in the case of repurchase transactions or securities lending or borrowing transactions in securities issued by its domestic government, then other competent authorities may choose to allow credit institutions incorporated in their jurisdiction to adopt the same approach to the same transactions.

(c)          Calculating risk-weighted exposure amounts and expected loss amounts

Standardised Approach

61. E* as calculated under paragraph 34 shall be taken as the exposure value for the purposes of Article 80.

IRB Foundation Approach

62. LGD* (the effective Loss Given Default) calculated as set out in this paragraph shall be taken as the LGD for the purposes of Annex VII.

LGD* = Max {0, LGD x [(E*/E]}

where

LGD is the loss given fault that would apply to the exposure under Articles 84 to 89 if the exposure was not collateralised;

E is the exposure value under Articles 84 to 89;

E* is as calculated under paragraph 34.

1.5. Other eligible collateral for Articles 84 to 89 1.5.1. Valuation

(a)          Real estate collateral

63. The property shall be valued by an independent valuer at or less than the market value. In those Member States that have laid down rigorous criteria for the assessment of the mortgage lending value in statutory or regulatory provisions the property may instead be valued by an independent valuer at or less than the mortgage lending value.

64. Market value means the estimated amount for which the property should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion. The market value shall be documented in a transparent and clear manner.

65. Mortgage lending value means the value of the property as determined by a prudent assessment of the future marketability of the property taking into account long-term sustainable aspects of the property, the normal and local market conditions, the current use and alternative appropriate uses of the property. Speculative elements shall not be taken into account in the assessment of the mortgage lending value. The mortgage lending value shall be documented in a transparent and clear manner.

66. The value of the collateral shall be the market value or mortgage lending value reduced as appropriate to reflect the results of the monitoring required under Part 2, paragraph 8 and to take account of the any prior claims on the property.

(b)          Receivables

67. The value of receivables shall be the amount receivable.

(c)          Other physical collateral

68. The property shall be valued at its market value – that is the estimated amount for which the property would exchange on the date of valuation between a willing buyer and a willing seller in an arm’s-length transaction.

1.5.2. Calculating risk-weighted exposure amounts and expected loss amounts

(a)          General treatment

69. LGD* (the effective Loss Given Default) calculated as set out in paragraphs 70 to 73 shall be taken as the LGD for the purposes of Annex VII.

70. Where the ratio of the value of the collateral (C) to the exposure value (E) is below a threshold level of C* (the required minimum collateralisation level for the exposure) as laid down in Table 6, LGD* shall be the LGD laid down in Annex VII for uncollateralised exposures to the counterparty.

71. Where the ratio of the value of the collateral to the exposure value exceeds a second, higher threshold level of C** (i.e. the required level of collateralisation to receive full LGD recognition) as laid down in Table 6, LGD* shall be that prescribed in the following table.

72. For these purposes, where the required level of collateralisation C** is not achieved in respect of the exposure as a whole, the exposure shall be considered to be two exposures – that part in respect of which the required level of collateralisation C** is achieved and the remainder.

73. Table 6 sets out the applicable LGD* and required collateralisation levels for the secured parts of exposures:

Table 6

Minimum LGD for secured portion of exposures

|| LGD* for senior claims or contingent claims || LGD* for subordinated claims or contingent claims || Required minimum collateralisation level of the exposure (C*) || Required minimum collateralisation level of the exposure (C**)

Receivables || 35% || 65% || 0% || 125%

Residential real estate/commercial real estate || 35% || 65% || 30% || 140%

Other collateral || 40% || 70% || 30% || 140%

By way of derogation, until 31 December 2012 the competent authorities may, subject to the indicated levels of collateralisation

(a)     allow credit institutions to assign a 30% LGD for senior exposures in the form of Commercial Real Estate leasing; and

(b)     allow credit institutions to assign a 35% LGD for senior exposures in the form of equipment leasing.

At the end of this period, this derogation shall be reviewed.

(b)          Alternative treatment for real estate collateral

74. Subject to the requirements of this paragraphs and paragraph 75 and as an alternative to the treatment in paragraphs 69 to 73, the competent authorities of a Member State may authorise credit institutions to apply a 50% risk weighting to the part of the exposure fully collateralised by residential real estate property or commercial real estate property situated within the territory of the Member State if they have evidence that the relevant markets are well-developed and long-established with loss-rates from lending collateralised by residential real estate property or commercial real estate property respectively that do not exceed the following limits:

(a)     up to 50 % of the market value (or where applicable and if lower 60 % of the mortgage-lending-value) must not exceed 0.3 % of the outstanding residential real estate and/or commercial real estate loans in any given year.

(b)     overall losses stemming from lending collateralised by residential real estate property or commercial real estate property respectively must not exceed 0.5 % of the outstanding loans collateralised by that form of real estate property in any given year.

75. If either of the conditions in paragraph 74 is not satisfied in a given year, the eligibility to use this treatment shall cease until the conditions are satisfied in a subsequent year.

76. The competent authorities, which do not authorise the treatment in paragraph 73, may authorise credit institutions to apply the risk weights permitted under this treatment in respect of exposures collateralised by residential real estate property of commercial real estate property respectively located in the territory of those Member States the competent authorities of which authorise this treatment subject to the same conditions as apply in that Member State.

1.6. Calculating risk-weighted exposure amounts and expected loss amounts in the case of mixed pools of collateral

77. Where risk-weighted exposure amounts and expected loss amounts are calculated under Articles 84 to 89, and an exposure is collateralised by both financial collateral and other eligible collateral, LGD* (the effective Loss Given Default) to be taken as the LGD for the purposes of Annex VII shall be calculated as follows.

78. The credit institution shall be required to subdivide the volatility-adjusted value of the exposure (i.e. the value after the application of the volatility adjustment as set out in paragraph 34) into portions each covered by only one type of collateral. That is, the credit institution must divide the exposure into the portion covered by eligible financial collateral, the portion covered by receivables, the portions covered by commercial real estate property collateral and/or residential real estate property collateral, the portion covered by other eligible collateral, and the unsecured portion, as relevant.

79. LGD* for each portion of exposure shall be calculated separately in accordance with the relevant provisions of this Annex.

1.7. Other funded credit protection 1.7.1. Deposits with third party institutions

80. Where the conditions set out in Part 2, paragraph 12 are satisfied, credit protection falling within the terms of Part 1, paragraph 23 may be treated as a guarantee by the third party institution.

1.7.2. Life insurance policies pledged to the lending credit institution

81. Where the conditions set out in Part 2, paragraph 13 are satisfied, credit protection falling within the terms of Part 1, paragraph 24 may be treated as a guarantee by the company providing the life insurance. The value of the credit protection recognised shall be the surrender value of the life insurance policy.

1.7.3. Institution instruments repurchased on request

82. Instruments eligible under Part 1, paragraph 25 may be treated as a guarantee by the issuing institution.

83. For these purposes the value of the credit protection recognised shall be the following:

(a)     where the instrument will be repurchased at its face value, the value of the protection shall be that amount;

(b)     where the instrument will be repurchased at market price, the value of the protection shall be the value of the instrument valued in the same way as the debt securities specified in Part 1, paragraph 8.

2. Unfunded credit protection 2.1. Valuation

84. The value of unfunded credit protection (G) shall be the amount that the protection provider has undertaken to pay in the event of the default or non-payment of the borrower or on the occurrence of other specified credit events. In the case of credit derivatives which do not include as a credit event restructuring of the underlying obligation involving forgiveness or postponement of principal, interest or fees that result in a credit loss event (e.g. value adjustment, the making of a value adjustment or other similar debit to the profit and loss account), the value of the credit protection calculated under the first sentence of this paragraph shall be reduced by 40%.

85. Where unfunded credit protection is denominated in a currency different from that in which the exposure is denominated (a currency mismatch) the value of the credit protection shall be reduced by the application of a volatility adjustment HFX as follows:

G* = G x (1-HFX)

where

G is the nominal amount of the credit protection;

G* is G adjusted for any foreign exchange risk, and

Hfx is the volatility adjustment for any currency mismatch between the credit protection and the underlying obligation.

Where there is no currency mismatch

G* = G

86. The volatility adjustments to be applied for any currency mismatch may be calculated based on the Supervisory volatility adjustments approach or the Own estimates approach as set out in paragraphs 35 to 58.

2.2. Calculating risk-weighted exposure amounts and expected loss amounts 2.2.1. Partial protection – tranching

87. Where the credit institution transfers a portion of the risk of a loan in one or more tranches, the rules set out in Articles 94 to 101 shall apply. Materiality thresholds on payments below which no payment shall be made in the event of loss are considered to be equivalent to retained first loss positions and to give rise to a tranched transfer of risk.

2.2.2. Standardised Approach

(a)          Full protection

88. For the purposes of Article 80, g shall be the risk weight to be assigned to an exposure which is fully protected by unfunded protection (GA),

where

g is the risk weight of exposures to the protection provider as specified under Articles 78 to 83; and

GA is the value of G* as calculated under paragraph 85 further adjusted for any maturity mismatch as laid down in Part 4.

(b)          Partial protection – equal seniority

89. Where the protected amount is less than the exposure value and the protected and unprotected portions are of equal seniority – ie the credit institution and the protection provider share losses on a pro-rata basis, proportional regulatory capital relief shall be afforded. For the purposes of Article 80 risk-weighted exposure amounts shall be calculated in accordance with the following formula:

(E-GA) x r + GA x g

where

E is the exposure value;

GA is the value of G* as calculated under paragraph 85 further adjusted for any maturity mismatch as laid down in Part 4;

r is the risk weight of exposures to the obligor as specified under Articles 78 to 83;

g is the risk weight of exposures to the protection provider as specified under Articles 78 to 83.

(c)          Sovereign guarantees

90. The competent authorities may extend the treatment provided for in Annex VI, paragraphs 4 to 6 to exposures or portions of exposures guaranteed by the central government or central bank, where the guarantee is denominated in the domestic currency of the borrower and the exposure is funded in that currency.

2.2.3. IRB Foundation Approach

Full protection / Partial protection – equal seniority

91. For the covered portion of the exposure (based on the adjusted value of the credit protection GA), the PD for the purposes of Annex VII, Part 2 may be the PD of the protection provider, or a PD between that of the borrower and that of the guarantor if a full substitution is deemed not to be warranted. In the case of subordinated exposures and non-subordinated unfunded protection, the LGD to be applied for the purposes of Annex VII, Part 2 may be that associated with senior claims.

92. For any uncovered portion of the exposure the PD shall be that of the borrower and the LGD shall be that of the underlying exposure.

93. GA is the value of G* as calculated under paragraph 85 above further adjusted for any maturity mismatch as laid down in Part 4.

Part 4 - Maturity Mismatches

1. For the purposes of calculating risk-weighted exposure amounts, a maturity mismatch occurs when the residual maturity of the credit protection is less than that of the protected exposure. Protection of less than three months residual maturity, the maturity of which is less than the maturity of the underlying exposure, shall not be recognised.

2. Where there is a maturity mismatch the credit protection shall not be recognised where

(a)     the original maturity of the protection is less than 1 year; or

(b)     the exposure is a short term exposure specified by the competent authorities as being subject to a one–day floor rather than a one-year floor in respect of the maturity value (M) under Annex VII, Part 2, paragraph 13.

1. Definition of maturity

3. Subject to a maximum of 5 years, the effective maturity of the underlying shall be the longest possible remaining time before the obligor is scheduled to fulfil its obligations. Subject to paragraph 4, the maturity of the credit protection shall be the time to the earliest date at which the protection may terminate or be terminated.

4. Where there is an option to terminate the protection which is at the discretion of the protection seller, the maturity of the protection shall be taken to be the time to the earliest date at which that option may be exercised. Where there is an option to terminate the protection which is at the discretion of the protection buyer and the terms of the arrangement at origination of the protection contain a positive incentive for the credit institution to call the transaction before contractual maturity, the maturity of the protection shall be taken to be the time to the earliest date at which that option may be exercised; otherwise such an option may be considered not to affect the maturity of the protection.

5. Where a credit derivative is not prevented from terminating prior to expiration of any grace period required for a default on the underlying obligation to occur as a result of a failure to pay the maturity of the protection shall be reduced by the amount of the grace period.

2. Valuation of protection 2.1. Transactions subject to funded credit protection – Financial Collateral Simple Method

6. Where there is a mismatch between the maturity of the exposure and the maturity of the protection, the collateral shall not be recognised.

2.2. Transactions subject to funded credit protection - Financial Collateral Comprehensive Method

7. The maturity of the credit protection and that of the exposure must be reflected in the adjusted value of the collateral according to the following formula:

CVAM = CVA x (t-t*)/(T-t*)

where

CVA is the volatility adjusted value of the collateral as specified in Part 3, paragraph 34 or the amount of the exposure, whichever is the lowest;

t is the number of years remaining to the maturity date of the credit protection calculated in accordance with paragraphs 3 to 5, or the value of T, whichever is the lower;

T is the number of years remaining to the maturity date of the exposure calculated in accordance with paragraphs 3 to 5, or 5 years, whichever is the lower; and

t* is 0.25.

CVAM shall be taken as CVA further adusted for maturity mismatch to be included in the formula for the calculation of the fully adjusted value of the exposure (E*) set out at Part 3, paragraph 34.

2.3. Transactions subject to unfunded credit protection

8. The maturity of the credit protection and that of the exposure must be reflected in the adjusted value of the credit protection according to the following formula

GA = G* x (t-t*)/(T-t*)

where

G* is the amount of the protection adjusted for any currency mismatch

GA is G* adjusted for any maturity mismatch

t is the number of years remaining to the maturity date of the credit protection calculated in accordance with paragraphs 3 to 5, or the value of T, whichever is the lower;

T is the number of years remaining to the maturity date of the exposure calculated in accordance with paragraphs 3 to 5, or 5 years, whichever is the lower; and

t* is 0.25.

GA is then taken as the value of the protection for the purposes of Part 3, paragraphs 84 to 93.

Part 5 - Combinations of credit risk mitigation in the Standardised Approach

9. In the case where a credit institution calculating risk-weighted exposure amounts under Articles 78 to 83 has more than one form of credit risk mitigation covering a single exposure (e.g. a credit institution has both collateral and a guarantee partially covering an exposure), the credit institution shall be required to subdivide the exposure into portions covered by each type of credit risk mitigation tool (e.g. a portion covered by collateral and a portion covered by guarantee) and the risk-weighted exposure amount for each portion must be calculated separately in accordance with the provisions of Articles 78 to 83 and this Annex.

10. When credit protection provided by a single protection provider has differing maturities, a similar approach to that described in paragraph 1 shall be applied.

Part 6 - Basket CRM techniques

1. First-to-default credit derivatives

1. Where a credit institution obtains credit protection for a number of exposures under terms that the first default among the exposures shall trigger payment and that this credit event shall terminate the contract, the credit institution may modify the calculation of the risk-weighted exposure amount and, as relevant, the expected loss amount of the exposure which would in the absence of the credit protection produce the lowest risk-weighted exposure amount under Articles 78 to 83 or Articles 84 to 89 as appropriate in accordance with this Annex, but only if the exposure value is less than or equal to the value of the credit protection.

2. nth-to-default credit derivatives

2. In the case where the nth default among the exposures triggers payment under the credit protection, the credit institution purchasing the protection may only recognise the protection for the calculation of risk-weighted exposure amounts and, as relevant, expected loss amounts if protection has also been obtained for defaults 1 to n-1 or when n-1 defaults have already occurred. In such cases the methodology shall follow that set out in paragraph 1 for first-to-default derivatives appropriately modified for nth-to-default products.

ANNEX IX – Securitisation Part 1 - Definitions for purposes of Annex X

1. For the purposes of this Annex

– ‘Excess spread’ means finance charge collections and other fee income received in respect of the securitised exposures net of costs and expenses.

– ‘Clean-up call option’ means a contractual option for the originator to repurchase or extinguish the securitisation positions before all of the underlying exposures have been repaid, when the amount of outstanding exposures falls below a specified level.

– ‘Liquidity facility’ means the securitisation position arising from a contractual agreement to provide funding to ensure timeliness of cashflows to investors.

– ‘Kirb’ means 8% of the risk-weighted exposure amounts that would be calculated under Articles 84 to 89 in respect of the securitised exposures had they not been securitised plus the amount of expected losses associated with those exposures calculated under those Articles.

– ‘Ratings based method’ means the method of calculating risk-weighted exposure amounts for securitisation positions in accordance with Part 4, paragraphs 45 to 49.

– ‘Supervisory formula method’ means the method of calculating risk-weighted exposure amounts for securitisation positions in accordance with Part 4, paragraphs 50 to 52.

– ‘Unrated position’ means a securitisation position which does not have an eligible credit assessment by an eligible ECAI as defined in Article 97.

– ‘Rated position’ means a securitisation position which has an eligible credit assessment by an eligible ECAI as defined in Article 97.

– ‘Asset-backed commercial paper programme’ (‘ABCP’ programme) means a programme of securitisations the securities issued by which predominantly take the form of commercial paper with an original maturity of one year or less.

Part 2 - Minimum requirements for recognition of significant credit risk transfer and calculation of risk-weighted exposure amounts and expected loss amounts for securitised exposures

1. Minimum requirements for recognition of significant credit risk transfer in a traditional securitisation

1. The originator credit institution of a traditional securitisation may exclude securitised exposures from the calculation of risk-weighted exposure amounts and expected loss amounts if significant credit risk associated with the securitised exposures has been transferred to third parties and the transfer complies with the following conditions:

(a)     The securitisation documentation reflects the economic substance of the transaction.

(b)     The securitised exposures are put beyond the reach of the originator credit institution and its creditors, including in bankruptcy and receivership. This shall be supported by the opinion of qualified legal counsel

(c)     The securities issued do not represent payment obligations of the originator credit institution.

(d)     The transferee is a securitisation special-purpose entity (SSPE).

(e)     The originator credit institution does not maintain effective or indirect control over the transferred exposures. An originator shall be considered to have maintained effective control over the transferred exposures if it has the right to repurchase from the transferee the previously transferred exposures in order to realise their benefits or if it is obligated to re-assume transferred risk. The originator credit institution’s retention of servicing rights or obligations in respect of the exposures shall not of itself constitute indirect control of the exposures.

(f)     Where there is a clean-up call option, the following conditions are satisfied:

(i)      The clean-up call option is exercisable at the discretion of the originator credit institution;

(ii)     The clean-up call option may only be exercised when 10% or less of the original value of the exposures securitised remains unamortised; and

(iii)    The clean-up call option is not structured to avoid allocating losses to credit enhancement positions or other positions held by investors and is not otherwise structured to provide credit enhancement.

(g)     The securitisation documentation does not contain clauses that

(i)      other than in the case of early amortisation provisions, require positions in the securitisation to be improved by the originator credit institution institution including but not limited to altering the underlying credit exposures or increasing the yield payable to investors in response to a deterioration in the credit quality of the securitised exposures, or

(ii)     increase the yield payable to holders of positions in the securitisation in response to a deterioration in the credit quality of the underlying pool.

2. Minimum requirements for recognition of significant credit risk transfer in a synthetic securitisation

2. An originator credit institution of a synthetic securitisation may calculate risk-weighted exposure amounts, and, as relevant, expected loss amounts, for the securitised exposures in accordance with paragraphs 3 and 4 below, if significant credit risk has been transferred to third parties either through funded or unfunded credit protection and the transfer complies with the following conditions.

(a)     The securitisation documentation reflects the economic substance of the transaction.

(b)     The credit protection by which the credit risk is transferred complies with the eligibility and other requirements under Articles 90 to 93 for the recognition of such credit protection. For these purposes, special purpose entities shall not be recognised as eligible unfunded protection providers.

(c)     The instruments used to transfer credit risk do not contain terms or conditions that

(i)      impose significant materiality thresholds below which credit protection is deemed not to be triggered if a credit event occurs;

(ii)     allow for the termination of the protection due to deterioration of the credit quality of the underlying exposures;

(iii)    other than in the case of early amortisation provisions, require positions in the securitisation to be improved by the originator credit institution;

(iv)    increase the credit institutions’ cost of credit protection or the yield payable to holders of positions in the securitisation in response to a deterioration in the credit quality of the underlying pool.

(d)     An opinion is obtained from qualified legal counsel confirming the enforceability of the credit protection in all relevant jurisdictions.

3. Originator credit institutions’ calculation of risk-weighted exposure amounts for exposures securitised in a synthetic securitisation

3. In calculating risk-weighted exposure amounts for the securitised exposures, where the conditions in paragraph 2 are met, the originator credit institution of a synthetic securitisation shall, subject to paragraphs 5 to 8, use the relevant calculation methodologies set out in Part 4 and not those set out in Articles 78 to 89. For credit institutions calculating risk-weighted exposure amounts and expected loss amounts under Articles 84 to 89, the expected loss amount in respect of such exposures shall be zero.

4. For clarity, paragraph 3 refers to the entire pool of exposures included in the securitisation. Subject to paragraphs 5 to 8, the originator credit institution is required to calculate risk-weighted exposure amounts in respect of all tranches in the securitisation in accordance with the provisions of Part IV including those relating to the recognition of credit risk mitigation. For example, where a tranche is transferred by means of unfunded credit protection to a third party, the risk weight of that third party shall be applied to the tranche in the calculation of the originator credit institution’s risk-weighted exposure amounts.

3.1. Treatment of maturity mismatches in synthetic securitisations

5. For the purposes of calculating risk-weighted exposure amounts in accordance with paragraph 3, any maturity mismatch between the credit protection by which the tranching is achieved and the securitised exposures shall be taken into consideration in accordance with paragraphs 6 to 8. The maturity of the securitised exposures shall be taken to be the longest maturity of any of those exposures subject to a maximum of five years.

6. The maturity of the securitied exposures shall be taken to be the longest maturity of any of those exposures subject to a maximum of five years. The maturity of the credit protection shall be determined in accordance with Annex VIII .

7. Where an originator credit institution uses Part 4, paragraphs 6 to 35 for the calculation of risk-weighted exposure amounts, it shall ignore any maturity mismatch in calculating risk-weighted exposure amounts for tranches that are unrated or rated below investment grade. For all other tranches the maturity mismatch treatment set out in Annex VIII shall be applied in accordance with the following formula:

RW* is [RW(SP) x (t-t*)/(T-t*)] + [RW(Ass) x (T-t)/(T-t*)]

Where

RW* is Risk-weighted exposure amounts for the purposes of Article 75(a) ;

RW(Ass) is Risk-weighted exposure amounts for exposures if they had not been securitised calculated on a pro-rata basis;

RW(SP) is Risk-weighted exposure amounts calculated under paragraph 3 if there was no maturity mismatch;

T is maturity of the underlying exposures expressed in years;

t is maturity of credit protection. expressed in years;

t* is 0.25.

8. Where an originator credit institution uses Part 4, paragraphs 36 to 74 for the calculation of risk-weighted exposure amounts, it shall ignore any maturity mismatch in calculating risk-weighted exposure amounts for tranches or parts of tranches which are associated with a risk weight of 1250% under those paragraphs. For all other tranches or parts of tranches the maturity mismatch treatment set out in Annex VIII shall be applied in accordance with the formula in paragraph 7.

Part 3 - External credit assessments

1. Requirements to be met by the credit assessments of ECAIS

1. To be used for the purposes of calculating risk-weighted exposure amounts under Part 4 of this Annex, a credit assessment of an eligible ECAI shall comply with the following conditions.

(a)     There shall be no mismatch between the types of payments reflected in the credit assessment and the types of payment to which the credit institution is entitled under the contract giving rise to the securitisation position in question.

(b)     It shall be available publicly to the market. Credit ssessments are c$onsidered to be publicly available only if they have been published in a publicly accessible forum and they are included in the ECAI’s transition matrix. Credit assessments that are made available only to a limited number of entities shall not be considered to be publicly available.

2. Use of credit assessments

2. A credit institution may nominate one or more eligible ECAIs the credit assessments of which shall be used in the calculation of its risk-weighted exposure amounts under Articles 94 to 101 (a ‘nominated ECAI’).

3. Subject to paragraphs 5 to 7 below, a credit institution must use credit assessments from nominated ECAIs consistently in respect of its securitisation positions.

4. Subject to paragraphs 5 and 6, a credit institution may not use an ECAI’s credit assessments for its positions in some tranches and another ECAI’s credit assessments for its positions in other tranches within the same structure that may or may not be rated by the first ECAI.

5. In cases where a position has two credit assessments by nominated ECAIs, the credit institution shall use the less favourable credit assessment.

6. In cases where a position has more than two credit assessments by nominated ECAIs, the two most favourable credit assessments shall be used. If the two most favourable assessments are different, the least favourable of the two shall be used.

7. Where credit protection eligible under Articles 90 to 93 is provided directly to the SSPE, and that protection is reflected in the credit assessment of a position by a nominated ECAI, the risk weight associated with that credit assessment may be used. If the protection is not eligible under Articles 90 to 93, the credit assessment shall not be recognised. In the situation where the credit protection is not provided to the SSPE but rather directly to a securitisation position, the credit assessment shall not be recognised.

3. Mapping

8. The competent authorities shall determine with which credit quality step in the tables set out in Part 4 each credit assessment of an eligible ECAI shall be associated. In doing so the competent authorities shall differentiate between the relative degrees of risk expressed by each assessment. They shall consider quantitative factors, such as default and/or loss rates, and qualitative factors such as the range of transactions assessed by the ECAI and the meaning of the credit assessment.

9. The competent authorities shall seek to ensure that securitisation positions to which the same risk weight is applied on the basis of the credit assessments of eligible ECAIs are subject to equivalent degrees of credit risk. This shall include modifying their determination as to the credit quality step with which a particular credit assessment shall be associated as appropriate.

Part 4 - Calculation

1. Calculation of risk-weighted exposure amounts

1. For the purposes of Article 96, the risk-weighted exposure amount of a securitisation position shall be calculated by applying to the exposure value of the position the relevant risk weight as set out in this Part.

2. Subject to paragraph 3,

(a)     where a credit institution calculates risk-weighted exposure amounts under paragraphs 6 to 35, the exposure value of an on-balance sheet securitisation position shall be its balance sheet value;

(b)     where a credit institution calculates risk-weighted exposure amounts under paragraphs 36 to 74, the exposure value of an on-balance sheet securitisation position shall be measured gross of value adjustments; and

(c)     the exposure value of an off-balance sheet securitisation position shall be its nominal value multiplied by a conversion figure as prescribed in this Annex. This conversion figure shall be 100% unless otherwise specified.

3. The exposure value of a securitisation position arising from a derivative instrument listed in Annex IV, shall be determined in accordance with Annex III.

4. Where a securitisation position is subject to funded credit protection, the exposure value of that position may be modified in accordance with and subject to the requirements in Annex VIII as further specified in this Annex.

5. Where a credit institution has two or more overlapping positions in a securitisation, it will be required to the extent that they overlap to include in its calculation of risk-weighted exposure amounts only the position or portion of a position producing the higher risk-weighted exposure amounts. For these purposes ‘overlapping’ means that the positions, wholly or partially, represent an exposure to the same risk such that to the extent of the overlap there is a single exposure.

2. Calculation of risk-weighted exposure amounts under the Standardised Approach

6. Subject to paragraph 8 and 9, the risk-weighted exposure amount of a rated securitisation position shall be calculated by applying to the exposure value the risk weight associated with the credit quality step with which the credit assessment has been determined to be associated by the competent authorities in accordance with Article 98 as laid down in the following tables 1 and 2.

Table 1

Positions other than ones with short-term credit assessments

Credit quality step || 1 || 2 || 3 || 4 || 5 and below

Risk weight || 20% || 50% || 100% || 350% || 1250%

Table 2

Positions with short-term credit assessments

Credit quality step || 1 || 2 || 3 || All other credit assessments

Risk weight || 20% || 50% || 100% || 1250%

7. Subject to paragraphs 10 to 16 , the risk-weighted exposure amount of an unrated securitisation position shall be calculated by applying a risk weight of 1250%.

2.1. Originator and sponsor credit institutions

8. Originator credit institutions and sponsor credit institutions shall apply a risk weight of 1250% to all retained and repurchased securitisation positions which have a credit assessment by a nominated ECAI which has been determined by the competent authorities to be associated with a credit quality step below credit quality step 3. In determining whether a position has such a credit assessment the provisions of Part 3, paragraphs 2 to 7 shall apply.

9. For an originator credit institution or sponsor credit credit institution, the risk-weighted exposure amounts calculated in respect of its positions in a securitisation may be limited to the risk-weighted exposure amounts which would be calculated for the securitised exposures had they not been securitised subject to the presumed application of a 150% risk weight to all past due items and items belonging to ‘regulatory high risk categories’ amongst the securitised exposures.

2.2. Treatment of unrated positions

10. Competent authorities may permit a credit institution having an unrated securitisation position to apply the treatment set out in paragraph 11 for calculating the risk-weighted exposure amount for that position provided the composition of the pool of exposures securitised is known at all times.

11. A credit institution may apply the weighted-average risk weight that would be applied to the securitised exposures Articles 78 to 83 by a credit institution holding the exposures multiplied by a concentration ratio. This concentration ratio is equal to the sum of the nominal amounts of all the tranches divided by the sum of the nominal amounts of the tranches junior to or pari passu with the tranche in which the position is held including that tranche itself. The resulting risk weight shall not be higher than 1250% or lower than any risk weight applicable to a rated more senior tranche. Where the credit institution is unable to determine the risk weights that would be applied to the securitised exposures under Articles 78 to 83, it shall apply a risk weight of 1250% to the position.

2.3. Treatment of securitisation positions in a second loss tranche or better in an ABCP programme

12. Subject to the availability of a more favourable treatment by virtue of the provisions concerning liquidity facilities in paragraphs 14 to 16, a credit institution may apply to securitisation positions meeting the conditions set out in paragraph 13 a risk weight that is the greater of (i) 100% or (ii) the highest of the risk weights that would be applied to any of the securitised exposures under Articles 78 to 83 by a credit institution holding the exposures.

13. For the treatment in the paragraph 12 to be available, the securitisation position shall be

(a)     in a tranche which is economically in a second loss position or better in the securitisation and the first loss tranche must provide meaningful credit enhancement to the second loss tranche;

(b)     of a quality the equivalent of investment grade or better; and

(c)     held by a a credit institution which does not hold a position in the first loss tranche.

2.4. Treatment of unrated liquidity facilities 2.4.1. Eligible liquidity facilities

14. When the following conditions are met, to determine its exposure value a conversion figure of 20% may be