Appendix I International Documents
Appendix I 1 Third Amendment of the Articles of Agreement of the International Monetary Fund
Entered into force November 11, 1992
The Governments on whose behalf the present Agreement is signed agree as follows:
1. The text of Article XXVI, Section 2 shall be amended to read as follows:
“(a) If a member fails to fulfill any of its obligations under this Agreement, the Fund may declare the member ineligible to use the general resources of the Fund. Nothing in this Section shall be deemed to limit the provisions of Article V, Section 5 or Article VI, Section 1.
(b) If, after the expiration of a reasonable period following a declaration of ineligibility under (a) above, the member persists in its failure to fulfill any of its obligations under this Agreement, the Fund may, by a seventy percent majority of the total voting power, suspend the voting rights of the member. During the period of the suspension, the provisions of Schedule L shall apply. The Fund may, by a seventy percent majority of the total voting power, terminate the suspension at any time.
(c) If, after the expiration of a reasonable period following a decision of suspension under (b) above, the member persists in its failure to fulfill any of its obligations under this Agreement, that member may be required to withdraw from membership in the Fund by a decision of the Board of Governors carried by a majority of the Governors having eighty-five percent of the total voting power.
(d) Regulations shall be adopted to ensure that before action is taken against any member under (a), (b), or (c) above, the member shall be informed in reasonable time of the complaint against it and given an adequate opportunity for stating its case, both orally and in writing.”
2. A new Schedule L shall be added to the Articles, to read as follows:
“Schedule L Suspension of Voting Rights
In the case of a suspension of voting rights of a member under Article XXVI, Section 2(b), the following provisions shall apply:
1. The member shall not:
(a) participate in the adoption of a proposed amendment of this Agreement, or be counted in the total number of members for that purpose, except in the case of an amendment requiring acceptance by all members under Article XXVIII(b) or pertaining exclusively to the Special Drawing Rights Department;
(b) appoint a Governor or Alternate Governor, appoint or participate in the appointment of a Councillor or Alternate Councillor, or appoint, elect, or participate in the election of an Executive Director.
2. The number of votes allotted to the member shall not be cast in any organ of the Fund. They shall not be included in the calculation of the total voting power, except for purposes of the acceptance of a proposed amendment pertaining exclusively to the Special Drawing Rights Department.
3. (a) The Governor and Alternate Governor appointed by the member shall cease to hold office.
(b) The Councillor and Alternate Councillor appointed by the member, or in whose appointment the member has participated, shall cease to hold office, provided that, if such Councillor was entitled to cast the number of votes allotted to other members whose voting rights have not been suspended, another Councillor and Alternate Councillor shall be appointed by such other members under Schedule D, and, pending such appointment, the Councillor and Alternate Councillor shall continue to hold office, but for a maximum of thirty days from the date of the suspension.
(c) The Executive Director appointed or elected by the member, or in whose election the member has participated, shall cease to hold office, unless such Executive Director was entitled to cast the number of votes allotted to other members whose voting rights have not been suspended. In the latter case:
(i) if more than ninety days remain before the next regular election of Executive Directors, another Executive Director shall be elected for the remainder of the term by such other members by a majority of the votes cast; pending such election, the Executive Director shall continue to hold office, but for a maximum of thirty days from the date of suspension;
(ii) if not more than ninety days remain before the next regular election of Executive Directors, the Executive Director shall continue to hold office for the remainder of the term.
4. The member shall be entitled to send a representative to attend any meeting of the Board of Governors, the Council, or the Executive Board, but not any meeting of their committees, when a request made by, or a matter particularly affecting, the member is under consideration.”
3. The following shall be added to Article XII, Section 3(i): “(v) When the suspension of the voting rights of a member is terminated under Article XXVI, Section 2(b), and the member is not entitled to appoint an Executive Director, the member may agree with all the members that have elected an Executive Director that the number of votes allotted to that member shall be cast by such Executive Director, provided that, if no regular election of Executive Directors has been conducted during the period of the suspension, the Executive Director in whose election the member had participated prior to the suspension, or his successor elected in accordance with paragraph 3(c)(i) of Schedule L or with (f) above, shall be entitled to cast the number of votes allotted to the member. The member shall be deemed to have participated in the election of the Executive Director entitled to cast the number of votes allotted to the member.”
4. The following shall be added to paragraph 5 of Schedule D: “(f) When an Executive Director is entitled to cast the number of votes allotted to a member pursuant to Article XII, Section 3(i)(v), the Councillor appointed by the group whose members elected such Executive Director shall be entitled to vote and cast the number of votes allotted to such member. The member shall be deemed to have participated in the appointment of the Councillor entitled to vote and cast the number of votes allotted to the member.”
Appendix I 2 Basle Committee Amendment of the 1988 Capital Accord
Monitoring the Capital Accord1
1. Amendment of the 1988 Capital Accord
In concluding the 1988 agreement to establish a common measurement system and a minimum standard for capital adequacy of international banks, the Basle Committee experienced difficulty in defining those general provisions or general loan-loss reserves which could qualify for inclusion in capital and agreed to work towards further clarity in this respect. The basic principle was that where provisions have been created against identified losses or in respect of demonstrable deterioration in the value of particular assets, they should not be included in the capital base which should all be available to absorb unidentified losses.
Following discussion in the Committee and public consultation, the capital agreement was revised in November 1991 to ensure greater consistency. The amendment is intended to be fully effective by the end of 1993 at the latest. In the agreement as amended, provisions are divided into three categories. First, provisions made with respect to identified deterioration in the value of particular assets should not be part of capital. Second, other provisions made with respect to credit risk which do not reflect any identified deterioration in the value of particular assets may be included in capital, but only in supplementary capital. Third, certain general funds originating from retained earnings may be included in core capital on condition that they meet the following criteria:
allocations to such funds must be made out of post-tax retained earnings or out of pre-tax earnings adjusted for all potential tax liabilities;
the funds and movements into or out of them must be disclosed separately in the bank’s published accounts;
the funds must be available to a bank to meet losses for unrestricted and immediate use as soon as they occur; and
losses cannot be charged directly to the funds but must be taken through the profit and loss account.
The full text of the amendment follows at the end of this chapter.
2. Implementation of the Capital Agreement
(i) In Member Countries
The capital agreement has now been fully incorporated within the supervisory framework of all member countries. There are, however, a few differences in the way in which the capital agreement has been implemented. Banks in some countries are required to adhere to standards beyond those called for in the agreement and, in certain instances, the treatment of supplementary capital elements and the transitional arrangements differ. Some variation also reflects differing legal and accounting practices in member countries. So by the end of 1992, when the transition arrangements expire, further convergence is expected.
Since the capital requirements were introduced, banks in all countries have been keen to improve their capital strength, in many cases beyond the minimum ratios, and markets themselves have put more focus on capital adequacy in their assessment of banks’ safety and soundness. Based on figures for major banks collected from member countries, the capital ratios of large international banks have increased considerably and exceeded the prospective minimum standard of 8% with few exceptions at end-1991. This improvement in capital adequacy was partly due to the decreasing rate of growth of risk assets, but mainly to increases in capital, both core and supplementary capital, reflecting both new issues and retained profits.
Another feature is the improvement in the quality of capital in that provisions earmarked against country risk have now been excluded from supplementary capital in more countries in advance of the deadline of end-1993 specified in the 1991 amendment, while banks’ provisioning levels are now more clearly adequate.
(ii) In Non-Member Countries
Virtually all countries outside the membership of the Basle Committee with international banks of significant size have introduced, or are in the process of introducing, arrangements based on the capital agreement. For example, all EC countries have been required to implement the EC Directives on Solvency Ratio and Own Funds, which are closely based on the capital agreement, by the beginning of 1993 at the latest. Also, many other countries have implemented or have already committed themselves to implement the capital agreement. In some cases adjustments have been made for local circumstances with respect to the risk weighting of assets, but these have been of minor significance. Furthermore, a number of countries have applied the capital standard not only to international banks but also to banks operating domestically and in some cases with higher minimum ratios than required in the capital agreement.
3. Interpretation of the Capital Agreement
Since the Committee published the capital agreement, it has dealt with a number of technical issues concerning the interpretation of certain of its provisions. Although in many cases interpretation can be left to national supervisors, in some cases an agreed interpretation was felt preferable to avoid competitive inequalities. At the sixth ICBS in Frankfurt, a text describing a number of such interpretations was made available to participants. Since then, the Committee agreed as a transitional arrangement that, in certain narrowly-defined cases, preferred stock issued by overseas subsidiaries of banks unable to issue such capital themselves could be counted as core capital until such time as the legal impediments were removed or, at the latest, until the end of June 1995.
4. Text of the Amendment of the Basle Capital Accord in Respect of the Inclusion of General Provisions/General Loan-Loss Reserves in Capital
1. Banking supervisors in the Group of Ten countries, with the approval of their central-bank Governors, have agreed to implement the attached changes to the Basle capital accord of July 1988. The changes affect paragraphs 18–21 of the accord and two sections of Annex 1, paragraph D.
2. The amended text is virtually the same as that contained in the proposals issued on 21st February 1991. The only change made has been to replace the word “future” with other wording in two parts of the text which referred to the fact that general provisions are created against the possibility of future losses. This is because the accounting profession has noted that law and accounting practice in a number of countries prohibits the setting-up of provisions for unidentified losses that relate to unknown conditions which could arise in the future, requiring this to be done by transfer to a separate reserve.
3. It is intended that these amendments be fully implemented by member countries as soon as possible, and at the latest by the end of 1993. Until that date the existing arrangements will apply, that is to say the limits in paragraph 21 of the 1988 paper will apply in the period between the end of 1990 and the end of 1993.
4. In order to ensure that the proposals are having the desired effect of achieving further convergence and improving the quality of capital, the Committee will keep these arrangements under periodic review. Such a review would include, inter alia, an assessment of the following aspects:
(i) that disclosed reserves and equivalent general funds (such as the EC’s Fund for general banking risks) are being or are likely to be used in the way anticipated;
(ii) that the level of the limit on general provisions/general loan-loss reserves in tier 2 capital is appropriate;
(iii) that differing tax arrangements are adequately catered for.
Amendments to the Basle Capital Accord
A. Replacement for Paragraphs 18–21
(iii) General provisions/general loan-loss reserves
18. General provisions or general loan-loss reserves are created against the possibility of losses not yet identified. Where they do not reflect a known deterioration in the valuation of particular assets, these reserves qualify for inclusion in tier 2 capital. Where, however, provisions or reserves have been created against identified losses or in respect of an identified deterioration in the value of any asset or group or subsets of assets, they are not freely available to meet unidentified losses which may subsequently arise elsewhere in the portfolio and do not possess an essential characteristic of capital. Such provisions or reserves should therefore not be included in the capital base.
19. The supervisory authorities represented on the Committee undertake to ensure that the supervisory process takes due account of any identified deterioration in value. They will also ensure that general provisions or general loan-loss reserves will only be included in capital if they are not intended to deal with the deterioration of particular assets, whether individual or grouped.
20. This would mean that all elements in general provisions or general loan loss reserves designed to protect a bank from identified deterioration in the quality of specific assets (whether foreign or domestic) should be ineligible for inclusion in capital. In particular, elements that reflect identified deterioration in assets subject to country risk, in real estate lending and in other problem sectors would be excluded from capital.
21. General provisions/general loan-loss reserves that qualify for inclusion in tier 2 under the terms described above do so subject to a limit of 1.25 percentage points of weighted risk assets.
B. Amendments to Paragraph D of Annex 1
Indent (i) (first sentence)
Tier 1: includes only permanent shareholders’ equity (issued and fully paid ordinary shares/common stock and perpetual non-cumulative preference shares) and disclosed reserves (created or increased by appropriations of retained earnings or other surplus, e.g. share premiums, retained profit, general reserves and legal reserves). Disclosed reserves also include general funds (such as a Fund for general banking risks in certain EC countries) of the same quality that meet the following criteria:
allocations to the funds must be made out of post-tax retained earnings or out of pre-tax earnings adjusted for all potential tax liabilities;
the funds and movements into or out of them must be disclosed separately in the bank’s published accounts;
the funds must be available to a bank to meet losses for unrestricted and immediate use as soon as they occur;
losses cannot be charged directly to the funds but must be taken through the profit and loss account.
Indent (ii) (c)
General provisions/general loan-loss reserves: provisions or loan-loss reserves held against presently unidentified losses are freely available to meet losses which subsequently materialise and therefore qualify for inclusion within supplementary elements. Provisions ascribed to identified deterioration of particular assets or known liabilities, whether individual or grouped, should be excluded. Furthermore, general provisions/general loan-loss reserves eligible for inclusion in tier 2 will be limited to a maximum of 1.25 percentage points of weighted risk assets.
C. Amendment to the Transitional Arrangements (Section IV and Annex 4)
The transitional arrangement will remain as specified in the agreement, subject to the extension of the transitional period until end-1993 for the implementation of the arrangements described above.
Appendix I 3 Basle Committee Paper on Minimum Standards for the Supervision of International Banking Groups and Their Cross-Border Establishments
Strengthening International Cooperation Between Banking Supervisory Authorities1
Reproduced below is the text of a paper circulated to supervisors in the summer of 1992. It reflects a review of international supervisory coordination in the light not only of the BCCI affair but also of other recent developments, such as the events in the Atlanta branch of the Banca Nazionale del Lavoro. The conclusion of the Committee was that the Basle Concordat and its supplement of 1990 were soundly based but that the time had come for supervisory authorities to strengthen their commitment to implement the principles contained in them. The Committee thus reinforced the Concordat, which has a “best-efforts” character, with a document setting out minimum standards.
The members of the Basle Committee are themselves committed to implementing the minimum standards and are urging the supervisory authorities in other countries to adopt them too. The Committee intends to monitor their implementation in its ongoing review of the supervision of international banks. By doing so, the Committee believes it should be possible to increase assurances that in [the] future no international bank can operate without being subject to effective consolidated supervision.
The standards do not and cannot anticipate each and every practical application. As is the tradition of understandings reached in the Committee, notably the 1988 capital accord, the standards need to allow flexibility of implementation according to differing legal and structural circumstances in different countries. For this reason, the paper is deliberately couched in general terms. Moveover, the recommendations are addressed to individual supervisor authorities in their relations with others. It is, of course, also possible for groups of countries to apply the same standards through negotiated agreements for the harmonisation of supervisory rules and mutual recognition. This has, for example, already been achieved in the European Community’s banking legislation which comes into effect on 1st January 1993 and which is fully in keeping with the standards.
Minimum Standards for the Supervision of International Banking Groups and their Cross-Border Establishments
I. Introduction
In 1975, the Basle Committee obtained the agreement of the G-10 Governors to a paper setting out principles for the supervision of banks’ foreign establishments. These arrangements, revised in 1983 and now better known as the Concordat, took the form of recommended guidelines for best practice, and members of the Committee undertook to work towards their implementation according to the means available to them. Subsequently, in April 1990, certain practical aspects of these principles were elaborated in a supplement to the Concordat.
Following recent developments, the Committee has reviewed the arrangements for coordination of the supervision of international banking. While the principles of the Concordat and its supplement are still viewed as being sound, members of the Committee now recognise that there needs to be a greater effort to ensure that these principles can be applied in practice. Accordingly certain of these principles have been reformulated as minimum standards, set out below, which G-10 supervisory authorities expect each other to observe.
The supervisory authorities represented on the Basle Committee will be taking the necessary steps to ensure that their own supervisory arrangements meet the standards as soon as possible. Furthermore, the Committee will monitor members’ experience in implementing them with a view to determining what further refinements are needed as part of its ongoing efforts to enhance cooperation in the supervision of international banks. The Committee is making this paper available to bank supervisory authorities throughout the world and is urging them to join with the authorities represented on the Committee in adhering to the minimum standards.
The Committee has also reviewed the April 1990 supplement to the Concordat on “Information flows between banking supervisory authorities” which provides practical guidance for ongoing contact and collaboration among supervisory authorities. The Committee’s conclusion is that the nature and extent of information-sharing possible amongst supervisory authorities must continue to be determined largely on a case-by-case basis and cannot, at this time, be usefully expressed in minimum standards. Nevertheless, consistent with the April 1990 supplement, the Committee believes that supervisory authorities should undertake an affirmative commitment to cooperate, on a best-efforts basis, with supervisory authorities from other countries on all prudential matters pertaining to international banks, and, in particular, in respect of the investigation of documented allegations of fraud, criminal activity, or violations of banking laws. In addition, both the Committee and its members will continue their efforts to reduce impediments to the sharing of information among supervisory authorities.
II. Minimum Standards for Supervision
Banking groups are increasingly complex organisations and may have several tiers of ownership within them. In some cases, a banking group’s home-country consolidated supervisory authority will also be the authority directly responsible for the supervision of the group’s lead and subsidiary banks. However, in other cases, there will be one authority responsible for the consolidated supervision of the banking group as a whole (the banking group’s home-country authority) and different authorities responsible for the consolidated supervision of individual banks (and such banks’ own subsidiaries) that are owned or controlled by the group (the bank’s home-country authority). This may occur, for example, where a banking subsidiary chartered in one country, which is seeking to create an establishment in a second country, is itself owned by a banking group subject to home-country consolidated supervision in a third country. A host-country authority must be aware of these distinctions between immediate and higher-level home-country authorities. Except where specified, the term home-country authority includes both types of authority.
The following four minimum standards are to be applied by individual supervisory authorities in their own assessment of their relations with supervisory authorities in other countries. In particular, a host-country authority, into whose jurisdiction a bank or banking group is seeking to expand, is called upon to determine whether that bank or banking group’s home-country supervisory authority2 has the necessary capabilities to meet these minimum standards. In making this determination, host-country authorities should review the other authority’s statutory powers, past experience in their relations, and the scope of the other authority’s administrative practices. Some authorities may initially need to make either statutory or administrative changes in order to comply with these new standards; therefore, in cases where an authority fails to meet one or more of these standards, recognition should be given to the extent to which the authority is actively working to establish the necessary capabilities to permit it to meet all aspects of these minimum standards.
1. All international banking groups and international banks should be supervised by a home-country authority that capably performs consolidated supervision
As a condition for the creation and maintenance of cross-border banking establishments, a host-country authority should assure itself that the relevant bank and, if different, the banking group is subject to the authority of a supervisor with the practical capability of performing consolidated supervision. To meet this minimum standard, the home-country supervisory authority should (a) receive consolidated financial and prudential information on the bank’s or banking group’s global operations, have the reliability of this information confirmed to its own satisfaction through on-site examination or other means, and assess the information as it may bear on the safety and soundness of the bank or banking group, (b) have the capability to prevent corporate affiliations or structures that either undermine efforts to maintain consolidated financial information or otherwise hinder effective supervision of the bank or banking group, and (c) have the capability to prevent the bank or banking group from creating foreign banking establishments in particular jurisdictions.
2. The creation of a cross-border banking establishment should receive the prior consent of both the host-country supervisory authority and the bank’s and, if different, banking group’s home-country supervisory authority
Consent by a host-country authority for the inward creation of a cross-border banking establishment should only be considered if the appropriate home-country authorities have first given their consent to the bank or banking group’s outward expansion. Outward consent by a home-country authority should always be made contingent upon the subsequent receipt of inward consent from the host authority. Thus, in the absence of consent by both the host-country authority and the bank’s home-country authority and, if different, the banking group’s home-country authority, cross-border expansion will not be permitted. As a matter of procedure, a host-country authority should seek to assure itself that consent has been given by the supervisory authority directly responsible for the entity seeking to create an establishment; this authority, in turn, should assure itself that consent is given by the next higher tier supervisory authority, if any, which may perform consolidated supervision with respect to the entity as part of a banking group.
While the safety and soundness of a bank should be judged by its overall condition, in reviewing proposals for inward and outward expansion, host-country and home-country authorities should, at a minimum, give weight to (a) the strength of the bank’s and banking group’s capital and (b) the appropriateness of the bank’s and banking group’s organisation and operating procedures for the effective management of risks, on a local and consolidated basis respectively. In judging these two criteria, a host-country authority should be particularly concerned with the level of support that the parent is capable of providing to the proposed establishment.
The business activities of major international banking groups increasingly cut across traditional supervisory categories. Individual activities or products may be managed on a centralised or decentralised basis, without particular regard to corporate form or the location of a bank’s or group’s head office. Because of this, before giving consent to the creation of a cross-border establishment, the host-country authority and the bank’s and banking group’s home-country authorities should each review the allocation of supervisory responsibilities recommended in the Concordat in order to determine whether its application to the proposed establishment is appropriate.
If, as a result of the establishment’s proposed activities or the location and structure of the bank’s or the banking group’s management, either authority concludes that the division of supervisory responsibilities suggested in the Concordat is not appropriate, then that authority has the responsibility to initiate consultations with the other authority so that they reach an explicit understanding on which authority is in the best position to take primary responsibility either generally or in respect of specific activities. A similar review should be undertaken by all authorities if there is a significant change in the bank’s or banking group’s activities or structure.
Inaction on the part of either authority will be construed as an acceptance of the division of responsibilities established in the Concordat. Thus each authority is responsible for making a deliberate choice between accepting its responsibilities under the Concordat or initiating consultations on an alternative allocation of supervisory responsibilities for the case at hand.
3. Supervisory authorities should possess the right to gather information from the cross-border banking establishments of the banks or banking groups for which they are the home-country supervisor
As a condition for giving either inward or outward consent for the creation of a cross-border banking establishment, a supervisory authority should establish an understanding with the other authority that they may each gather information to the extent necessary for effective home-country supervision, either through on-site examination or by other means satisfactory to the recipient, from the cross-border establishments located in one another’s jurisdictions of banks or banking groups chartered or incorporated in their respective jurisdictions. Thus, consent for inward expansion by a prospective host-country authority should generally be contingent upon there being such an understanding, with the foreign bank’s or banking group’s home-country authority, that each authority may gather such information from their respective bank’s and banking group’s foreign establishments. Similarly, consent for outward expansion by the home-country authority should generally be contingent upon there being such an understanding with the host-country authority. Through such bilateral arrangements, all home-country authorities should be able to improve their ability to review the financial condition of their banks’ and banking groups’ cross-border banking establishments.
4. If a host-country authority determines that any one of the foregoing minimum standards is not met to its satisfaction, that authority could impose restrictive measures necessary to satisfy its prudential concerns consistent with these minimum standards, including the prohibition of the creation of banking establishments
In considering whether to consent to the creation of a banking establishment by a foreign bank or foreign banking group, or in reviewing any other proposal by a foreign bank or banking group which requires its consent, a host-country authority should determine whether the bank or banking group is subject to consolidated supervision by an authority that has—or is actively working to establish—the necessary capabilities to meet these minimum standards. First, the host-country authority should determine whether the bank or banking group is chartered or incorporated in a jurisdiction with which the host-country authority has a mutual understanding for the gathering of information from cross-border establishments. Secondly, the host-country authority should determine whether consent for outward expansion has been given by the appropriate home-country authorities. Thirdly, the host-country authority should determine whether the bank and, if different, the banking group is supervised by a home-country authority which has the practical capability of performing consolidated supervision.
If these minimum standards are not met with respect to a particular bank or banking group, and the relevant home-country authorities are unwilling or unable to initiate the effort to take measures to meet these standards, the host-country authority should prevent the creation in its jurisdiction of any cross-border establishments by that bank or banking group. However, in its sole discretion, the host-country authority may alternatively choose to permit the creation of establishments by such a bank or banking group, subject to whatever prudential restrictions on the scope and nature of the establishment’s operations which the host-country authority deems necessary and appropriate to address its prudential concerns, provided that the host-country authority itself also accepts the responsibility to perform adequate supervision of the bank’s or banking group’s local establishments on a “stand-alone” consolidated basis.
Thus, if a bank or banking group is not subject to the level of supervision and supervisory cooperation required by these minimum standards, and the relevant supervisory authority is not actively working to establish the necessary capabilities, that bank or banking group will only be permitted to expand its operations into jurisdictions whose authorities are adhering to these minimum standards if the host-country authority itself accepts the responsibility to perform supervision of the bank or banking group’s local establishments consistent with these minimum standards.
Appendix I 4 Organization of American States Model Regulations Concerning Laundering Offences Connected to Illicit Drug Trafficking and Related Offences
Introduction 1
Considering the provisions of the United Nations Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances signed in Vienna, Austria on December 20, 1988 and in force since November 11, 1990 and the mandate contained in point 6 of the Declaration and Program of Action of Ixtapa, approved at the Ministerial Meeting of Ixtapa, Mexico on April 20 1990, the General Assembly of the Organization of American States (OAS) recommends to the member states, pursuant to the basic provisions of their respective legal systems, that they adopt the norms contained in the following Model Regulations.2
These Model Regulations have been prepared reconciling, whenever pertinent, the legal systems prevailing in the Inter-American region.
Article 1 DEFINITIONS
The following definitions shall be applicable throughout the text of these Regulations except when another is expressly indicated:
1. “Convention” means the United Nations Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances, which was signed in Vienna, Austria, on December 20, 1988, and entered into force on November 11, 1990.
2. “Forfeiture” means the permanent deprivation of property by order of a court or other competent authority.
3. “Freezing” or “seizure” means temporarily prohibiting the transfer, conversion, disposition or movement of property or temporarily assuming custody or control of property on the basis of an order issued by a court or other competent authority.
4. “Illicit traffic” means the offences set forth in the Convention and in these Regulations.
5. “Instrumentality” means something that is used in or intended for use in any manner in the commission of illicit traffic or related offences.
6. “Person” means any entity, natural or juridical, including among others, a corporation, partnership, trust or estate, joint stock company, association, syndicate, joint venture, or other unincorporated organization or group, capable of acquiring rights or entering into obligations.
7. “Proceeds” means any property derived from or obtained, directly or indirectly, through the commission of illicit traffic or related offences.
8. “Property” means assets of every kind, whether corporeal or incorporeal, movable or immovable, tangible or intangible, and legal documents or instruments evidencing title to, or interest in, such assets.
Article 2 LAUNDERING OFFENCES
1. A criminal offence is committed by any person who converts or transfers property and knows, should have known, or is intentionally ignorant that such property is proceeds from illicit traffic or related offences.
2. A criminal offence is committed by any person who acquires, possesses, or uses property and knows, should have known, or is intentionally ignorant that such property is proceeds from illicit traffic or related offences.
3. A criminal offence is committed by any person who conceals, disguises or impedes the establishment of the true nature, source, location, disposition, movement, rights with respect to, or ownership of property and knows, should have known, or is intentionally ignorant that such property is proceeds from illicit traffic or related offences.
4. A criminal offence is committed by any person who participates in, associates with, conspires to commit, attempts to commit, aids and abets, facilitates and counsels, incites publicly or privately the commission of any of the offences established in accordance with this Article, or who assists any person participating in such an offence or offences to evade the legal consequences of his actions.
5. Knowledge, intent or purpose required as an element of any offence set forth in this Article may be inferred from objective, factual circumstances.
6. An offence defined in this Article shall be investigated, tried, judged and sentenced by a court or other competent authority as an offence distinct from other illicit traffic or related offences.
Article 3 JURISDICTION
The offences defined in Article 2 shall be investigated, tried, judged and sentenced by a court or other competent authority regardless of whether or not the illicit traffic or related offences occurred in another territorial jurisdiction, without prejudice to extradition when applicable in accordance with the law.
Article 4 PREVENTIVE MEASURES RELATING TO PROPERTY, PROCEEDS OR INSTRUMENTALITIES
In accordance with the law, the court or other competent authority shall issue, at any time, without prior notification or hearing, a freezing or seizure order, or any other preventive or provisional measure intended to preserve the availability of property, proceeds or instrumentalities connected to illicit traffic or related offences, for its eventual forfeiture.
Article 5 FORFEITURE OF PROPERTY, PROCEEDS OR INSTRUMENTALITIES
1. When a person is convicted of an illicit traffic or related offence, the court shall order that the property, proceeds or instrumentalities connected to such an offence be forfeited and disposed of in accordance with the law.
2. When, as a result of any act or omission of the person convicted, any of the property, proceeds or instrumentalities described in the previous paragraph cannot be forfeited, the court shall order the forfeiture of any other property of the person convicted, for an equivalent value or shall order the person convicted to pay a fine of such value.
Article 6 BONA FIDE THIRD PARTIES
1. The measures and sanctions referred to in Articles 4 and 5 shall apply without prejudice to the rights of bona fide third parties.
2. In accordance with the law, proper notification shall be made so that all those claiming a legitimate legal interest in property, proceeds or instrumentalities may appear in support of their claims.
3. A third party’s lack of good faith may be inferred, at the discretion of the court or other competent authority, from the objective circumstances of the case.
4. In accordance with the law, the court or other competent authority shall return the property, proceeds or instrumentalities to the claimant, when it has been demonstrated to its satisfaction that:
a) the claimant has a legitimate legal interest in the property, proceeds or instrumentalities;
b) no participation, collusion or involvement with respect to illicit traffic or related offences which are the object of the proceedings can be imputed to the claimant;
c) the claimant lacked knowledge and was not intentionally ignorant of the illegal use of the property, proceeds or instrumentalities, or if he had knowledge, did not freely consent to its illegal use;
d) the claimant did not acquire any right in the property, proceeds or instrumentalities from a person proceeded against under circumstances that give rise to a reasonable inference that any right was transferred for the purpose of avoiding the eventual subsequent forfeiture of the property, proceeds or instrumentalities, and;
e) the claimant did all that could reasonably be expected to prevent the illegal use of the property, proceeds or instrumentalities.
Article 7 DISPOSITION OF FORFEITED PROPERTY, PROCEEDS OR INSTRUMENTALITIES
Whenever property, proceeds or instrumentalities that are not required to be destroyed and that are not harmful to the public are forfeited under Article 5, the court or other competent authority may, in accordance with the law:
a) retain them for official use, or transfer them to any government agency that participated directly or indirectly in their freezing, seizure, or forfeiture;
b) sell them and transfer the proceeds from such sale to any government agency that participated directly or indirectly in their freezing, seizure, or forfeiture. It may also deposit the proceeds from the sale into the Special Fund provided for in the Inter-American Program of Action of Rio de Janeiro, or into other Funds to be used by the competent authorities in their fight against illicit traffic, prevention of the unlawful use of drugs, treatment, rehabilitation or social reintegration of those affected by its use;
c) transfer the property, proceeds or instrumentalities, or the proceeds from their sale, to any private entity dedicated to the prevention of the unlawful use of drugs, treatment, rehabilitation or social reintegration of those affected by its use.
d) transfer the object of the forfeiture or the proceeds from its sale to any other country which participated directly or indirectly in the freezing, seizure, or forfeiture of the property, if such a transfer is authorized by an international agreement; or
e) transfer the object of the forfeiture or the proceeds from its sale to intergovernmental bodies specializing in the fight against illicit traffic, prevention of the unlawful use of drugs, treatment, rehabilitation or social reintegration of those affected by its use.
Article 8 PROPERTY, PROCEEDS OR INSTRUMENTALITIES OF FOREIGN OFFENCES
The court or other competent authority may order, in accordance with the law, the freezing, seizure, or forfeiture of any property, proceeds or instrumentalities in its territorial jurisdiction when they are connected to illicit traffic or related offences committed against the laws of another country, and when that offence would have been an offence if committed within its jurisdiction.
Article 9 FINANCIAL INSTITUTIONS AND ACTIVITIES
1. For the purpose of these Regulations, financial institutions are, among others:
a) a commercial bank, trust company, savings and loan association, building and loan association, savings bank, industrial bank, credit union, or other thrift institution or establishment authorized to do business under the domestic banking laws, whether these be publicly or privately owned, or mixed;
b) a broker or dealer in securities;
c) a currency dealer or exchanger;
2. Likewise, those persons carrying out the following activities shall be considered to be financial institutions:
a) a systematic or substantial cashing of checks;
b) a systematic or substantial issuance, sale or redemption of traveler’s checks or money orders;
c) a systematic or substantial transmitting of funds;
d) any other activity subject to supervision by government bank or other financial institution authorities.
Article 10 IDENTIFICATION OF CLIENTS AND MAINTENANCE OF RECORDS
1. Financial institutions shall maintain accounts in the name of the accountholder. They may not keep anonymous accounts or accounts which are in fictitious or incorrect names.
2. Financial institutions shall record and verify by reliable means, the identity, representative capacity, domicile, legal capacity, occupation or business purpose of persons, as well as other identifying information on those persons, whether they be occasional or usual clients, through the use of documents such as identity documents, passports, birth certificates, driver’s license, partnership contracts and incorporation papers, or any other official or private documents, when establishing or conducting business relations, especially when opening new accounts or passbooks, entering into fiduciary transactions, renting of safe deposit boxes, or performing cash transactions over an amount specified by the competent authority.
3. Financial institutions shall take reasonable measures to obtain and record information about the true identity of the person on whose behalf an account is opened or a transaction is conducted, if there are any doubts that a client is acting on his/her own behalf, particularly in the case of a juridical person who is not conducting any commercial, financial, or industrial operations in the State where it has its headquarters or domicile.
4. Financial institutions shall maintain during the period in which an operation is in effect, and for at least five years after the conclusion of the transaction, the records of the information and documentation required in this Article.
5. Financial institutions shall maintain records on customer identification, account files, and business correspondence as determined by the competent authority, for at least five years after the account has been closed.
6. Financial institutions shall also maintain records to enable the reconstruction of financial transactions in excess of an amount specified by the competent authority, for at least five years after the conclusion of the transaction.
Article 11 AVAILABILITY OF RECORDS
1. Financial institutions shall comply promptly, and within the period of time to be established, with information requests from the competent authorities concerning the records of information and documentation referred to in the previous Article, for use in criminal, civil, or administrative investigations, prosecutions, or proceedings, as the case may be, regarding illicit traffic or related offences, or violations of the provisions of these Regulations.
Financial institutions shall not notify any person, other than a court, competent authority or other person authorized by law, that information has been requested by or furnished to a court or other competent authority.
2. The competent authorities shall share with other national competent authorities said information, in accordance with the law, and when it concerns illicit traffic or related offences, or violations of the provisions of these Regulations.
The competent authorities shall treat as confidential the information referred to in this Article, except insofar as such information is necessary for use in criminal, civil, or administrative investigations, prosecutions, or proceedings, as the case may be, regarding illicit traffic or related offences, or violations of the provisions of these Regulations.
3. The competent authorities may share such information with the competent authorities of other States, in accordance with the law.
4. The legal provisions referring to bank secrecy or confidentiality shall not be an impediment to compliance with this Article, when the information is requested by or shared with the court or other competent authority.
Article 12 RECORDING AND REPORTING OF CASH TRANSACTIONS
1. Each financial institution shall record, on a form designed by the competent authority, each cash transaction involving a domestic or foreign currency transaction exceeding an amount specified by the competent authority.
2. The form referred to in the previous paragraph shall include, at a minimum, the following data for each transaction:
a) the identity, signature, and address of the person who conducts physically the transaction;
b) the identity and address of the person in whose name the transaction is conducted;
c) the identity and address of the beneficiary or the person on whose behalf the transaction is conducted, as applicable;
d) the identity of the accounts affected by the transaction, if any;
e) the type of transaction involved, such as deposit, withdrawal, exchange of currency, check cashing, purchase of certified or cashier’s checks or money orders, or other payment or transfer by, through, or to such financial institution;
f) the identity of the financial institution where the transaction occurred; and
g) the date, time, and amount of the transaction.
3. This record shall be recorded, accurately and completely, by the financial institution on the day the transaction has occurred and shall be maintained for a period of five years from the date of the transaction.
4. Multiple cash transactions in domestic or foreign currency which, altogether, exceed a specified amount, shall be treated as a single transaction if they are undertaken by or on behalf of any one person during any one day or any other period established by the competent authority. In such a case, when a financial institution, its employees, officers or agents have knowledge of these transactions, they shall record these transactions on the form determined by the competent authority.
5. For transactions conducted on their own account between the financial institutions defined in Article 9 paragraph 1 (a) that are subject to supervision by the domestic banking and financial authorities, recording on the form referred to in this Article shall not be required.
6. These records shall be available to the court or other competent authority, in accordance with the law, for use in criminal, civil or administrative investigations, prosecutions or proceedings, as the case may be, connected to illicit traffic or related offences, or violations of the provisions of these Regulations.
7. When it deems advisable, the competent authority may establish that financial institutions file with it, within such time as the competent authorities may establish, the form referred to in paragraphs 1, 2 and 3 of this Article. This form shall serve as evidence or as an official report, and shall be used for the same purposes as referred to in paragraph 6 of this Article.
8. Financial institutions shall not notify any person, other than a court, competent authority or other person authorized by law, that information has been requested by or furnished to a court or other competent authority.
9. The legal provision referring to bank secrecy or confidentiality shall not be an impediment to compliance with this Article, when the information is requested by or shared with the court or other competent authority.
Article 13 REPORTING OF SUSPICIOUS FINANCIAL TRANSACTIONS
1. Financial institutions shall pay special attention to all complex, unusual or large transactions, whether completed or not, and to all unusual patterns of transactions, and to insignificant but periodic transactions, which have no apparent economic or lawful purpose.
2. Upon suspicion that the transactions described in paragraph 1 of this Article could constitute or be related to illicit activities, financial institutions shall promptly report the suspicious transactions to the competent authorities.
3. Financial institutions shall not notify any person, other than a court, competent authority or other person authorized by law, that information has been requested by or furnished to a court or other competent authority.
4. When the report referred to in paragraph 2 of this Article is made in good faith, the financial institutions and their employees, staff, directors, owners or other representatives as authorized by law, shall be exempted from criminal, civil and/or administrative liability, as the case may be, for complying with this Article or for breach of any restriction on disclosure of information imposed by contract or by any legislative, regulatory or administrative provision, regardless of the result of the communication.
Article 14 LIABILITY OF A FINANCIAL INSTITUTION
1. Financial institutions, or their employees, staff, directors, owners or other authorized representatives who, acting as such, participate in illicit traffic or related offences, shall be subject to more severe sanctions.
2. Financial institutions shall be liable, in accordance with the law, for the actions of their employees, staff, directors, owners or other authorized representatives who, acting as such, participate in the commission of any offence described in. Article 2 of these Regulations. Such liability may include, among other measures, the imposition of a fine, temporary suspension of business or charter, or suspension or revocation of the license to operate as a financial institution.
3. A criminal offence is committed by a financial institution or its employees, staff, director, owners or other authorized representatives who, acting as such, wilfully fail to comply with the obligations in Articles 10 through 13 of these Regulations, or who wilfully make a false or falsified record or report as referred to in the above mentioned Articles.
4. Without prejudice to criminal and/or civil liabilities for offences connected to illicit traffic or related offences, financial institutions that fail to comply with the obligations described in Articles 10 through 13 and 15 of these Regulations, shall be subject to other sanctions, such as imposition of a fine, temporary suspension of business or charter, or suspension or revocation of the license to operate as a financial institution.
Article 15 MANDATORY COMPLIANCE PROGRAMS IN FINANCIAL INSTITUTIONS
1. Financial institutions, pursuant to the regulation and supervision referred to in Article 17 of these Regulations shall adopt, develop and implement internal programs, policies, procedures and controls to guard and detect against the offences described in Article 2 of these Regulations. Such programs shall include, at a minimum:
a) the establishment of procedures to ensure high standards of integrity of their employees and a system to evaluate the personal, employment and financial history of these employees;
b) on-going employee training programs, such as “know-your-client” programs, and instructing employees in the responsibilities indicated in Articles 10 through 13 of these Regulations;
c) an independent audit function to check compliance with the programs.
2. Financial institutions shall also designate compliance officers at management level in charge of the application of the internal programs and procedures, including proper maintenance of records and reporting of suspicious transactions. These officers shall function as liaison with the competent authorities.
Article 16 PROVISIONS FOR OTHERS RESPONSIBLE
When it deems advisable, the competent authority shall extend the application of the relevant provisions of these Regulations relating to financial institutions, to any type of economic activities when a transaction is carried out in cash and in excess of an amount specified by the competent authority, such as:
a) the sale or transfer of real estate, weapons, metals, art, archaeological objects, jewelry, automobiles, boats, planes, or other consumer durables, collectibles, or travel or entertainment-related services;
b) casino or other gambling operations; or
c) professional services.
Article 17 OBLIGATIONS OF THE COMPETENT AUTHORITIES
1. In accordance with the law, the competent authorities, and especially those with regulatory and supervisory power over financial institutions shall, among other obligations:
a) grant, deny, suspend or cancel licenses or permits for the operation of financial institutions;
b) adopt the necessary measures to prevent and/or avoid any person who is unsuitable from controlling, or participating, directly or indirectly, in the directorship, management or operation of a financial institution;
c) examine and supervise financial institutions, and regulate and oversee effective compliance with the recordkeeping and reporting obligations specified in these Regulations;
d) verify, through regular examinations, that the financial institutions have and apply the mandatory compliance programs referred to in Article 15 of these Regulations;
e) provide other competent authorities with the information obtained from financial institutions in conformity with these Regulations, including that information which results from an examination of any financial institution;
f) prescribe instructions or recommendations to assist financial institutions in detecting suspicious patterns of behaviour in their clients. These guidelines shall be developed taking into account modern and secure techniques of money management and will serve as an educational tool for financial institutions’ personnel;
g) cooperate with other competent authorities and lend technical assistance in investigations, prosecutions or proceedings relating to the offences described in Article 2 of these Regulations, and other illicit traffic and related offences.
2. The competent authorities, and especially those with regulatory and supervisory power over financial institutions shall, in accordance with the law, report promptly to other competent authorities regarding any information received from financial institutions concerning suspicious transactions or activities that could be related to the offences described in Article 2 of these Regulations and other illicit traffic or related offences.
3. The competent authorities, and especially those with regulatory and supervisory power over financial institutions shall, in accordance with the law, cooperate closely with the competent authorities from other States in investigations, proceedings or prosecutions relating to the offences described in Article 2 of these Regulations, other illicit traffic or related offences, and to violations of the laws and administrative regulations dealing with financial institutions.
Article 18 INTERNATIONAL COOPERATION
1. The court or other competent authority shall cooperate with the court or other competent authority of another State, taking the appropriate measures to provide assistance in matters concerning illicit traffic or related offences, in accordance with these Regulations, and within the limits of their respective legal systems.
2. The court or other competent authority may receive a request from the court or other competent authority of another State to identify, trace, freeze, seize or forfeit the property, proceeds, or instrumentalities connected to illicit traffic or related offences, and may take appropriate actions, including those contained in Articles 4 and 5 of these Regulations.
3. A final judicial order or judgment that provides for the forfeiture of property, proceeds or instrumentalities connected to illicit traffic or related offences, issued by a court or other competent authority of another State, may be recognized as evidence that the property, proceeds or instrumentalities referred to by such order or judgement may be subject to forfeiture in accordance with the law.
4. The court or other competent authority may receive and take appropriate measures with respect to a request from a court or other competent authority from another State, for assistance related to a civil, criminal, or administrative investigation, prosecution or proceeding, as the case may be, involving illicit traffic or a related offence, or violations of any provision established in these Regulations. Such assistance may include providing original or certified copies of relevant documents and records, including those of financial institutions and government agencies; obtaining testimony in the requested State; facilitating the voluntary presence or availability in the requesting State of persons, including those in custody, to give testimony; locating or identifying persons; servicing of documents; examining objects and places; executing searches and seizures; providing information and evidentiary items; and provisional measures.
5. The legal provisions referring to bank secrecy or confidentiality shall not be an impediment to compliance with this Article, when the information is requested by or shared with the court or other competent authority.
6. Assistance provided pursuant to this Article shall be undertaken in accordance with the law.
Article 19 BANK SECRECY OR CONFIDENTIALITY
The legal provisions referring to bank secrecy or confidentiality shall not be an impediment to compliance with these Regulations, when the information is requested by or shared with the court or other competent authority, in accordance with the law.
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Recommendations of the Group of Experts to CICAD
The Group of Experts requests that CICAD consider and adopt the Model Regulations and present them to the next General Assembly of the OAS, for its possible adoption by the member states.
To facilitate the adoption of the Model Regulations, the Group of Experts recommends that CICAD:
On the basis of the Model Regulations the Group of Experts recommends that CICAD urge the member states of the OAS to consider:
Furthermore, the Group of Experts recommends that CICAD suggest to the member states of the OAS that they consider the possibility of:
Appendix II European Community Documents
Appendix II 1 Treaty Establishing the European Community, as Amended by the Treaty on European Union
[Selected Provisions]
TITLE III: Free Movement of Persons, Services, and Capital
Chapter 4 (Capital and Payments)
Article 73b
1. Within the framework of the provisions set out in this Chapter, all restrictions on the movement of capital between member-States and between member-States and third countries shall be prohibited.
2. Within the framework of the provisions set out in this Chapter, all restrictions on payments between member-States and between member-States and third countries shall be prohibited.
Article 73c
1. The provisions of Article 73b shall be without prejudice to the application to third countries of any restrictions which exist on 31 December 1993 under national or Community law adopted in respect of the movement of capital to or from third countries involving direct investment (including investment in real estate), establishment, the provision of financial services or the admission of securities to capital markets.
2. Whilst endeavouring to achieve the objective of free movement of capital between member-States and third countries to the greatest extent possible and without prejudice to the other Chapters of this Treaty, the Council may, acting by a qualified majority on a proposal from the Commission, adopt measures on the movement of capital to or from third countries involving direct investment (including investment in real estate), establishment, the provision of financial services or the admission of securities to capital markets.
Unanimity shall be required for measures under this paragraph which constitute a step back in Community law as regards the liberalisation of the movement of capital to or from third countries.
Article 73d
1. The provisions of Article 73b shall be without prejudice to the right of member-States:
(a) to apply the relevant provisions of their tax law which distinguish between tax-payers who are not in the same situation with regard to their place of residence or with regard to the place where their capital is invested;
(b) to take all requisite measures to prevent infringements of national law and regulations, in particular in the field of taxation and the prudential supervision of financial institutions, or to lay down procedures for the declaration of capital movements for purposes of administrative or statistical information, or to take measures which are justified on grounds of public policy or public security.
2. The provisions of this Chapter shall be without prejudice to the applicability of restrictions on the right of establishment which are compatible with this Treaty.
3. The measures and procedures referred to in paragraphs 1 and 2 shall not constitute a means of arbitrary discrimination or a disguised restriction on the free movement of capital and payments as defined in Article 73b.
Article 73e
By way of derogation from Article 73b, member-States which, on 31 December 1993, enjoy a derogation on the basis of existing Community law, shall be entitled to maintain, until 31 December 1995 at the latest, restrictions on movements of capital authorised by such derogations as exist on that date.
Article 73f
Where, in exceptional circumstances, movements of capital to or from third countries cause, or threaten to cause, serious difficulties for the operation of economic and monetary union, the Council, acting by a qualified majority on a proposal from the Commission and after consulting the ECB, may take safeguard measures with regard to third countries for a period not exceeding six months if such measures are strictly necessary.
Article 73g
1. If, in the case envisaged in Article 228a, action by the Community is deemed necessary, the Council may, in accordance with the procedure provided for in Article 228a, take the necessary urgent measures on the movement of capital and on payments as regards the third countries concerned.
2. Without prejudice to Article 224 and as long as the Council has not taken measures pursuant to paragraph 1, a member-State may, for serious political reasons and on grounds of urgency, take unilateral measures against a third country with regard to capital movements and payments. The Commission and the other member-States shall be informed of such measures by the date of their entry into force at the latest.
The Council may, acting by a qualified majority on a proposal from the Commission, decide that the member-State concerned shall amend or abolish such measures. The President of the Council shall inform the European Parliament of any such decision taken by the Council.
* * * * *
TITLE VI: Economic and Monetary Policy
Chapter 1 (Economic Policy)
Article 102a
Member-States shall conduct their economic policies with a view to contributing to the achievement of the objectives of the Community, as defined in Article 2, and in the context of the broad guidelines referred to in Article 103(2).
The member-States and the Community shall act in accordance with the principle of an open market economy with free competition, favouring an efficient allocation of resources, and in compliance with the principles set out in Article 3a.
Article 103
1. Member-States shall regard their economic policies as a matter of common concern and shall co-ordinate them within the Council, in accordance with the provisions of Article 102a.
2. The Council shall, acting by a qualified majority on a recommendation from the Commission, formulate a draft for the broad guidelines of the economic policies of the member-States and of the Community, and shall report its findings to the European Council.
The European Council shall, acting on the basis of this report from the Council, discuss a conclusion on the broad guidelines of the economic policies of the member-States and of the Community.
On the basis of this conclusion, the Council shall, acting by a qualified majority, adopt a recommendation setting out these broad guidelines. The Council shall inform the European Parliament of its recommendation.
3. In order to ensure closer co-ordination of economic policies and sustained convergence of the economic performances of the member-States, the Council shall, on the basis of reports submitted by the Commission, monitor economic developments in each of the member-States and in the Community as well as the consistency of economic policies with the broad guidelines referred to in paragraph 2, and regularly carry out an overall assessment.
For the purpose of this multilateral surveillance, member-States shall forward information to the Commission about important measures taken by them in the field of their economic policy and such other information as they deem necessary.
4. Where it is established, under the procedure referred to in paragraph 3, that the economic policies of a member-State are not consistent with the broad guidelines referred to in paragraph 2 or that they risk jeopardising the proper functioning of economic and monetary union, the Council may, acting by a qualified majority on a recommendation from the Commission, make the necessary recommendations to the member-State concerned.
The Council may, acting by a qualified majority on a proposal from the Commission, decide to make its recommendations public.
The President of the Council and the Commission shall report to the European Parliament on the results of multilateral surveillance. The President of the Council may be invited to appear before the competent Committee of the European Parliament if the Council has made its recommendations public.
5. The Council, acting in accordance with the procedure referred to in Article 189c, may adopt detailed rules for the multilateral surveillance procedure referred to in paragraphs 3 and 4 of this Article.
Article 103a
1. Without prejudice to any other procedures provided for in this Treaty, the Council may, acting unanimously on a proposal from the Commission, decide upon the measures appropriate to the economic situation, in particular if severe difficulties arise in the supply of certain products.
2. Where a member-State is in difficulties or is seriously threatened with severe difficulties caused by exceptional occurrences beyond its control, the Council may, acting unanimously on a proposal from the Commission, grant, under certain conditions, Community financial assistance to the member-State concerned. Where the severe difficulties are caused by natural disasters, the Council shall act by qualified majority. The President of the Council shall inform the European Parliament of the decision taken.
Article 104
1. Overdraft facilities or any other type of credit facility with the ECB or with the central banks of the member-States (hereinafter referred to as ‘national central banks’) in favour of Community institutions or bodies, central governments, regional, local or other public authorities, other bodies governed by public law or public undertakings of member-States shall be prohibited, as shall the purchase directly from them by the ECB or national central banks of debt instruments.
2. The provisions of paragraph 1 shall not apply to publicly-owned credit institutions, which in the context of the supply of reserves by central banks shall be given the same treatment by national central banks and the ECB as private credit institutions.
Article 104a
1. Any measure, not based on prudential considerations, establishing privileged access by Community institutions or bodies, central governments, regional, local or other public authorities, other bodies governed by public law or public undertakings of member-States to financial institutions shall be prohibited.
2. The Council, acting in accordance with the procedure referred to in Article 189c, shall, before 1 January 1994, specify definitions for the application of the prohibition referred to in paragraph 1.
Article 104b
1. The Community shall not be liable for or assume the commitments of central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of any member-State, without prejudice to mutual financial guarantees for the joint execution of a specific project. A member-State shall not be liable for or assume the commitments of central governments, regional, local or other public authorities, other bodies governed by public law or public undertakings of another member-State, without prejudice to mutual financial guarantees for the joint execution of a specific project.
2. If necessary, the Council, acting in accordance with the procedure referred to in Article 189c, may specify definitions for the application of the prohibitions referred to in Article 104 and in this Article.
Article 104c
1. Member-States shall avoid excessive government deficits.
2. The Commission shall monitor the development of the budgetary situation and of the stock of government debt in the member-States with a view to identifying gross errors. In particular it shall examine compliance with budgetary discipline on the basis of the following two criteria:
(a) whether the ratio of the planned or actual government deficit to gross domestic product exceeds a reference value, unless
— either the ratio has declined substantially and continuously and reached a level that comes close to the reference value;
— or, alternatively, the excess over the reference value is only exceptional and temporary and the ratio remains close to the reference value;
(b) whether the ratio of government debt to gross domestic product exceeds a reference value, unless the ratio is sufficiently diminishing and approaching the reference value at a satisfactory pace.
The reference values are specified in the Protocol on the excessive deficit procedure annexed to this Treaty.
3. If a member-State does not fulfil the requirements under one or both of these criteria, the Commission shall prepare a report. The report of the Commission shall also take into account whether the government deficit exceeds government investment expenditure and take into account all other relevant factors, including the medium term economic and budgetary position of the member-State.
The Commission may also prepare a report if, notwithstanding the fulfilment of the requirements under the criteria, it is of the opinion that there is a risk of an excessive deficit in a member-State.
4. The Committee provided for in Article 109c shall formulate an opinion on the report of the Commission.
5. If the Commission considers that an excessive deficit in a member-State exists or may occur, the Commission shall address an opinion to the Council.
6. The Council shall, acting by a qualified majority on a recommendation from the Commission, and having considered any observations which the member-State concerned may wish to make, decide after an overall assessment whether an excessive deficit exists.
7. Where the existence of an excessive deficit is decided according to paragraph 6, the Council shall make recommendations to the member-State concerned with a view to bringing that situation to an end within a given period. Subject to the provisions of paragraph 8, these recommendations shall not be made public.
8. Where it establishes that there has been no effective action in response to its recommendations within the period laid down, the Council may make its recommendations public.
9. If a member-State persists in failing to put into practice the recommendations of the Council, the Council may decide to give notice to the member-State to take, within a specified time limit, measures for the deficit reduction which is judged necessary by the Council in order to remedy the situation.
In such a case, the Council may request the member-State concerned to submit reports in accordance with a specific timetable in order to examine the adjustment efforts of that member-State.
10. The rights to bring actions provided for in Articles 169 and 170 may not be exercised within the framework of paragraphs 1 to 9 of this Article.
11. As long as a member-State fails to comply with a decision taken in accordance with paragraph 9, the Council may decide to apply or, as the case may be, intensify one or more of the following measures:
— to require that the member-State concerned shall publish additional information, to be specified by the Council, before issuing bonds and securities;
— to invite the European Investment Bank to reconsider its lending policy towards the member-State concerned;
— to require that the member-State concerned makes a noninterest-bearing deposit of an appropriate size with the Community until the excessive deficit has, in the view of the Council, been corrected;
— to impose fines of an appropriate size.
The President of the Council shall inform the European Parliament of the decisions taken.
12. The Council shall abrogate some or all of its decisions as referred to in paragraphs 6 to 9 and 11 to the extent that the excessive deficit in the member-State concerned has, in the view of the Council, been corrected.
If the Council previously has made public recommendations, it shall, as soon as the decision under paragraph 8 has been abrogated, make a public statement that an excessive deficit in the member-State concerned no longer exists.
13. When taking the decisions referred to in paragraphs 7 to 9, 11 and 12, the Council shall act on a recommendation from the Commission by a majority of two thirds of the votes of its members weighted in accordance with Article 148(2) and excluding the votes of the representative of the member-State concerned.
14. Further provisions relating to the implementation of the procedure described in this Article are set out in the Protocol on the excessive deficit procedure annexed to this Treaty.
The Council shall, acting unanimously on a proposal from the Commission and after consulting the European Parliament and the ECB, adopt the appropriate provisions which shall then replace the said Protocol.
Subject to the other provisions of this paragraph the Council shall, before January 1994, acting by a qualified majority on a proposal from the Commission and after consulting the European Parliament, lay down detailed rules and definitions for the application of the provisions of the said Protocol.
Chapter 2 (Monetary Policy)
Article 105
1. The primary objective of the ESCB shall be to maintain price stability. Without prejudice to the objective of price stability, the ESCB shall support the general economic policies in the Community with a view to contributing to the achievement of the objectives of the Community as laid down in Article 2.
The ESCB shall act in accordance with the principle of an open market economy with free competition, favouring an efficient allocation of resources, and in compliance with the principles set out in Article 3a.
2. The basic tasks to be carried out through the ESCB shall be:
— to define and implement the monetary policy of the Community;
— to conduct foreign exchange operations consistent with the provisions of Article 109;
— to hold and manage the official foreign reserves of the member-States;
— to promote the smooth operation of payment systems.
3. The third indent of paragraph 2 shall be without prejudice to the holding and management by the governments of member-States of foreign exchange working balances.
4. The ECB shall be consulted:
— on any proposed Community act in its fields of competence;
— by national authorities regarding any draft legislative provision in its fields of competence, but within the limits and under the conditions set out by the Council in accordance with the procedure laid down in Article 106(6).
The ECB may submit opinions to the appropriate Community institutions or bodies or to national authorities on matters within its fields of competence.
5. The ESCB shall contribute to the smooth conduct of policies pursued by the competent authorities relating to the prudential supervision of credit institutions and the stability of the financial system.
6. The Council may, acting unanimously on a proposal from the Commission and after consulting the ECB and after receiving the assent of the European Parliament, confer upon the ECB specific tasks concerning policies relating to the prudential supervision of credit institutions and other financial institutions with the exception of insurance undertakings.
Article 105a
1. The ECB shall have the exclusive right to authorise the issue of bank notes within the Community. The ECB and the national central banks may issue such notes.
The bank notes issued by the ECB and the national central banks shall be the only such notes to have the status of legal tender within the Community.
2. Member-States may issue coins subject to approval by the ECB of the volume of the issue. The Council may, acting in accordance with the procedure referred to in Article 189c and after consulting the ECB, adopt measures to harmonise the denominations and technical specifications of all coins intended for circulation to the extent necessary to permit their smooth circulation within the Community.
Article 106
1. The ESCB shall be composed of the ECB and of the national central banks.
2. The ECB shall have legal personality.
3. The ESCB shall be governed by the decision-making bodies of the ECB which shall be the Governing Council and the Executive Board.
4. The Statute of the ESCB is laid down in a Protocol annexed to this Treaty.
5. Articles 5.1, 5.2, 5.3, 17, 18, 19.1, 22, 23, 24, 26, 32.2, 32.3, 32.4, 32.6, 33.1(a) and 36 of the Statute of the ESCB may be amended by the Council, acting either by a qualified majority on a recommendation from the ECB and after consulting the Commission or unanimously on a proposal from the Commission and after consulting the ECB. In either case, the assent of the European Parliament shall be required.
6. The Council, acting by a qualified majority either on a proposal from the Commission and after consulting the European Parliament and the ECB, or on a recommendation from the ECB and after consulting the European Parliament and the Commission, shall adopt the provisions referred to in Articles 4, 5.4, 19.2, 20, 28.1, 29.2, 30.4 and 34.3 of the Statute of the ESCB.
Article 107
When exercising the powers and carrying out the tasks and duties conferred upon them by this Treaty and the Statute of the ESCB, neither the ECB, nor a national central bank, nor any member of their decision-making bodies shall seek or take instructions from Community institutions or bodies, from any government of a member-State or from any other body.
The Community institutions and bodies and the governments of the member-States undertake to respect this principle and not to seek to influence the members of the decision-making bodies of the ECB or of the national central banks in the performance of their tasks.
Article 108
Each member-State shall ensure, at the latest at the date of the establishment of the ESCB, that its national legislation including the statutes of its national central bank is compatible with this Treaty and the Statute of the ESCB.
Article 108a
1. In order to carry out the tasks entrusted to the ESCB, the ECB shall, in accordance with the provisions of this Treaty and under the conditions laid down in the Statute of the ESCB:
— make regulations to the extent necessary to implement the tasks defined in Article 3.1, first indent, Articles 19.1, 22 or 25.2 of the Statute of the ESCB and in cases which shall be laid down in the acts of the Council referred to in Article 106(6);
— take decisions necessary for carrying out the tasks entrusted to the ESCB under this Treaty and the Statute of the ESCB;
— make recommendations and deliver opinions.
2. A regulation shall have general application. It shall be binding in its entirety and directly applicable in all member-States.
Recommendations and opinions shall have no binding force.
A decision shall be binding in its entirety upon those to whom it is addressed.
Articles 190 to 192 shall apply to regulations and decisions adopted by the ECB.
The ECB may decide to publish its decisions, recommendations and opinions.
3. Within the limits and under the conditions adopted by the Council under the procedure laid down in Article 106(6), the ECB shall be entitled to impose fines or periodic penalty payments on undertakings for failure to comply with obligations under its regulations and decisions.
Article 109
1. By way of derogation from Article 228, the Council may, acting unanimously on a recommendation from the ECB or from the Commission, and after consulting the ECB in an endeavour to reach a consensus consistent with the objective of price stability, after consulting the European Parliament, in accordance with the procedure in paragraph 3 for determining the arrangements, conclude formal agreements on an exchange rate system for the ECU in relation to non-Community currencies.
The Council may, acting by a qualified majority on a recommendation from the ECB or from the Commission, and after consulting the ECB in an endeavour to reach a consensus consistent with the objective of price stability, adopt, adjust or abandon the central rates of the ECU within the exchange rate system.
The President of the Council shall inform the European Parliament of the adoption, adjustment or abandonment of the ECU central rates.
2. In the absence of an exchange rate system in relation to one or more non-Community currencies as referred to in paragraph 1, the Council, acting by a qualified majority either on a recommendation from the Commission and after consulting the ECB, or on a recommendation from the ECB, may formulate general orientations for exchange rate policy in relation to these currencies.
These general orientations shall be without prejudice to the primary objective of the ESCB to maintain price stability.
3. By way of derogation from Article 228, where agreements concerning monetary or foreign exchange regime matters need to be negotiated by the Community with one or more States or international organisations, the council, acting by a qualified majority on a recommendation from the Commission and after consulting the ECB, shall decide the arrangements for the negotiation and for the conclusion of such agreements.
These arrangements shall ensure that the community expresses a single position. The Commission shall be fully associated with the negotiations. Agreements concluded in accordance with this paragraph shall be binding on the institutions of the Community, on the ECB and on member-States.
4. Subject to paragraph 1, the Council shall, on a proposal from the Commission and after consulting the ECB, acting by a qualified majority decide on the position of the Community at international level as regards issues of particular relevance to economic and monetary union and, acting unanimously, decide its representation in compliance with the allocation of powers laid down in Articles 103 and 105.
5. Without prejudice to Community competence and Community agreements as regards Economic and Monetary Union, member-States may negotiate in international bodies and conclude international agreements.
Chapter 3 (Institutional Provisions)
Article 109a
1. The Government Council of the ECB shall comprise the members of the Executive Board of the ECB and the Governors of the national central banks.
2. (a) The executive Board shall comprise the President, the Vice-President and four other members.
(b) The President, the Vice-President and the other members of the Executive Board shall be appointed from among persons of recognised standing and professional experience in monetary or banking matters by common accord of the Governments of the member-States at the level of Heads of State or of Government, on a recommendation from the Council, after it has consulted the European Parliament and the Governing Council of the ECB.
Their term of office shall be eight years and shall not be renewable. Only nationals of member-States may be members of the Executive Board.
Article 109b
1. The President of the Council and a member of the Commission may participate, without having the right to vote, in meetings of the Governing Council of the ECB.
The President of the Council may submit a motion for deliberation to the Governing Council of the ECB.
2. The President of the ECB shall be invited to participate in Council meetings when the Council is discussing matters relating to the objectives and tasks of the ESCB.
3. The ECB shall address an annual report on the activities of the ESCB and on the monetary policy of both the previous and current year to the European Parliament, the Council and the Commission, and also to the European Council.
The President of the ECB shall present this report to the Council and to the European Parliament, which may hold a general debate on that basis.
The President of the ECB and the other members of the Executive Board may, at the request of the European Parliament or on their own initiative, be heard by the competent Committees of the European Parliament.
Article 109c
1. In order to promote co-ordination of the policies of member-States to the full extent needed for the functioning of the internal market, a Monetary Committee with advisory status is hereby set up.
It shall have the following tasks:
— to keep under review the monetary and financial situation of the member-States and of the Community and the general payments system of the member-States and to report regularly thereon to the Council and to the Commission;
— to deliver opinions at the request of the Council or of the Commission, or on its own initiative for submission to those institutions;
— without prejudice to Article 151, to contribute to the preparation of the work of the Council referred to in Articles 73f, 73g, 103(2), (3), (4) and (5), 103a, 104a, 104b, 104c, 109e(2), 109f(6), 109h, 109i, 109j(2) and 109k(1);
— to examine, at lease once a year, the situation regarding the movement of capital and the freedom of payments, as they result from the application of this Treaty and of measures adopted by the Council; the examination shall cover all measures relating to capital movements and payments; the Committee shall report to the commission and to the Council on the outcome of this examination.
The member-States and the Commission shall each appoint two members of the Monetary Committee.
2. At the start of the third stage, an Economic and Financial Committee shall be set up. The Monetary Committee provided for in paragraph 1 shall be dissolved.
The Economic and Financial Committee shall have the following tasks:
— to deliver opinions at the request of the Council or of the Commission, or on its own initiative for submission to those institutions;
— to keep under review the economic and financial situation of the member-States and of the Community and to report regularly thereon to the Council and to the Commission, in particular on financial relations with third countries and international institutions;
— without prejudice to Article 151, to contribute to the preparation of the work of the Council referred to in Articles 73f, 73g, 103(2), (3), (4) and (5), 103a, 104a, 104b, 104c, 105(6), 105a(2), 106(5) and (6), 109, 109h, 109i(2) and (3), 109k(2), 1091(4) and (5), and to carry out other advisory and preparatory tasks assigned to it by the Council;
— to examine, at least once a year, the situation regarding the movement of capital and the freedom of payments, as they result from the application of this Treaty and of measures adopted by the Council; the examination shall cover all measures relating to capital movements and payments; the Committee shall report to the Commission and to the council on the outcome of this examination.
The member-States, the Commission and the ECB shall each appoint no more than two members of the Committee.
3. The Council shall, acting by a qualified majority on a proposal from the Commission and after consulting the ECB and the Committee referred to in this Article, lay down detailed provisions concerning the composition of the Economic and Financial Committee. The President of the Council shall inform the European Parliament of such a decision.
4. In addition to the tasks set out in paragraph 2, if and as long as there are member-States with a derogation as referred to in Articles 109k and 1091, the Committee shall keep under review the monetary and financial situation and the general payments system of those member-States and report regularly thereon to the Council and to the Commission.
Article 109d
For matters within the scope of Articles 103(4), 104c with the exception of paragraph 14, 109, 109j, 109k and 1091(4) and (5), the Council or a member-State may request the Commission to make a recommendation or a proposal, as appropriate. The Commission shall examine this request and submit its conclusions to the Council without delay.
Chapter 4 (Transitional Provisions)
Article 109e
1. The second stage for achieving economic and monetary union shall begin on 1 January 1994.
2. Before that date
(a) each member-State shall:
— adopt, where necessary, appropriate measures to comply with the prohibitions laid down in Article 73b, without prejudice to Article 73e, and in Articles 104 and 104a(1);
— adopt, if necessary, with a view to permitting the assessment provided for in subparagraph (b), multiannual programmes intended to ensure the lasting convergence necessary for the achievement of economic and monetary union, in particular with regard to price stability and sound public finances;
(b) the Council shall, on the basis of a report from the Commission, assess the progress made with regard to economic and monetary convergence, in particular with regard to price stability and sound public finances, and the progress made with the implementation of Community law concerning the internal market.
3. The provisions of Articles 104, 104a(1), 104b(1) and 104c with the exception of paragraphs 1, 9, 11 and 14 shall apply from the beginning of the second stage.
The provisions of Articles 103a(2), 104c(1), (9) and (11), 105, 105a, 107, 109, 109a, 109b and 109c(2) and (4) shall apply from the beginning of the third stage.
4. In the second stage, member-States shall endeavour to avoid excessive government deficits.
5. During the second stage, each member-State shall, as appropriate, start the process leading to the independence of its central bank, in accordance with Article 108.
Article 109f
1. At the start of the second stage, a European Monetary Institute (hereinafter referred to as ‘EMI’) shall be established and take up its duties; it shall have legal personality and be directed and managed by a Council, consisting of a President and the Governors of the national central banks, one of whom shall be Vice-President.
The President shall be appointed by common accord of the Governments of the member-States at the level of Heads of State or of Government, on a recommendation from, as the case may be, the Committee of Governors of the central banks of the member-States (hereinafter referred to as ‘Committee of Governors’) or the Council of the EMI, and after consulting the European Parliament and the Council. The President shall be selected from among persons of recognised standing and professional experience in monetary or banking matters. Only nationals of member-States may be President of the EMI. The Council of the EMI shall appoint the Vice-President.
The Statute of the EMI is laid down in a Protocol annexed to this Treaty.
The Committee of Governors shall be dissolved at the start of the second stage.
2. The EMI shall:
— strengthen co-operation between the national central banks;
— strengthen the co-ordination of the monetary policies of the member-States, with the aim of ensuring price stability;
— monitor the functioning of the European Monetary System;
— hold consultations concerning issues falling within the competence of the national central banks and affecting the stability of financial institutions and markets;
— take over the tasks of the European Monetary Co-operation Fund, which shall be dissolved; the modalities of dissolution are laid down in the Statute of the EMI;
— facilitate the use of the ECU and oversee its development, including the smooth functioning of the ECU clearing system.
3. For the preparation of the third stage, the EMI shall:
— prepare the instruments and the procedures necessary for carrying out a single monetary policy in the third stage;
— promote the harmonisation, where necessary, of the rules and practices governing the collection, compilation and distribution of statistics in the areas within its field of competence;
— prepare the rules for operations to be undertaken by the national central banks in the framework of the ESCB;
— promote the efficiency of cross-border payments;
— supervise the technical preparation of ECU bank notes.
At the latest by 31 December 1996, the EMI shall specify the regulatory, organisational and logistical framework necessary for the ESCB to perform its tasks in the third stage. This framework shall be submitted for decision to the ECB at the date of its establishment.
4. The EMI, acting by a majority of two thirds of the members of its Council may:
— formulate opinions or recommendations on the overall orientation of monetary policy and exchange rate policy as well as on related measures introduced in each member-State;
— submit opinions or recommendations to Governments and to the Council on policies which might affect the internal or external monetary situation in the Community and, in particular, the functioning of the European Monetary System;
— make recommendations to the monetary authorities of the member-States concerning the conduct of their monetary policy.
5. The EMI, acting unanimously, may decide to publish its opinions and its recommendations.
6. The EMI shall be consulted by the Council regarding any proposed Community act within its field of competence.
Within the limits and under the conditions set out by the Council, acting by a qualified majority on a proposal from the Commission and after consulting the European Parliament and the EMI, the EMI shall be consulted by the authorities of the member-States on any draft legislative provision within its field of competence.
7. The Council may, acting unanimously on a proposal from the Commission and after consulting the European Parliament and the EMI, confer upon the EMI other tasks for the preparation of the third stage.
8. Where this Treaty provides for a consultative role for the ECB, references to the ECB shall be read as referring to the EMI before the establishment of the ECB.
Where this Treaty provides for a consultative role for the EMI, references to the EMI shall be read, before 1 January 1994, as referring to the Committee of Governors.
9. During the second stage, the term ‘ECB’ used in Articles 173, 175, 176, 177, 180 and 215 shall be read as referring to the EMI.
Article 109g
The currency composition of the ECU basket shall not be changed. From the start of the third stage, the value of the ECU shall be irrevocably fixed in accordance with Article 1091(4).
Article 109h
1. Where a member-State is in difficulties or is seriously threatened with difficulties as regards its balance of payments either as a result of an overall disequilibrium in its balance of payments, or as a result of the type of currency at its disposal, and where such difficulties are liable in particular to jeopardise the functioning of the Common Market or the progressive implementation of the common commercial policy, the Commission shall immediately investigate the position of the State in question and the action which, making use of all the means at its disposal, that State has taken or may take in accordance with the provisions of this Treaty.
The Commission shall state what measures it recommends the State concerned to take.
If the action taken by a member-State and the measures suggested by the Commission do not prove sufficient to overcome the difficulties which have arisen or which threaten, the Commission shall, after consulting the Committee referred to in Article 109c, recommend to the Council the granting of mutual assistance and appropriate methods therefor.
The Commission shall keep the Council regularly informed of the situation and of how it is developing.
2. The Council, acting by a qualified majority, shall grant such mutual assistance; it shall adopt directives or decisions laying down the conditions and details of such assistance, which may take such forms as:
(a) a concerted approach to or within any other international organisations to which member-States may have recourse;
(b) measures needed to avoid deflection of trade where the State which is in difficulties maintains or reintroduces quantitative restrictions against third countries;
(c) the granting of limited credits by other member-States, subject to their agreement.
3. If the mutual assistance recommended by the Commission is not granted by the Council or if the mutual assistance granted and the measures taken are insufficient, the Commission shall authorise the State which is in difficulties to take protective measures, the conditions and details of which the Commission shall determine.
Such authorisation may be revoked and such conditions and details may be changed by the Council acting by a qualified majority.
4. Subject to Article 109k(6), this Article shall cease to apply from the beginning of the third stage.
Article 109i
1. Where a sudden crisis in the balance of payments occurs and a decision within the meaning of Article 109h(2) is not immediately taken, the member-State concerned may, as a precaution, take the necessary protective measures. Such measures must cause the least possible disturbance in the functioning of the Common Market and must not be wider in scope than is strictly necessary to remedy the sudden difficulties which have arisen.
2. The Commission and the other member-States shall be informed of such protective measures not later than when they enter into force. The Commission may recommend to the Council the granting of mutual assistance under Article 109h.
3. After the Commission has delivered an opinion and the Committee referred to in Article 109c has been consulted, the Council may, acting by a qualified majority, decide that the State concerned shall amend, suspend or abolish the protective measures referred to above.
4. Subject to Article 109k(6), this Article shall cease to apply from the beginning of the third stage.
Article 109j
1. The Commission and the EMI shall report to the Council on the progress made in the fulfilment by the member-States of their obligations regarding the achievement of economic and monetary union.
These reports shall include an examination of the compatibility between each member-State’s national legislation, including the statutes of its national central bank, and Articles 107 and 108 of this Treaty and the Statute of the ESCB. The reports shall also examine the achievement of a high degree of sustainable convergence by reference to the fulfilment by each member-State of the following criteria:
— the achievement of a high degree of price stability; this will be apparent from a rate of inflation which is close to that of, at most, the three best performing member-States in terms of price stability;
— the sustainability of the government financial position; this will be apparent from having achieved a government budgetary position without a deficit that is excessive as determined in accordance with Article 104c(6);
— the observance of the normal fluctuation margins provided for by the Exchange Rate Mechanism of the European Monetary System, for at least two years, without devaluing against the currency of any other member-State;
— the durability of convergence achieved by the member-State and of its participation in the Exchange Rate Mechanism of the European Monetary System being reflected in the long-term interest rate levels.
The four criteria mentioned in this paragraph and the relevant periods over which they are to be respected are developed further in a Protocol annexed to this Treaty.
The reports of the Commission and the EMI shall also take account of the development of the ECU, the results of the integration of markets, the situation and development of the balances of payments on current account and an examination of the development of unit labour costs and other price indices.
2. On the basis of these reports, the council, acting by a qualified majority on a recommendation from the Commission, shall assess:
— for each member-State, whether it fulfils the necessary conditions for the adoption of a single currency;
— whether a majority of the member-States fulfil the necessary conditions for the adoption of a single currency, and recommend its findings to the Council, meeting in the composition of the Heads of State or of Government. The European Parliament shall be consulted and forward its opinion to the Council, meeting in the composition of the Heads of State or of Government.
3. Taking due account of the reports referred to in paragraph 1 and the opinion of the European Parliament referred to in paragraph 2, the Council, meeting in the composition of Heads of State or of Government, shall, acting by a qualified majority, not later than 31 December 1996:
— decide, on the basis of the recommendations of the Council referred to in paragraph 2, whether a majority of the member-States fulfil the necessary conditions for the adoption of a single currency;
— decide whether it is appropriate for the Community to enter the third stage, and if so
— set the date for the beginning of the third stage.
4. If by the end of 1997 the date for the beginning of the third stage has not been set, the third stage shall start on 1 January 1999. Before 1 July 1998, the Council, meeting in the composition of Heads of State or of Government, after a repetition of the procedure provided for in paragraphs 1 and 2, with the exception of the second indent of paragraph 2, taking into account the reports referred to in paragraph 1 and the opinion of the European Parliament, shall, acting by a qualified majority and on the basis of the recommendations of the Council referred to in paragraph 2, confirm which member-States fulfil the necessary conditions for the adoption of a single currency.
Article 109k
1. If the decision has been taken to set the date in accordance with Article 109j(3), the council shall, on the basis of its recommendations as referred to in Article 109j(2), acting by a qualified majority on a recommendation from the Commission, decide whether any, and if so which, member-States shall have a derogation as defined in paragraph 3 of this Article. Such member-States shall in this Treaty be referred to as ‘Member States with a derogation’.
If the Council has confirmed which member-States fulfil the necessary conditions for the adoption of a single currency, in accordance with Article 109j(4), those member-States which do not fulfil the conditions shall have a derogation as defined in paragraph 3 of this Article. Such member-States shall in this Treaty be referred to as ‘Member-States with a derogation’.
2. At least once every two years, or at the request of a member-State with a derogation, the Commission and the ECB shall report to the Council in accordance with the procedure laid down in Article 109j(1). After consulting the European Parliament and after discussion in the Council, meeting in the composition of the Heads of State or of Government, the Council shall, acting by a qualified majority on a proposal from the Commission, decide which member-States with a derogation fulfil the necessary conditions on the basis of the criteria set out in Article 109j(1), and abrogate the derogations of the member-States concerned.
3. A derogation referred to in paragraph 1 shall entail that the following Articles do not apply to the member-State concerned: Article 104c(9) and (11), 105(1), (2), (3) and (5), 105a, 108a, 109, and 109a(2)(b). The exclusion of such a member-State and its national central bank from rights and obligations within the ESCB is laid down in Chapter IX of the Statute of the ESCB.
4. In Articles 105(1), (2) and (3), 105a, 108a, 109 and 109a(2)(b), ‘Member-States’ shall be read as ‘Member-States without a derogation’.
5. The voting rights of the member-States with a derogation shall be suspended for the Council decisions referred to in the Articles of this Treaty mentioned in paragraph 3. In that case, by way of derogation from Articles 148 and 189a(1), a qualified majority shall be defined as two thirds of the votes of the representatives of the member-States without a derogation weighted in accordance with Article 148(2), and unanimity of those member-States shall be required for an act requiring unanimity.
6. Articles 109h and 109i shall continue to apply to a member-State with a derogation.
Article 109l
1. Immediately after the decision on the date for the beginning of the third stage has been taken in accordance with Article 109j(3), or, as the case may be, immediately after 1 July 1998:
— the Council shall adopt the provisions referred to in Article 106(6);
— the governments of the member-States without a derogation shall appoint, in accordance with the procedure set out in Article 50 of the Statute of the ESCB, the President, the Vice-President and the other members of the Executive Board of the ECB.
If there are member-States with a derogation, the number of members of the Executive Board may be smaller than provided for in Article 11.1 of the Statute of the ESCB, but in no circumstances shall it be less than four.
As soon as the Executive Board is appointed, the ESCB and the ECB shall be established and shall prepare for their full operation as described in this Treaty and the Statute of the ESCB. The full exercise of their powers shall start from the first day of the third stage.
2. As soon as the ECB is established, it shall if necessary, take over functions of the EMI. The EMI shall go into liquidation upon the establishment of the ECB; the modalities of liquidation are laid down in the Statute of the EMI.
3. If and as long as there are member-States with a derogation, and without prejudice to Article 106(3) of this Treaty, the General Council of the ECB referred to in Article 45 of the Statute of the ESCB shall be constituted as a third decision-making body of the ECB.
4. At the starting date of the third stage, the Council shall, acting with the unanimity of the member-States without a derogation, on a proposal from the Commission and after consulting the ECB, adopt the conversion rates at which their currencies shall be irrevocably fixed and at which irrevocably fixed rate the ECU shall be substituted for these currencies, and the ECU will become a currency in its own right. This measure shall by itself not modify the external value of the ECU. The Council shall, acting according to the same procedure, also take the other measures necessary for the rapid introduction of the ECU as the single currency of those member-States.
5. If it is decided, according to the procedure set out in Article 109k(2), to abrogate a derogation, the Council shall, acting with the unanimity of the member-States without a derogation and the member-State concerned, on a proposal from the Commission and after consulting the ECB, adopt the rate at which the ECU shall be substituted for the currency of the member-State concerned, and take the other measures necessary for the introduction of the ECU as the single currency in the member-State concerned.
Article 109m
1. Until the beginning of the third stage, each member-State shall treat its exchange rate policy as a matter of common interest. In so doing, member-States shall take account of the experience acquired in co-operation within the framework of the European Monetary System (EMS) and in developing the ECU, and shall respect existing powers in this field.
2. From the beginning of the third stage and for as long as a member-State has a derogation, paragraph 1 shall apply by analogy to the exchange rate policy of that member-State.
Appendix II 1a EC Regulation Specifying Definitions for the Application of the Prohibitions Referred to in Articles 104 and 104b(1) of the Treaty
Council Regulation (EC) 3603/931 of 13 December 1993
Specifying Definitions for the Application of the Prohibitions Referred to in Articles 104 and 104b(1) of the Treaty
The Council of the European Union,
Having regard to the Treaty establishing the European Community, and in particular Article 104b(2) thereof,
Having regard to the proposal from the Commission,2
In cooperation with the European Parliament,3
Whereas Articles 104 and 104b(1) of the Treaty are directly applicable; whereas the terms featuring in Articles 104 and 104b(1) may be specified, if necessary;
Whereas the terms ‘overdraft facilities’ and ‘other types of credit facility’ used in Article 104 of the Treaty should be defined, particularly with reference to the treatment of claims existing at 1 January 1994;
Whereas it is desirable that the national central banks participating in the third stage of Economic and Monetary Union should enter such Union having on their balance sheets claims negotiable under market conditions, in particular to give the required flexibility to the monetary policy of the European System of Central Banks and to permit a standard contribution from the various national central banks participating in monetary union to the monetary income to be distributed among them;
Whereas the central banks which, after 1 January 1994, still hold claims against the public sector which are non-negotiable or are subject to conditions which are not market conditions should be authorized subsequently to convert such claims into negotiable fixed-maturity securities under market conditions;
Whereas paragraph 11 of the Protocol on certain provisions relating to the United Kingdom of Great Britain and Northern Ireland stipulates that the Government of the United Kingdom may maintain its ‘ways and means’ facility with the Bank of England if and so long as the United Kingdom does not move to the third stage; whereas it is appropriate to make provision for the conversion of the amount of this facility into marketable debt at a fixed maturity and on market terms if the United Kingdom moves to stage three of EMU;
Whereas the Protocol on Portugal lays down that ‘Portugal is hereby authorized to maintain the facility afforded to the Autonomous Regions of the Azores and Madeira to benefit from an interest-free credit facility with the Banco de Portugal under the terms established by existing Portuguese law’; and that ‘Portugal commits itself to pursue its best endeavours in order to put an end to the abovementioned facility as soon as possible’;
Whereas Member States must take appropriate measures to ensure that the prohibitions referred to in Article 104 of the Treaty are applied effectively and fully; whereas, in particular, purchases made on the secondary market must not be used to circumvent the objective of that Article;
Whereas, within the limits laid down in this Regulation, the direct acquisition by the central bank of one Member State of marketable debt instruments issued by the public sector of another Member State does not help to shield the public sector from the discipline of market mechanisms where such purchases are conducted for the sole purpose of managing foreign exchange reserves;
Whereas, notwithstanding the role assigned to the Commission pursuant to Article 169 of the Treaty, it is for the European Monetary Institute and, thereafter, for the European Central Bank, pursuant to Articles 109f(9) and 180 of the Treaty, to ensure that national central banks honour the obligations laid down by the Treaty;
Whereas intra-day credits by the central banks may assist the smooth operation of payment systems; whereas, therefore, intra-day credits in the public sector are compatible with the objectives of Article 104 of the Treaty, provided that no extension to the following day is possible;
Whereas the function of fiscal agent exercised by the central banks should not be impeded; whereas, even if clearing by the central banks of cheques issued by third parties for the public sector’s account may occasionally involve a credit, Article 104 of the Treaty should not be regarded as prohibiting such operations, provided that they do not result overall in a credit for the public sector;
Whereas the holding by the central banks of coins issued by the public sector and credited to the public sector constitutes an interest-free form of credit for the public sector; whereas, however, if only limited amounts are involved, this practice does not interfere with the principle of Article 104 of the Treaty; whereas, therefore, in view of the difficulties which would arise from total prohibition of this form of credit, it may be permitted within the limits laid down in this Regulation;
Whereas, following unification, the Federal Republic of Germany has particular difficulty in complying with the limit set on such assets; whereas it is appropriate in those circumstances to authorize a higher percentage for a limited period;
Whereas the financing by the central banks of obligations falling upon the public sector vis-à-vis the International Monetary Fund or resulting from the implementation of the medium-term financial assistance facility set up within the Community results in foreign claims which have all the characteristics of reserve assets; whereas it is, therefore, appropriate to authorize them;
Whereas public undertakings are covered by the prohibition in Articles 104 and 104b(1); whereas they are defined in Commission Directive 80/723/EEC of 25 June 1980 on the transparency of financial relations between Member States and public undertakings,4
HAS ADOPTED THIS REGULATION:
Article 1
1. For the purposes of Article 104 of the Treaty:
(a) ‘overdraft facilities’ means any provision of funds to the public sector resulting or likely to result in a debit balance;
(b) ‘other type of credit facility’ means:
(i) any claim against the public sector existing at 1 January 1994, except for fixed-maturity claims acquired before that date;
(ii) any financing of the public sector’s obligations vis-à-vis third parties;
(iii) without prejudice to Article 104(2) of the Treaty, any transaction with the public sector resulting or likely to result in a claim against that sector.
2. The following shall not be regarded as ‘debt instruments’ within the meaning of Article 104 of the Treaty: securities acquired from the public sector to ensure the conversion into negotiable fixed-maturity securities under market conditions of:
fixed-maturity claims acquired before 1 January 1994 which are not negotiable or not under market conditions, provided that the maturity of the securities is not subsequent to that of the aforementioned claims;
the amount of the ‘ways and means’ facility maintained by the United Kingdom Government with the Bank of England until the date, if any, on which the United Kingdom moves to stage three of EMU.
Article 2
1. During stage two of EMU, purchases by the national central bank of one Member State of marketable debt instruments issued by the public sector of another Member State shall not be considered direct purchases within the meaning of Article 104 of the Treaty, provided that such purchases are conducted for the sole purpose of managing foreign exchange reserves.
2. During stage three of EMU, the following purchases conducted for the sole purpose of managing foreign exchange reserves shall not be considered direct purchases within the meaning of Article 104 of the Treaty:
purchases by the national central bank of a Member State not participating in stage three of EMU, from the public sector of another Member State, of marketable debt instruments of the latter,
purchases by the European Central Bank or the national central bank of a Member State participating in stage three of EMU, from the public sector of a Member State not participating in stage three, of marketable debt instruments of the latter.
Article 3
For the purposes of this Regulation,
‘public sector’ means Community institutions or bodies, central governments, regional, local or other public authorities, other bodies governed by public law or public undertakings of Member States.
‘National central banks’ means the central banks of the Member States and the Luxembourg Monetary Institute.
Article 4
Intra-day credits by the European Central Bank or the national banks to the public sector shall not be considered as a credit facility within the meaning of Article 104 of the Treaty, provided that they remain limited to the day and that no extension is possible.
Article 5
Where the European Central Bank or the national central banks receive from the public sector, for collection, cheques issued by third parties and credit the public sector’s account before the drawee bank has been debited, this operation shall not be considered as a credit facility within the meaning of Article 104 of the Treaty if a fixed period of time corresponding to the normal period for the collection of cheques by the central bank of the Member State concerned has elapsed since receipt of the cheque, provided that any float which may arise is exceptional, is of a small amount and averages out in the short term.
Article 6
The holding by the European Central Bank or the national central banks of coins issued by the public sector and credited to the public sector shall not be regarded as a credit facility within the meaning of Article 104 of the Treaty where the amount of these assets remains at less than 10% of the coins in circulation.
Until 31 December 1996, this figure shall be 15% for Germany.
Article 7
The financing by the European Central Bank or the national central banks of obligations falling upon the public sector vis-à-vis the International Monetary Fund or resulting from the implementation of the medium-term financial assistance facility set up by Regulation (EEC) No 1969/88 5 shall not be regarded as a credit facility within the meaning of Article 104 of the Treaty.
Article 8
1. For the purposes of Articles 104 and 104b(1) of the Treaty, ‘public undertaking’ shall be defined as any undertaking over which the State or other regional or local authorities may directly or indirectly exercise a dominant influence by virtue of their ownership of it, their financial participation therein or the rules which govern it.
A dominant influence on the part of the public authorities shall be presumed when these authorities, directly or indirectly in relation to an undertaking:
(a) hold the major part of the undertaking’s subscribed capital;
(b) control the majority of the votes attaching to shares issued by the undertaking; or
(c) can appoint more than half of the members of the undertaking’s administrative, managerial or supervisory body.
2. For the purposes of Articles 104 and 104b(1) of the Treaty, the European Central Bank and the national central banks do not form part of the public sector.
Article 9
This Regulation shall enter into force on 1 January 1994.
This Regulation shall be binding in its entirety and directly applicable in all Member States.
Done at Brussels, 13 December 1993.
For the Council
The President
Ph. MAYSTADT
Appendix II 1b EC Regulation Specifying Definitions for the Application of the Prohibition of Privileged Access Referred to in Article 104a of the Treaty
Council Regulation (EC) 3604/ 931 of 13 December 1993
Specifying Definitions for the Application of the Prohibition of Privileged Access Referred to in Article 104a of the Treaty
The Council of the European Union,
Having regard to the Treaty establishing the European Community, and in particular Article 104a(2) thereof,
Having regard to the proposal from the Commission,2
In cooperation with the European Parliament,3
Whereas the prohibition of privileged access to financial institutions, as laid down in Article 104a of the Treaty, forms an essential element of the submission of the public sector in its financing operations to the discipline of the market mechanism and so makes a contribution to the strengthening of budgetary discipline; whereas, moreover, it places the Member States on an equal footing as regards public sector access to financial institutions;
Whereas the Council must specify definitions for the application of such prohibition;
Whereas the Member States and the Community must act with due regard for the principle of an open market economy in which there is free competition;
Whereas, in particular, this Regulation cannot affect the methods for organizing markets complying with that principle;
Whereas this Regulation does not seek to interfere with any operation of public financial institutions complying with the same principle;
Whereas Article 104a of the Treaty prohibits measures establishing privileged access; whereas the types of acts concerned by this prohibition should be specified; whereas the commitments freely made by financial institutions in the framework of contractual relations unquestionably cannot be affected;
Whereas the same Article provides that prudential considerations may justify departure from the principle of this prohibition; whereas laws, regulations or administrative actions may not, however, under the cover of prudential consideration, be used to establish disguised privileged access;
Whereas public undertakings are covered by the same prohibition; whereas they are defined in Commission Directive 80/723/EEC of 25 June 1980 on the transparency of financial relations between the Member States and public undertakings;4
Whereas, for reasons of monetary policy, financial institutions and, in particular, credit institutions may be obliged to hold claims against the European Central Bank and/or national central banks;
Whereas the European Central Bank and national central banks may not, as public authorities, take measures establishing privileged access; whereas the rules on mobilization or pledging of debt instruments enacted by the European Central Bank or by national central banks must not be used as a means of circumventing the prohibition of privileged access;
Whereas, in order to avoid any circumvention of the prohibition, the definitions in Community law of the various types of financial institution should be supplemented by a reference to those institutions engaging in financial activities which have not yet been harmonized at Community level, such as, for instance, branches of third-country establishments, holding and factoring companies, uncoordinated undertakings for collective investment in transferable securities (UCITS), institutions for retirement provision, etc.,
HAS ADOPTED THIS REGULATION:
Article 1
1. For the purposes of Article 104a of the Treaty, ‘any measure establishing privileged access’ shall be defined as any law, regulation or any other binding legal instrument adopted in the exercise of public authority which:
obliges financial institutions to acquire or to hold liabilities of Community institutions or bodies, central governments, regional, local or other public authorities, other bodies governed by public law or public undertakings of Member States (hereinafter referred to as ‘public sector’), or
confers tax advantages which may benefit only financial institutions or financial advantages which do not comply with the principles of a market economy, in order to encourage the acquiring or the holding by those institutions of such liabilities.
2. Privileged access shall not be regarded as being established by those measures which give rise to:
obligations for funding social housing under special terms such as, inter alia, an obligation to centralize funds with public financial institutions, when the funding terms prevailing for the public sector are identical to those for funding of the same nature granted to private borrowers for the same purposes,
the obligation to centralize funds with a public credit institution, in so far as such a constraint is an integral part, as at 1 January 1994, of the organization of a particular network of credit institutions or of specific savings arrangements designed for households and intended to provide the whole of the network or the specific arrangements with financial security. The use of such centralized funds must be determined by the management bodies of the public credit institution concerned and comply with the principle of a market economy where there is free competition,
obligations to finance the repair of disaster damage, provided that the conditions for financing repairs are not more favourable when damage is sustained by the public sector than when it is sustained by the private sector.
Article 2
For the purposes of Article 104a of the Treaty, ‘prudential considerations’ shall be those which underlie national laws, regulations or administrative actions based on, or consistent with, EC law and designed to promote the soundness of financial institutions so as to strengthen the stability of the financial system as a whole and the protection of the customers of those institutions.
Article 3
1. For the purposes of Article 104a of the Treaty, ‘public undertaking’ shall be defined as any undertaking over which the State or other regional or local authorities may exercise directly or indirectly a dominant influence by virtue of their ownership of it, their financial participation therein or the rules which govern it.
A dominant influence on the part of the State or other regional or local authorities shall be presumed when these authorities, directly or indirectly in relation to an undertaking:
(a) hold the major part of the undertaking’s subscribed capital;.
(b) control the majority of the votes attaching to shares issued by the undertaking; or.
(c) can appoint more than half of the members of the undertaking’s administrative, managerial or supervisory body.
2. Without prejudice to their obligation as public authorities not to take measures establishing privileged access within the meaning of Article 104a of the Treaty, the European Central Bank and the national central banks shall not, for the purposes of this Article, be considered as forming part of the public sector.
3. ‘National central banks’ means the central banks of the Member States and the Luxembourg Monetary Institute.
Article 4
1. For the purposes of Article 104a of the Treaty, ‘financial institutions’ means:
credit institutions as defined in the first indent of Article 1 of Directive 77/780/EEC,5
insurance undertakings as defined in Article 1, point (a) of Directive 92/49/EEC,6
assurance undertakings as defined in Article 1, point (a) of Directive 92/96/EEC,7
UCITS as defined in Article 1(2) of Directive 85/611/EEC,8
investment firms as defined in Article 1(2) of Directive 93/22/EEC,9
other undertakings the activities of which are similar to those of the undertakings referred to in the previous indents or the principal activity of which is to acquire holdings of financial assets or to transform financial claims.
2. The following institutions do not form part of the financial institutions defined in paragraph 1:
the European Central Bank and national central banks,
post office financial services when they form part of the general government sector defined in accordance with the European System of Integrated Economic Accounts or when their main activity is to act as the financial agent of government, and
the institutions which are part of the general government sector defined in accordance with the European System of Integrated Economic Accounts or the liabilities of which correspond completely to a public debt.
Article 5
This Regulation shall enter into force on 1 January 1994.
This Regulation shall be binding in its entirety and directly applicable in all Member States.
Done at Brussels, 13 December 1993.
For the Council
The President
Ph. MAYSTADT
Appendix II 2 Protocol on the Statute of the European System of Central Banks and of the European Central Bank
[Annexed to E.C. Treaty (Article 4a)]
CHAPTER I CONSTITUTION OF THE ESCB
Article 1 (The European System of Central Banks)
1. The European System of Central Banks (ESCB) and the European Central Bank (ECB) shall be established in accordance with Article 4a of this Treaty; they shall perform their tasks and carry on their activities in accordance with the provisions of this Treaty and of this Statute.
2. In accordance with Article 106(1) of this Treaty, the ESCB shall be composed of the ECB and of the central banks of the member-States (‘national central banks’). The Institut Monétaire Luxembourgeois will be the central bank of Luxembourg.
CHAPTER II OBJECTIVES AND TASKS OF THE ESCB
Article 2 (Objectives)
In accordance with Article 105(1) of this Treaty, the primary objective of the ESCB shall be to maintain price stability.
Without prejudice to the objective of price stability, it shall support the general economic policies in the Community with a view to contributing to the achievement of the objectives of the Community as laid down in Article 2 of this Treaty.
The ESCB shall act in accordance with the principle of an open market economy with free competition, favouring an efficient allocation of resources, and in compliance with the principles set out in Article 3a of this Treaty.
Article 3 (Tasks)
1. In accordance with Article 105(2) of this Treaty, the basic tasks to be carried out through the ESCB shall be:
— to define and implement the monetary policy of the Community;
— to conduct foreign exchange operations consistent with the provisions of Article 109 of this Treaty;
— to hold and manage the official foreign reserves of the member-States;
— to promote the smooth operation of payment systems.
2. In accordance with Article 105(3) of this Treaty, the third indent of Article 3.1 shall be without prejudice to the holding and management by the governments of member-States of foreign exchange working balances.
3. In accordance with Article 105(5) of this Treaty, the ESCB shall contribute to the smooth conduct of policies pursued by the competent authorities relating to the prudential supervision of credit institutions and the stability of the financial system.
Article 4 (Advisory functions)
In accordance with Article 105(4) of this Treaty:
(a) the ECB shall be consulted:
— on any proposed Community act in its fields of competence;
by national authorities regarding any draft legislative provision in its fields of competence, but within the limits and under the conditions set out by the Council in accordance with the procedure laid down in Article 42;
(b) the ECB may submit opinions to the appropriate Community institutions or bodies or to national authorities on matters in its fields of competence.
Article 5 (Collection of statistical information)
1. In order to undertake the tasks of the ESCB, the ECB, assisted by the national central banks, shall collect the necessary statistical information either from the competent national authorities or directly from economic agents. For these purposes it shall co-operate with the Community institutions or bodies and with the competent authorities of the member-States or third countries and with international organisations.
2. The national central banks shall carry out, to the extent possible, the tasks described in Article 5.1.
3. The ECB shall contribute to the harmonisation, where necessary, of the rules and practices governing the collection, compilation and distribution of statistics in the areas within its fields of competence.
4. The Council, in accordance with the procedure laid down in Article 42, shall define the natural and legal persons subject to reporting requirements, the confidentiality regime and the appropriate provisions for enforcement.
Article 6 (International co-operation)
1. In the field of international co-operation involving the tasks entrusted to the ESCB, the ECB shall decide how the ESCB shall be represented.
2. The ECB and, subject to its approval, the national central banks may participate in international monetary institutions.
3. Articles 6.1 and 6.2 shall be without prejudice to Article 109(4) of this Treaty.
CHAPTER III: ORGANISATION OF THE ESCB
Article 7 (Independence)
In accordance with Article 107 of this Treaty, when exercising the powers and carrying out the tasks and duties conferred upon them by this Treaty and this Statute, neither the ECB, nor a national central bank, nor any member of their decision-making bodies shall seek or take instructions from Community institutions or bodies, from any government of a member-State or from any other body. The Community institutions and bodies and the governments of the member-States undertake to respect this principle and not to seek to influence the members of the decision-making bodies of the ECB or of the national central banks in the performance of their tasks.
Article 8 (General principle)
The ESCB shall be governed by the decision-making bodies of the ECB.
Article 9 (The European Central Bank)
1. The ECB which, in accordance with Article 106(2) of this Treaty, shall have legal personality, shall enjoy in each of the member-States the most extensive legal capacity accorded to legal persons under its law; it may, in particular, acquire or dispose of movable and immovable property and may be a party to legal proceedings.
2. The ECB shall ensure that the tasks conferred upon the ESCB under Article 105(2), (3), and (5) of this Treaty are implemented either by its own activities pursuant to this Statute or through the national central banks pursuant to Articles 12.1 and 14.
3. In accordance with Article 106(3) of this Treaty, the decision-making bodies of the ECB shall be the Governing Council and the Executive Board.
Article 10 (The Governing Council)
1. In accordance with Article 109a(1) of this Treaty, the Governing Council shall comprise the members of the Executive Board of the ECB and the Governors of the national central banks.
2. Subject to Article 10.3, only members of the Governing Council present in person shall have the right to vote. By way of derogation from this rule, the Rules of Procedure referred to in Article 12.3 may lay down that members of the Governing Council may cast their vote by means of teleconferencing. These rules shall also provide that a member of the Governing Council who is prevented from voting for a prolonged period may appoint an alternate as a member of the Governing Council.
Subject to Articles 10.3 and 11.3, each member of the Governing Council shall have one vote. Save as otherwise provided for in this Statute, the Governing Council shall act by a simple majority. In the event of a tie, the President shall have the casting vote.
In order for the Governing Council to vote, there shall be a quorum of two-thirds of the members. If the quorum is not met, the President may convene an extraordinary meeting at which decisions may be taken without regard to the quorum.
3. For any decisions to be taken under Articles 28, 29, 30, 32, 33 and 51, the votes in the Governing Council shall be weighted according to the national central banks’ shares in the subscribed capital of the ECB. The weights of the votes of the members of the Executive Board shall be zero. A decision requiring a qualified majority shall be adopted if the votes cast in favour represent at least two thirds of the subscribed capital of the ECB and represent at least half of the shareholders. If a Governor is unable to be present, he may nominate an alternate to cast his weighted vote.
4. The proceedings of the meetings shall be confidential. The Governing Council may decide to make the outcome of its deliberations public.
5. The Governing Council shall meet at least ten times a year.
Article 11 (The Executive Board)
1. In accordance with Article 109a(2)(a) of this Treaty, the Executive Board shall comprise the President, the Vice-President and four other members.
The members shall perform their duties on a full-time basis. No member shall engage in any occupation, whether gainful or not, unless exemption is exceptionally granted by the Governing Council.
2. In accordance with Article 109a(2)(b) of this Treaty, the President, the Vice-President and the other Members of the Executive Board shall be appointed from among persons of recognised standing and professional experience in monetary or banking matters by common accord of the governments of the member-States at the level of the Heads of State or of Government, on a recommendation from the Council after it has consulted the European Parliament and the Governing Council.
Their term of office shall be eight years and shall not be renewable.
Only nationals of member-States may be members of the Executive Board.
3. The terms and conditions of employment of the members of the Executive Board, in particular their salaries, pensions and other social security benefits shall be the subject of contracts with the ECB and shall be fixed by the Governing Council on a proposal from a Committee comprising three members appointed by the Governing Council and three members appointed by the Council. The members of the Executive Board shall not have the right to vote on matters referred to in this paragraph.
4. If a member of the Executive Board no longer fulfils the conditions required for the performance of his duties or if he has been guilty of serious misconduct, the Court of Justice may, on application by the Governing Council or the Executive Board, compulsorily retire him.
5. Each member of the Executive Board present in person shall have the right to vote and shall have, for that purpose, one vote. Save as otherwise provided, the Executive Board shall act by a simple majority of the votes cast. In the event of a tie, the President shall have the casting vote. The voting arrangements shall be specified in the Rules of Procedure referred to in Article 12.3.
6. The Executive Board shall be responsible for the current business of the ECB.
7. Any vacancy on the Executive Board shall be filled by the appointment of a new member in accordance with Article 11.2.
Article 12 (Responsibilities of the decision-making bodies)
1. The Governing Council shall adopt the guidelines and take the decisions necessary to ensure the performance of the tasks entrusted to the ESCB under this Treaty and this Statute. The Governing Council shall formulate the monetary policy of the Community including, as appropriate, decisions relating to intermediate monetary objectives, key interest rates and the supply of reserves in the ESCB, and shall establish the necessary guidelines for their implementation.
The Executive Board shall implement monetary policy in accordance with the guidelines and decisions laid down by the Governing Council. In doing so the Executive Board shall give the necessary instructions to national central banks. In addition the Executive Board may have certain powers delegated to it where the Governing Council so decides.
To the extent deemed possible and appropriate and without prejudice to the provisions of this Article, the ECB shall have recourse to the national central banks to carry out operations which form part of the tasks of the ESCB.
2. The Executive Board shall have responsibility for the preparation of meetings of the Governing Council.
3. The Governing Council shall adopt Rules of Procedure which determine the internal organisation of the ECB and its decision-making bodies.
4. The Governing Council shall exercise the advisory functions referred to in Article 4.
5. The Governing Council shall take the decisions referred to in Article 6.
Article 13 (The President)
1. The President or, in his absence, the Vice-President shall chair the Governing Council and the Executive Board of the ECB.
2. Without prejudice to Article 39, the President or his nominee shall represent the ECB externally.
Article 14 (National central banks)
1. In accordance with Article 108 of this Treaty, each member-State shall ensure, at the latest at the date of the establishment of the ESCB, that its national legislation, including the statutes of its national central bank, is compatible with this Treaty and this Statute.
2. The statutes of the national central banks shall, in particular, provide that the term of office of a Governor of a national central bank shall be no less than five years.
A Governor may be relieved from office only if he no longer fulfils the conditions required for the performance of his duties or if he has been guilty of serious misconduct.
A decision to this effect may be referred to the Court of Justice by the Governor concerned or the Governing Council on grounds of infringement of this Treaty or of any rule of law relating to its application. Such proceedings shall be instituted within two months of the publication of the decision or of its notification to the plaintiff or, in the absence thereof, of the day on which it came to the knowledge of the latter, as the case may be.
3. The national central banks are an integral part of the ESCB and shall act in accordance with the guidelines and instructions of the ECB. The Governing Council shall take the necessary steps to ensure compliance with the guidelines and instructions of the ECB, and shall require that any necessary information be given to it.
4. National central banks may perform functions other than those specified in this Statute unless the Governing Council finds, by a majority of two thirds of the votes cast, that these interfere with the objectives and tasks of the ESCB. Such functions shall be performed on the responsibility and liability of national central banks and shall not be regarded as being part of the functions of the ESCB.
Article 15 (Reporting commitments)
1. The ECB shall draw up and publish reports on the activities of the ESCB at least quarterly.
2. A consolidated financial statement of the ESCB shall be published each week.
3. In accordance with Article 109b(3) of this Treaty, the ECB shall address an annual report on the activities of the ESCB and on the monetary policy of both the previous and the current year to the European Parliament, the Council and the Commission, and also to the European Council.
4. The reports and statements referred to in this Article shall be made available to interested parties free of charge.
Article 16 (Bunk notes)
In accordance with Article 105a(1) of this Treaty, the Governing Council shall have the exclusive right to authorise the issue of bank notes within the Community.
The ECB and the national central banks may issue such notes. The bank notes issued by the ECB and the national central banks shall be the only such notes to have the status of legal tender within the Community.
The ECB shall respect as far as possible existing practices regarding the issue and design of bank notes.
CHAPTER IV MONETARY FUNCTIONS AND OPERATIONS OF THE ESCB
Article 17 (Accounts with the ECB and the national central banks)
In order to conduct their operations, the ECB and the national central banks may open accounts for credit institutions, public entities and other market participants and accept assets, including book-entry securities, as collateral.
Article 18 (Open market and credit operations)
1. In order to achieve the objectives of the ESCB and to carry out its tasks, the ECB and the national central banks may:
— operate in the financial markets by buying and selling outright (spot and forward) or under repurchase agreement and by lending or borrowing claims and marketable instruments, whether in Community or in non-Community currencies, as well as precious metals;
— conduct credit operations with credit institutions and other market participants, with lending being based on adequate collateral.
2. The ECB shall establish general principles for open market and credit operations carried out by itself or the national central banks, including for the announcement of conditions under which they stand ready to enter into such transactions.
Article 19 (Minimum reserves)
1. Subject to Article 2, the ECB may require credit institutions established in member-States to hold minimum reserves on accounts with the ECB and national central banks in pursuance of monetary policy objectives. Regulations concerning the calculation and determination of the required minimum reserves may be established by the Governing Council. In cases of non-compliance the ECB shall be entitled to levy penalty interest and to impose other sanctions with comparable effect.
2. For the application of this Article, the Council shall, in accordance with the procedure laid down in Article 42, define the basis for minimum reserves and the maximum permissible ratios between those reserves and their basis, as well as the appropriate sanctions in cases of non-compliance.
Article 20 (Other instruments of monetary control)
The Governing Council may, by a majority of two thirds of the votes cast, decide upon the use of such other operational methods of monetary control as it sees fit, respecting Article 2.
The Council shall, in accordance with the procedure laid down in Article 42, define the scope of such methods if they impose obligations on third parties.
Article 21 (Operations with public entities)
1. In accordance with Article 104 of this Treaty, overdrafts or any other type of credit facility with the ECB or with the national central banks in favour of Community institutions or bodies, central governments, regional, local or other public authorities, other bodies governed by public law or public undertakings of member-States shall be prohibited, as shall the purchase directly from them by the ECB or national central banks of debt instruments.
2. The ECB and national central banks may act as fiscal agents for the entities referred to in Article 21.1.
3. The provisions of this Article shall not apply to publicly-owned credit institutions which, in the context of the supply of reserves by central banks, shall be given the same treatment by national central banks and the ECB as private credit institutions.
Article 22 (Clearing and payment systems)
The ECB and national central banks may provide facilities, and the ECB may make regulations, to ensure efficient and sound clearing and payment systems within the Community and with other countries.
Article 23 (External operations)
The ECB and national central banks may:
— establish relations with central banks and financial institutions in other countries and, where appropriate, with international organisations;
— acquire and sell spot and forward all types of foreign exchange assets and precious metals; the term ‘foreign exchange asset’ shall include securities and all other assets in the currency of any country or units of account and in whatever form held;
— hold and manage the assets referred to in this Article;
— conduct all types of banking transactions in relations with third countries and international organisations, including borrowing and lending operations.
Article 24 (Other operations)
In addition to operations arising from their tasks, the ECB and national central banks may enter into operations for their administrative purposes or for their staff.
CHAPTER V PRUDENTIAL SUPERVISION
Article 25 (Prudential supervision)
1. The ECB may offer advice to and be consulted by the Council, the Commission and the competent authorities of the member-States on the scope and implementation of Community legislation relating to the prudential supervision of credit institutions and to the stability of the financial system.
2. In accordance with any decision of the Council under Article 105(6) of this Treaty, the ECB may perform specific tasks concerning policies relating to the prudential supervision of credit institutions and other financial institutions with the exception of insurance undertakings.
CHAPTER VI FINANCIAL PROVISIONS OF THE ESCB
Article 26 (Financial accounts)
1. The financial year of the ECB and national central banks shall begin on the first day of January and end on the last day of December.
2. The annual accounts of the ECB shall be drawn up by the Executive Board, in accordance with the principles established by the Governing Council.
The accounts shall be approved by the Governing Council and shall thereafter be published.
3. For analytical and operational purposes, the Executive Board shall draw up a consolidated balance sheet of the ESCB, comprising those assets and liabilities of the national central banks that fall within the ESCB.
4. For the application of this Article, the Governing Council shall establish the necessary rules for standardising the accounting and reporting of operations undertaken by the national central banks.
Article 27 (Auditing)
1. The accounts of the ECB and national central banks shall be audited by independent external auditors recommended by the Governing Council and approved by the Council.
The auditors shall have full power to examine all books and accounts of the ECB and national central banks and obtain full information about their transactions.
2. The provisions of Article 188b of this Treaty shall only apply to an examination of the operational efficiency of the management of the ECB.
Article 28 (Capital of the ECB)
1. The capital of the ECB, which shall become operational upon its establishment, shall be 5,000 million ECUs.
The capital may be increased by such amounts as may be decided by the Governing Council acting by the qualified majority provided for in Article 10.3, within the limits and under the conditions set by the Council under the procedure laid down in Article 42.
2. The national central banks shall be the sole subscribers to and holders of the capital of the ECB. The subscription of capital shall be according to the key established in accordance with Article 29.
3. The Governing Council, acting by the qualified majority provided for in Article 10.3, shall determine the extent to which and the form in which the capital shall be paid up.
4. Subject to Article 28.5, the shares of the national central banks in the subscribed capital of the ECB may not be transferred, pledged or attached.
5. If the key referred to in Article 29 is adjusted, the national central banks shall transfer among themselves capital shares to the extent necessary to ensure that the distribution of capital shares corresponds to the adjusted key.
The Governing Council shall determine the terms and conditions of such transfers.
Article 29 (Key for capital subscription)
1. When in accordance with the procedure referred to in Article 1091(1) of this Treaty the ESCB and the ECB have been established, the key for subscription of the ECB’s capital shall be established. Each national central bank shall be assigned a weighting in this key which shall be equal to the sum of:
— 50 per cent. of the share of its respective member-State in the population of the Community in the penultimate year preceding the establishment of the ESCB;
— 50 per cent. of the share of its respective member-State in the gross domestic product at market prices of the Community as recorded in the last five years preceding the penultimate year before the establishment of the ESCB;
The percentages shall be rounded up to the nearest multiple of 0.05 per cent. points.
2. The statistical data to be used for the application of this Article shall be provided by the Commission in accordance with the rules adopted by the Council under the procedure provided for in Article 42.
3. The weightings assigned to the national central banks shall be adjusted every five years after the establishment of the ESCB by analogy with the provisions laid down in Article 29.1.
The adjusted key shall apply with effect from the first day of the following year.
4. The Governing Council shall take all other measures necessary for the application of this Article.
Article 30 (Transfer of foreign reserve assets to the ECB)
1. Without prejudice to Article 28, the ECB shall be provided by the national central banks with foreign reserve assets, other than member-States’ currencies, ECUs, IMF reserve positions and SDRs, up to an amount equivalent to 50,000 million ECUs. The Governing Council shall decide upon the proportion to be called up by the ECB following its establishment and the amounts called up at later dates.
The ECB shall have the full right to hold and manage the foreign reserves that are transferred to it and to use them for the purposes set out in this Statute.
2. The contributions of each national central bank shall be fixed in proportion to its share in the subscribed capital of the ECB.
3. Each national central bank shall be credited by the ECB with a claim equivalent to its contribution.
The Governing Council shall determine the denomination and remuneration of such claims.
4. Further calls of foreign reserve assets beyond the limit set in Article 30.1 may be effected by the ECB, in accordance with Article 30.2, within the limits and under the conditions set by the Council in accordance with the procedure laid down in Article 42.
5. The ECB may hold and manage IMF reserve positions and SDRs and provide for the pooling of such assets.
6. The Governing Council shall take all other measures necessary for the application of this Article.
Article 31 (Foreign reserve assets held by national central banks)
1. The national central banks shall be allowed to perform transactions in fulfilment of their obligations towards international organisations in accordance with Article 23.
2. All other operations in foreign reserve assets remaining with the national central banks after the transfers referred to in Article 30, and member-States’ transactions with their foreign exchange working balances shall, above a certain limit to be established within the framework of Article 31.3, be subject to approval by the ECB in order to ensure consistency with the exchange rate and monetary policies of the Community.
3. The Governing Council shall issue guidelines with a view to facilitating such operations.
Article 32 (Allocation of monetary income of national central banks)
1. The income accruing to the national central banks in the performance of the ESCB’s monetary policy function (hereinafter referred to as ‘monetary income’) shall be allocated at the end of each financial year in accordance with the provisions of this Article.
2. Subject to Article 32.3, the amount of each national central bank’s monetary income shall be equal to its annual income derived from its assets held against notes in circulation and deposit liabilities to credit institutions. These assets shall be earmarked by national central banks in accordance with guidelines to be established by the Governing Council.
3. If, after the start of the third stage, the balance sheet structure of the national central banks do not, in the judgment of the Governing Council, permit the application of Article 32.2, the Governing Council, acting by a qualified majority, may decide that, by way of derogation from Article 32.2, monetary income shall be measured according to an alternative method for a period of not more than five years.
4. The amount of each national central bank’s monetary income shall be reduced by an amount equivalent to any interest paid by that central bank on its deposit liabilities to credit institutions in accordance with Article 19.
The Governing Council may decide that national central banks shall be indemnified against costs incurred in connection with the issue of bank notes or in exceptional circumstances for specific losses arising from monetary policy operations undertaken for the ESCB.
Indemnification shall be in a form deemed appropriate in the judgment of the Governing Council; these amounts may be offset against the national central banks’ monetary income.
5. The sum of the national central banks’ monetary income shall be allocated to the national central banks in proportion to their paid-up shares in the capital of the ECB, subject to any decision taken by the Governing Council pursuant to Article 33.2.
6. The clearing and settlement of the balances arising from the allocation of monetary income shall be carried out by the ECB in accordance with guidelines established by the Governing Council.
7. The Governing Council shall take all other measures necessary for the application of this Article.
Article 33 (Allocation of net profits and losses of the ECB)
1. The net profit of the ECB shall be transferred in the following order:
(a) an amount to be determined by the Governing Council, which may not exceed 20 per cent. of the net profit, shall be transferred to the general reserve fund subject to a limit equal to 100 per cent. of the capital;
(b) the remaining net profit shall be distributed to the shareholders of the ECB in proportion to their paid-up shares.
2. In the event of a loss incurred by the ECB, the shortfall may be offset against the general reserve fund of the ECB and, if necessary, following a decision by the Governing Council, against the monetary income of the relevant financial year in proportion and up to the amounts allocated to the national central banks in accordance with Article 32.5.
CHAPTER VII GENERAL PROVISIONS
Article 34 (Legal acts)
1. In accordance with Article 108a of this Treaty, the ECB shall:
— make regulations to the extent necessary to implement the tasks defined in Article 3.1, first indent, Articles 19.1, 22 or 25.2 and in cases which shall be laid down in the acts of the Council referred to in Article 42;
— take decisions necessary for carrying out the tasks entrusted to the ESCB under this Treaty and this Statute;
— make recommendations and deliver opinions.
2. A regulation shall have general application. It shall be binding in its entirety and directly applicable in all member-States.
Recommendations and opinions shall have no binding force.
A decision shall be binding in its entirety upon those to whom it is addressed.
Articles 190 and 192 of this Treaty shall apply to regulations and decisions adopted by the ECB.
The ECB may decide to publish its decisions, recommendations and opinions.
3. Within the limits and under the conditions adopted by the Council under the procedure laid down in Article 42, the ECB shall be entitled to impose fines or periodic penalty payments on undertakings for failure to comply with obligations under its regulations and decisions.
Article 35 (Judicial control and related matters)
1. The acts or omissions of the ECB shall be open to review or interpretation by the Court of Justice in the cases and under the conditions laid down in this Treaty.
The ECB may institute proceedings in the cases and under the conditions laid down in this Treaty.
2. Disputes between the ECB, on the one hand, and its creditors, debtors or any other person, on the other, shall be decided by the competent national courts, save where jurisdiction has been conferred upon the Court of Justice.
3. The ECB shall be subject to the liability regime provided for in Article 215 of this Treaty.
The national central banks shall be liable according to their respective national laws.
4. The Court of Justice shall have jurisdiction to give judgment pursuant to any arbitration clause contained in a contract concluded by or on behalf of the ECB, whether that contract be governed by public or private law.
5. A decision of the ECB to bring an action before the Court of Justice shall be taken by the Governing Council.
6. The Court of Justice shall have jurisdiction in disputes concerning the fulfilment by a national central bank of obligations under this Statute.
If the ECB considers that a national central bank has failed to fulfil an obligation under this Statute, it shall deliver a reasoned opinion on the matter after giving the national central bank concerned the opportunity to submit its observations.
If the national central bank concerned does not comply with the opinion within the period laid down by the ECB, the latter may bring the matter before the Court of Justice.
Article 36 (Staff)
1. The Governing Council, on a proposal from the Executive Board, shall lay down the conditions of employment of the staff of the ECB.
2. The Court of Justice shall have jurisdiction in any dispute between the ECB and its servants within the limits and under the conditions laid down in the conditions of employment.
Article 37 (Seat)
Before the end of 1992, the decision as to where the seat of the ECB will be established shall be taken by common accord of the governments of the member-States at the level of Heads of State or of Government.
Article 38 (Professional secrecy)
1. Members of the governing bodies and the staff of the ECB and the national central banks shall be required, even after their duties have ceased, not to disclose information of the kind covered by the obligation of professional secrecy.
2. Persons having access to data covered by Community legislation imposing an obligation of secrecy shall be subject to such legislation.
Article 39 (Signatories)
The ECB shall be legally committed to third parties by the President or by two members of the Executive Board or by the signatures of two members of the staff of the ECB who have been duly authorised by the President to sign on behalf of the ECB.
Article 40 (Privileges and immunities)
The ECB shall enjoy in the territories of the member-States such privileges and immunities as are necessary for the performance of its tasks, under the conditions laid down in the Protocol on the Privileges and Immunities of the European Communities annexed to the Treaty establishing a Single Council and a Single Commission of the European Communities.
CHAPTER VIII AMENDMENT OF THE STATUTE AND COMPLEMENTARY LEGISLATION
Article 41 (Simplified amendment procedure)
1. In accordance with Article 106(5) of this Treaty, Articles 5.1, 5.2, 5.3, 17, 18, 19.1, 22, 23, 24, 26, 32.2, 32.3, 32.4, 32.6, 33.1(a) and 36 of this Statute may be amended by the Council, acting either by a qualified majority on a recommendation from the ECB and after consulting the Commission, or unanimously on a proposal from the Commission and after consulting the ECB. In either case the assent of the European Parliament shall be required.
2. A recommendation made by the ECB under this Article shall require a unanimous decision by the Governing Council.
Article 42 (Complementary legislation)
In accordance with Article 106(6) of this Treaty, immediately after the decision on the date for the beginning of the third stage, the Council, acting by a qualified majority either on a proposal from the Commission and after consulting the European Parliament and the ECB, or on a recommendation from the ECB and after consulting the European Parliament and the Commission, shall adopt the provisions referred to in Articles 4, 5.4, 19.2, 20, 28.1, 29.2, 30.4 and 34.3 of this Statute.
CHAPTER IX TRANSITIONAL AND OTHER PROVISIONS FOR THE ESCB
Article 43 (General Provisions)
1. A derogation as referred to in Article 109k(1) of this Treaty shall entail that the following Articles of this Statute shall not confer any rights or impose any obligations on the member-State concerned: 3, 6, 9.2, 12.1, 14.3, 16, 18, 19, 20, 22, 23, 26.2, 27, 30, 31, 32, 33, 34, 50 and 52.
2. The central banks of member-States with a derogation as specified in Article 109k(1) of this Treaty shall retain their powers in the field of monetary policy according to national law.
3. In accordance with Article 109k(4) of this Treaty, ‘member-States’ shall be read as ‘member-States without a derogation’ in the following Articles of this Statute: 3, 11.2, 19, 34.2 and 50.
4. ‘National central banks’ shall be read as ‘central banks of member-States without a derogation’ in the following Articles of this Statute: 9.2, 10.1, 10.3, 12.1, 16, 17, 18, 22, 23, 27, 30, 31, 32, 33.2 and 52.
5. ‘Shareholders’ shall be read as ‘central banks of member-States without a derogation’ in Articles 10.3 and 33.1.
6. ‘Subscribed capital of the ECB’ shall be read as ‘capital of the ECB subscribed by the central banks of member-States without a derogation’ in Articles 10.3 and 30.2.
Article 44 (Transitional tasks of the ECB)
The ECB shall take over those tasks of the EMI which, because of the derogations of one or more member-States, still have to be performed in the third stage.
The ECB shall give advice in the preparations for the abrogation of the derogations specified in Article 1091 of this Treaty.
Article 45 (The General Council of the ECB)
1. Without prejudice to Article 106(3) of this Treaty, the General Council shall be constituted as a third decision-making body of the ECB.
2. The General Council shall comprise the President and Vice-President of the ECB and the Governors of the national central banks. The other members of the Executive Board may participate, without having the right to vote, in meetings of the General Council.
3. The responsibilities of the General Council are listed in full in Article 47 of this Statute.
Article 46 (Rules of procedure of the General Council)
1. The President or, in his absence, the Vice-President of the ECB shall chair the General Council of the ECB.
2. The President of the Council and a member of the Commission may participate, without having the right to vote, in meetings of the General Council.
3. The President shall prepare the meetings of the General Council.
4. By way of derogation from Article 12.3, the General Council shall adopt its Rules of Procedure.
5. The Secretariat of the General Council shall be provided by the ECB.
Article 47 (Responsibilities of the General Council)
1. The General Council shall:
— perform the tasks referred to in Article 44;
— contribute to the advisory functions referred to in Articles 4 and 25.1.
2. The General Council shall contribute to:
— the collection of statistical information as referred to in Article 5;
—the reporting activities of the ECB as referred to in Article 15;
—the establishment of the necessary rules for the application of Article 26 as referred to in Article 26.4;
—the taking of all other measures necessary for the application of Article 29 as referred to in Article 29.4;
—the laying down of the conditions of employment of the staff of the ECB as referred to in Article 36.
3. The General Council shall contribute to the necessary preparations for irrevocably fixing the exchange rates of the currencies of member-States with a derogation against the currencies, or the single currency, of the member-States without a derogation, as referred to in Article 109l(5) of this Treaty.
4. The General Council shall be informed by the President of the ECB of decisions of the Governing Council.
Article 48 (Transitional provisions for the capital of the ECB)
In accordance with Article 29.1 each national central bank shall be assigned a weighting in the key for subscription of the ECB’s capital.
By way of derogation from Article 28.3, central banks of member-States with a derogation shall not pay up their subscribed capital unless the General Council, acting by a majority representing at least two thirds of the subscribed capital of the ECB and at least half of the shareholders, decides that a minimal percentage has to be paid up as a contribution to the operational costs of the ECB.
Article 49 (Deferred payment of capital, reserves and provisions of the ECB)
1. The central bank of a member-State whose derogation has been abrogated shall pay up its subscribed share of the capital of the ECB to the same extent as the central banks of other member-States without a derogation, and shall transfer to the ECB foreign reserve assets in accordance with Article 30.1. The sum to be transferred shall be determined by multiplying the ECU value at current exchange rates of the foreign reserve assets which have already been transferred to the ECB in accordance with Article 30.1, by the ratio between the number of shares subscribed by the national central bank concerned and the number of shares already paid up by the other national central banks.
2. In addition to the payment to be made in accordance with Article 49.1, the central bank concerned shall contribute to the reserves of the ECB, to those provisions equivalent to reserves, and to the amount still to be appropriated to the reserves and provisions corresponding to the balance of the profit and loss account as at 31 December of the year prior to the abrogation of the derogation. The sum to be contributed shall be determined by multiplying the amount of the reserves, as defined above and as stated in the approved balance sheet of the ECB, by the ratio between the number of shares subscribed by the central bank concerned and the number of shares already paid up by the other central banks.
Article 50 (Initial appointment of the members of the Executive Board)
When the Executive Board of the ECB is being established, the President, the Vice-President and the other members of the Executive Board shall be appointed by common accord of the governments of the member-States at the level of Heads of State or of Government, on a recommendation from the Council and after consulting the European Parliament and the Council of the EMI. The President of the Executive Board shall be appointed for eight years. By way of derogation from Article 11.2, the Vice-President shall be appointed for four years and the other members of the Executive Board for terms of office of between five and eight years. No term of office shall be renewable. The number of members of the Executive Board may be smaller than provided for in Article 11.1, but in no circumstance shall it be less than four.
Article 51 (Derogation from Article 32)
1. If, after the start of the third stage, the Governing Council decides that the application of Article 32 results in significant changes in national central banks’ relative income positions, the amount of income to be allocated pursuant to Article 32 shall be reduced by a uniform percentage which shall not exceed 60 per cent in the first financial year after the start of the third stage and which shall decrease by at least 12 percentage points in each subsequent financial year.
2. Article 51.1 shall be applicable for not more than five financial years after the start of the third stage.
Article 52 (Exchange of bank notes in Community currencies)
Following the irrevocable fixing of exchange rates, the Governing Council shall take the necessary measures to ensure that bank notes denominated in currencies with irrevocably fixed exchange rates are exchanged by the national central banks at their respective par values.
Article 53 (Applicability of the transitional provisions)
If and as long as there are member-States with a derogation Articles 43 to 48 shall be applicable.
Appendix II 3 Protocol on the Excessive Deficit Procedure
[Annexed to E.C. Treaty (Article 104c)]
Article 1
The reference values referred to in Article 104c(2) of this Treaty are:
— 3 percent for the ratio of the planned or actual government deficit to gross domestic product at market prices;
— 60 percent for the ratio of government debt to gross domestic product at market prices.
Article 2
In Article 104c of this Treaty and in this Protocol:
— government means general government, that is central government, regional or local government and social security funds, to the exclusion of commercial operations, as defined in the European System of Integrated Economic Accounts;
— deficit means net borrowing as defined in the European System of Integrated Economic Accounts;
—investment means gross fixed capital formation as defined in the European System of Integrated Economic Accounts;
—debt means total gross debt at nominal value outstanding at the end of the year and consolidated between and within the sectors of general government as defined in the first indent.
Article 3
In order to ensure the effectiveness of the excessive deficit procedure, the governments of the member-States shall be responsible under this procedure for the deficits of general government as defined in the first indent of Article 2. The member-States shall ensure that national procedures in the budgetary area enable them to meet their obligations in this area deriving from this Treaty. The member-States shall report their planned and actual deficits and the levels of their debt promptly and regularly to the Commission.
Article 4
The statistical data to be used for the application of this Protocol shall be provided by the Commission.
Appendix II 3a EC Regulation on the Application of the Protocol on the Excessive Deficit Procedure Annexed to the Treaty Establishing the European Community
Council Regulation (EC) 3605/931 of 22 November 1993
on the application of the protocol on the excessive deficit procedure annexed to the Treaty Establishing the European Community
The Council of the European Union,
Having regard to the Treaty establishing the European Community, and in particular the third subparagraph of Article 104c(14) thereof,
Having regard to the proposal from the Commission,2
Having regard to the opinion of the European Parliament,3
Whereas the definitions of ‘government’, ‘deficit’ and ‘investment’ are laid down in the Protocol on the excessive deficit procedure by reference to the European System of Integrated Economic Accounts (ESA);4 whereas precise definitions referring to the classification codes of ESA are required; whereas these definitions may be subject to revision in the context of the necessary harmonization of national statistics or for other reasons; whereas any revision of ESA will be decided by the Council in accordance with the rules on competence and procedure laid down in the Treaty;
Whereas the definition of ‘debt’ laid down in the Protocol on the excessive deficit procedure needs to be amplified by a reference to the classification codes of ESA;
Whereas Council Directive 89/130/EEC, Euratom of 13 February 1989 on the harmonization of the compilation of gross national product at market prices5 provides an adequate, detailed definition of gross domestic product at market prices;
Whereas, pursuant to the terms of the Protocol on the excessive deficit procedure, the Commission is required to provide the statistical data to be used in that procedure;
Whereas detailed rules are required to organize the prompt and regular reporting by the Member States to the Commission of their planned and actual deficits and of the levels of their debt;
Whereas, pursuant to Article 104c(2) and (3) of the Treaty, the Commission is to monitor the development of the budgetary situation and of the stock of government debt in the Member States and to examine compliance with budgetary discipline on the basis of criteria relating to government deficit and government debt; whereas, if a Member State does not fulfil the requirements under one or both criteria, the Commission must take into account all relevant factors; whereas the Commission has to examine whether there is a risk of an excessive deficit in a Member State,
HAS ADOPTED THIS REGULATION:
SECTION 1. Definitions
Article 1
1. For the purposes of the Protocol on the excessive deficit procedure and of this Regulation, the terms given in the following paragraphs are defined according to the European System of Integrated Economic Accounts (ESA). The codes in brackets refer to ESA, second edition.
2. ‘Government’ means the sector of general government (S60), that is central government (S61), local government (S62) and social security funds (S63), to the exclusion of commercial operations, as defined in ESA. The exclusion of commercial operations means that the sector of general government (S60) comprises only institutional units producing non-market services as their main activity.
3. ‘Government deficit (surplus)’ means the net borrowing (net lending) (N5) of the sector of general government (S60), as defined in ESA. The interest comprised in the government deficit is the sum of interest (R41), as defined in ESA.
4. ‘Government investment’ means the gross fixed capital formation (P41) of the sector of general government (S60), as defined in ESA.
5. ‘Government debt’ means the total gross debt at nominal value outstanding at the end of the year of the sector of general government (S60), with the exception of those liabilities the corresponding financial assets of which are held by the sector of general government (S60). Government debt is constituted by the liabilities of general government in the following categories: currency and deposits (F20 and F30), bills and short-term bonds (F40), long-term bonds (F50), other short-term loans (F79) and other medium and long-term loans (F89) as defined in ESA.
The nominal value of a liability outstanding at the end of the year is the face value.
The nominal value of an index-linked liability corresponds to its face value adjusted by the index-related capital uplift accrued to the end of the year.
Liabilities denominated in foreign currencies shall be converted into the national currency at the representative market exchange rate prevailing on the last working day of each year.
Article 2
Gross domestic product means gross domestic product at market prices (GDP mp), as defined in Article 2 of Directive 89/130/EEC, Euratom.
Article 3
1. Planned government deficit figures mean the figures established for the current year by the Member States consistent with the most recent decisions of their budgetary authorities.
2. Actual government deficit and government debt level figures mean estimated, provisional, half-finalized or final results for a past year.
SECTION 2. Rules and coverage of reporting
Article 4
1. As from the beginning of 1994, Member States shall report to the Commission their planned and actual government deficits and levels of government debt twice a year, the first time before 1 March of the current year (year n) and the second time before 1 September of year n.
2. Before 1 March of year n, Member States:
shall report to the Commission their planned government deficit for year n, an up-to-date estimate of their actual government deficit for year n-1 and their actual government deficits for years n-2, n-3 and n-4,
shall simultaneously provide the Commission for years n, n-1 and n-2 with their corresponding public accounts budget deficits according to the definition which is given most prominence nationally and with the figures which explain the transition between this public accounts budget deficit and their government deficit. The figures explaining this transition which are provided to the Commission shall include, in particular, the figures for net borrowing of the subsectors S61, S62 and S63,
shall report to the Commission their estimate of the level of actual government debt at the end of year n-1 and their levels of actual government debt for years n-2, n-3 and n-4,
shall simultaneously provide the Commission for years n-1 and n-2 with the figures which explain the contributions of their government deficit and the other relevant factors contributing to the variation in the level of their government debt.
3. Before 1 September of year n, Member States shall report to the Commission:
their updated planned government deficit for year n and their actual government deficits for years n-1, n-2, n-3 and n-4 and shall comply with the requirements of the second indent of paragraph 2,
their actual level of government debt for years n-1, n-2, n-3 and n-4, and shall comply with the requirements of the fourth indent of paragraph 2.
4. The figures for the planned government deficit reported to the Commission in accordance with paragraphs 2 and 3 shall be expressed in national currency and in budget years.
The figures for actual government deficit and actual government debt level reported to the Commission in accordance with paragraphs 2 and 3 shall be expressed in national currency and in calendar years, with the exception of the up-to-date estimates for year n-1, which may be expressed in budget years.
Where the budget year differs from the calendar year, Member States shall also report to the Commission their figures for actual government deficit and actual government debt level in budget years for the two budget years preceding the current budget year.
Article 5
Member States shall, in accordance with the procedure laid down in Article 4 (1), (2) and (3), provide the Commission with the figures for their government investment expenditure and interest expenditure.
Article 6
Member States shall provide the Commission with a forecast of their gross domestic product for year n and the actual amount of their gross domestic product for years n-1, n-2, n-3 and n-4, under the same timing conditions as those indicated in Article 4(1).
Article 7
In the event of a revision of ESA to be decided on by the Council in accordance with the rules on competence and procedure laid down in the Treaty, the Commission shall introduce the new references to ESA into Articles 1 and 4.
Article 8
This Regulation shall enter into force on 1 January 1994. This Regulation shall be binding in its entirety and directly applicable in all Member States.
Done at Brussels, 22 November 1993.
For the Council
The President
Ph. MAYSTADT
Appendix II 4 Protocol on the Convergence Criteria Referred to in Article 109j of the Treaty Establishing the European Community
[Annexed to E.C. Treaty (Article 109j)]
Article 1
The criterion on price stability referred to in the first indent of Article 109j(1) of this Treaty shall mean that a member-State has a price performance that is sustainable and an average rate of inflation, observed over a period of one year before the examination, that does not exceed by more than 1½ percentage points that of, at most, the three best performing member-States in terms of price stability. Inflation shall be measured by means of the consumer price index (CPI) on a comparable basis, taking into account differences in national definitions.
Article 2
The criterion on the government budgetary position referred to in the second indent of Article 109j(1) of this Treaty shall mean that at the time of the examination the member-State is not the subject of a Council decision under Article 104c(6) of this Treaty that an excessive deficit exists.
Article 3
The criterion on participation in the Exchange Rate Mechanism of the European Monetary System referred to in the third indent of Article 109j(1) of this Treaty shall mean that a member-State has respected the normal fluctuation margins provided for by the Exchange Rate Mechanism of the European Monetary System without severe tensions for at least the last two years before the examination. In particular, the member-State shall not have devalued its currency’s bilateral central rate against any other member-State’s currency on its own initiative for the same period.
Article 4
The criterion on the convergence of interest rates referred to in the fourth indent of Article 109j(1) of this Treaty shall mean that, observed over a period of one year before the examination, a member-State has had an average nominal long-term interest rate that does not exceed by more than 2 percentage points that of, at most, the three best performing member-States in terms of price stability. Interest rates shall be measured on the basis of long term government bonds or comparable securities, taking into account differences in national definitions.
Article 5
The statistical data to be used for the application of this Protocol shall be provided by the Commission.
Article 6
The Council shall, acting unanimously on a proposal from the Commission and after consulting the European Parliament, the EMI or the ECB as the case may be, and the Committee referred to in Article 109c, adopt appropriate provisions to lay down the details of the convergence criteria referred to in Article 109j of this Treaty, which shall then replace this Protocol.
Appendix II 5 EC Directive on the Annual Accounts and Consolidated Accounts of Banks and Other Financial Institutions
Council Directive1 8 December 1986 on the annual accounts and consolidated accounts of banks and other financial institutions (86/635/EEC)
The Council of the European Communities,
Having regard to the Treaty establishing the European Community, and in particular Article 54 (3)(g) thereof,
Having regard to the proposal from the Commission, 2
Having regard to the opinion of the European Parliament, 3
Having regard to the opinion of the Economic and Social Committee, 4
Whereas Council Directive 78/ 660/ EEC of 25 July 1978, based on Article 54(3)(g) of the Treaty, on the annual accounts of certain types of companies, 5 as last amended by Directive 84/ 569/ EEC,6 need not be applied to banks and other financial institutions, hereafter referred to as ‘credit institutions’, pending subsequent coordination; whereas in view of the central importance of these undertakings in the Community, such coordination is necessary;
Whereas Council Directive 83/ 349/ EEC of 13 June 1983, based on Article 54(3)(g) of the Treaty, on consolidated accounts,7 provides for derogations for credit institutions only until expiry of the deadline imposed for the application of this Directive; whereas this Directive must therefore also include provisions specific to credit institutions in respect of consolidated accounts;
Whereas such coordination has also become urgent because more and more credit institutions are operating across national borders; whereas for creditors, debtors and members and for the general public improved comparability of the annual accounts and consolidated accounts of these institutions is of crucial importance;
Whereas in virtually all the Member States of the Community credit institutions within the meaning of 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 having many different legal forms, are in competition with one another in the banking sector; whereas it therefore seems advisable not to confine coordination in respect of these credit institutions to the legal forms covered by Directive 78/660/EEC but rather to opt for a scope which includes all companies and firms as defined in the second paragraph of Article 58 of the Treaty;
Whereas as far as financial institutions are concerned the scope of this Directive should however be confined to those financial institutions taking one of the legal forms referred to in Directive 78/660/EEC; whereas financial institutions which are not subject to that Directive must automatically come under this Directive;
Whereas a link with coordination in respect of credit institutions is necessary because aspects of the provisions governing annual accounts and consolidated accounts will have an impact on other areas of that coordination, such as authorization requirements and the indicators used for supervisory purposes;
Whereas although, in view of the specific characteristics of credit institutions, it would appear appropriate to adopt a separate Directive on the annual accounts and consolidated accounts of such institutions, this does not imply a new set of rules separate from those under Directives 78/660/EEC and 83/349/EEC; whereas such separate rules would be neither appropriate nor consistent with the principles underlying the coordination of company law since, given the important role which they play in the Community economy, credit institutions cannot be excluded from a framework of rules devised for undertakings generally; whereas, for this reason, only the particular characteristics of credit institutions have been taken into account and this Directive deals only with exceptions to the rules contained in Directives 78/660/EEC and 83/349/EEC;
Whereas the structure and content of the balance sheets of credit institutions differ in each Member State; whereas this Directive must therefore prescribe the same layout, nomenclature and terminology for the balance sheets of all credit institutions in the Community; whereas derogations should be allowed if necessitated by the legal form of an institution or by the special nature of its business;
Whereas, if the annual accounts and consolidated accounts are to be comparable, a number of basic questions regarding the disclosure of various transactions in the balance sheet and off the balance sheet must be settled;
Whereas, in the interests of greater comparability, it is also necessary that the content of the various balance sheet and off-balance sheet items be determined precisely;
Whereas the same applies to the layout and definition of the items in the profit and loss account;
Whereas the comparability of figures in the balance sheet and profit and loss account also depends crucially on the values at which assets and liabilities are entered in the balance sheet;
Whereas, in view of the particular risks associated with banking and of the need to maintain confidence, provision should be made for the possibility of introducing a liabilities item in the balance sheet entitled ‘Fund for general banking risks’; whereas it would appear advisable for the same reasons that the Member States be permitted, pending subsequent coordination, to allow credit institutions some discretion, especially in the valuation of loans and advances and of certain securities; whereas, however, in this last case the Member States should allow these same credit institutions to create the ‘Fund for general banking risks’ mentioned above; whereas it would also appear appropriate to permit the Member States to allow credit institutions to set of certain charges and income in the profit and loss account;
Whereas, in view of the special nature of credit institutions, certain changes are also necessary with regard to the notes on the accounts;
Whereas, in the desire to place on the same footing as many credit institutions as possible, as was the case with Directive 77/780/EEC, the relief under Directive 78/660/EEC is not provided for in the case of small and medium-sized credit institutions; whereas, nevertheless, if in the light of experience such relief were to prove necessary it would be possible to provide for it in subsequent coordination; whereas for the same reasons the scope allowed the Member States under Directive 83/349/EEC to exempt parent undertakings from the consolidation requirement if the undertakings to be consolidated do not together exceed a certain size has not been extended to credit institutions;
Whereas the application of the provisions on consolidated accounts to credit institutions requires certain adjustments to some of the rules applicable to all industrial and commercial companies; whereas explicit rules have been provided for in the case of mixed groups and exemption from subconsolidation may be made subject to additional conditions;
Whereas, given the scale on which banking networks extend beyond national borders and their constant development, the annual accounts and consolidated accounts of a credit institution having its head office in one Member State should be published in all the Member States in which it is established;
Whereas the examination of problems which arise in connection with the subject matter of this Directive, notably concerning its application, requires the cooperation of representatives of the Member States and the Commission in a contact committee; whereas, in order to avoid the proliferation of such committees, it is desirable that such cooperation take place in the Committee provided for in Article 52 of Directive 78/660/EEC; whereas, nevertheless, when examining problems concerning credit institutions, the Committee will have to be appropriately constituted;
Whereas, in view of the complexity of the matter, the credit institutions covered by this Directive must be allowed a longer period than usual to implement its provisions;
Whereas provision should be made for the review of certain provisions of this Directive after five years’ experience of its application, in the light of the aims of greater transparency and harmonization,
HAS ADOPTED THIS DIRECTIVE:
Section 1. Preliminary provisions and scope
Article 1
1. Articles 2, 3, 4(1), (3) to (5), 6, 7, 13, 14, 15(3) and (4), 16 to 21, 29 to 35, 37 to 41, 42 first sentence, 45(1), 46, 48 to 50, 51(1), 54, 56 to 59 and 61 of Directive 78/660/EEC shall apply to the institutions mentioned in Article 2 of this Directive, except where this Directive provides otherwise.
2. Where reference is made in Directives 78/660/EEC and 83/349/EEC to Articles 9 and 10 (balance sheet) or to Articles 23 to 26 (profit and loss account) of Directive 78/660/EEC, such references shall be deemed to be references to Articles 4 (balance sheet) or to Articles 27 and 28 (profit and loss account) of this Directive.
3. References in Directive 78/660/EEC and 83/349/EEC to Articles 31 to 42 of Directive 78/660/EEC shall be deemed to be references to those Articles, taking account of Articles 35 to 39 of this Directive.
4. Where reference is made in the aforementioned provisions of Directive 78/660/EEC to balance sheet items for which this Directive makes no equivalent provision, such references shall be deemed to be references to the items in Article 4 of this Directive which include the assets and liabilities in question.
Article 2
1. The coordination measures prescribed by this Directive shall apply to
(a) credit institutions within the meaning of the first indent of Article 1 of Directive 77/780/EEC which are companies or firms as defined in the second paragraph of Article 58 of the Treaty;
(b) financial institutions having one of the legal forms referred to in Article 1(1) of Directive 78/660/EEC which, on the basis of paragraph 2 of that Article, are not subject to that Directive.
For the purposes of this Directive ‘credit institutions’ shall also include financial institutions unless the context requires otherwise.
2. The Member States need not apply this Directive to:
(a) the credit institutions listed in Article 2(2) of Directive 77/780/EEC;
(b) institutions of the same Member State which, as defined in Article 2(4)(a) of Directive 77/780/EEC, are affiliated to a central body in that Member State. In that case, without prejudice to the application of this Directive to the central body, the whole constituted by the central body and its affiliated institutions must be the subject of consolidated accounts including an annual report which shall be drawn up, audited and published in accordance with this Directive;
(c) the following credit institutions:
- in Greece: ETEBA (National Investment Bank for Industrial Development) and
(Investment Bank), - in Ireland: Industrial and Provident Societies,
- in the United Kingdom: Friendly Societies and Industrial and Provident Societies.
4. Without prejudice to Article 2(3) of Directive 78/660/EEC and pending subsequent coordination, the Member States may:
(a) in the case of the credit institutions referred to in Article 2(1)(a) of this Directive which are not companies of any of the types listed in Article 1(1) of Directive 78/660/EEC, lay down rules derogating from this Directive where derogating rules are necessary because of such institutions’ legal form;
(b) in the case of specialized credit institutions, lay down rules derogating from this Directive where derogating rules are necessary because of the special nature of such institutions’ business.
Such derogating rules may provide only for adaptations to the layout, nomenclature, terminology and content of items in the balance sheet and the profit and loss account; they may not have the effect of permitting the institutions to which they apply to provide less information in their annual accounts than other institutions subject to this Directive.
The Member States shall inform the Commission of those credit institutions, possibly by category, within six months of the end of the period stipulated in Article 47(2). They shall inform the Commission of the derogations laid down to that end.
These derogations shall be reviewed within 10 years of the notification of this Directive. The Commission shall, if appropriate, submit suitable proposals. It shall also submit an interim report within five years of the notification of this Directive.
Section 2. General provisions concerning the balance sheet and the profit and loss account
Article 3
In the case of credit institutions the possibility of combining items pursuant to Article 4(3)(a) or (b) of Directive 78/660/EEC shall be restricted to balance sheet and profit and loss account sub-items preceded by lower-case letters and shall be authorized only under the rules laid down by the Member States to that end.
Section 3. Layout of the balance sheet
Article 4
The Member States shall prescribe the following layout for the balance sheet.
Assets
1. Cash in hand, balances with central banks and post office banks
2. Treasury bills and other bills eligible for refinancing with central banks:
(a) Treasury bills and similar securities
(b) Other bills eligible for refinancing with central banks (unless national law prescribes that such bills be shown under Assets items 3 and 4)
3. Loans and advances to credit institutions:
(a) repayable on demand
(b) other loans and advances
4. Loans and advances to customers
5. Debt securities including fixed-income securities:
(a) issued by public bodies
(b) issued by other borrowers, showing separately:
- own-debt securities (unless national law requires their deduction from liabilities)
6. Shares and other variable-yield securities
7. Participating interests, showing separately:
- participating interests in credit institutions (unless national law requires their disclosure in the notes on the accounts)
8. Shares in affiliated undertakings, showing separately:
- shares in credit institutions (unless national law requires their disclosure in the notes on the accounts)
9. Intangible assets as described under Assets headings B and C.I. of Article 9 of Directive 78/ 660/ EEC, showing separately:
- formation expenses, as defined by national law and in so far as national law permits their being shown as an asset (unless national law requires their disclosure in the notes on the accounts)
- goodwill, to the extent that it was acquired for valuable consideration (unless national law requires their disclosure in the notes on the accounts)
10. Tangible assets as described under Assets heading C.II of Article 9 of Directive 78/ 660/ EEC, showing separately:
- land and buildings occupied by a credit institution for its own activities (unless national law requires their disclosure in the notes on the accounts)
11. Subscribed capital unpaid, showing separately:
- called-up capital (unless national law provides for called-up capital to be included under liabilities, in which case capital called but not yet paid must be included either in this Assets item or in Assets item 14)
12. Own shares (with an indication of their nominal value or, in the absence of a nominal value, their accounting par value to the extent that national law permits their being shown in the balance sheet)
13. Other assets
14. Subscribed capital called but not paid (unless national law requires that called-up capital be shown under Assets item 11)
15. Prepayments and accrued income
16. Loss for the financial year (unless national law provides for its inclusion under Liabilities item 14)
Total assets
Liabilities
1. Amounts owed to credit institutions:
(a) repayable on demand
(b) with agreed maturity dates or periods of notice
2. Amounts owed to customers:
(a) savings deposits, showing separately:
- those repayable on demand and those with agreed maturity dates or periods of notice where national law provides for such a breakdown (unless national law provides for such information to be given in the notes on the accounts)
(b) other debts
(ba) repayable on demand
(bb) with agreed maturity dates or periods of notice
3. Debts evidenced by certificates:
(a) debt securities in issue
(b) others
4. Other liabilities
5. Accruals and deferred income
6. Provisions for liabilities and charges:
(a) provisions for pensions and similar obligations
(b) provisions for taxation
(c) other provisions
7. Profit for the financial year (unless national law provides for its inclusion under Liabilities item 14)
8. Subordinated liabilities
9. Subscribed capital (unless national law provides for called-up capital to be shown under this item. In that case, the amounts of subscribed capital and paid-up capital must be shown separately)
10. Share premium account
11. Reserves
12. Revaluation reserve
13. Profit or loss brought forward
14. Profit or loss for the financial year (unless national law requires that this item be shown under Assets item 16 or Liabilities item 7)
Total liabilities
Off-balance sheet items
1. Contingent liabilities, showing separately:
acceptances and endorsements
guarantees and assets pledged as collateral security
2. Commitments, showing separately:
commitments arising out of sale and repurchase transactions
Article 5
The following must be shown separately as sub-items of the items in question:
claims, whether or not evidenced by certificates, on affiliated undertakings and included in Assets items 2 to 5,
claims, whether or not evidenced by certificates, on undertakings with which a credit institution is linked by virtue of a participating interest and included in Assets items 2 to 5,
liabilities, whether or not evidenced by certificates, to affiliated undertakings and included in Liabilities items 1, 2, 3 and 8.
liabilities, whether or not evidenced by certificates, to undertakings with which a credit institution is linked by virtue of a participating interest and included in Liabilities items 1, 2, 3 and 8.
Article 6
1. Subordinated assets shall be shown separately as sub-items of the items of the layout and the sub-items created in accordance with Article 5.
2. Assets, whether or not evidenced by certificates, are subordinated if, in the event of winding up or bankruptcy, they are to be repaid only after the claims of other creditors have been met.
Article 7
The Member States may permit the disclosure of the information referred to in Articles 5 and 6, duly broken down into the various relevant items, in the notes on the accounts.
Article 8
1. Assets shall be shown under the relevant balance sheet headings even where the credit institution drawing up the balance sheet has pledged them as security for its own liabilities or for those of third parties or has otherwise assigned them as security to third parties.
2. A credit institution shall not include in its balance sheet assets pledged or otherwise assigned to it as security unless such assets are in the form of cash in the hands of that credit institution.
Article 9
1. Where a loan has been granted by a syndicate consisting of a number of credit institutions, each credit institution participating in the syndicate shall disclose only that part of the total loan which it has itself funded.
2. If in the case of a syndicated loan such as described in paragraph 1 the amount of funds guaranteed by a credit institution exceeds the amount which it has made available any, additional guarantee portion shall be shown as contingent liability (in Off-balance sheet item 1, second indent).
Article 10
1. Funds which a credit institution administers in its own name but on behalf of third parties must be shown in the balance sheet if the credit institution acquires legal title to the assets concerned. The total amount of such assets and liabilities shall be shown separately or in the notes on the accounts, broken down according to the various Assets and Liabilities items. However, the Member States may permit the disclosure of such funds off the balance sheet provided there are special rules whereby such funds can be excluded from the assets available for distribution in the event of the winding-up of a credit institution (or similar proceedings).
2. Assets acquired in the name of and on behalf of third parties must not be shown in the balance sheet.
Article 11
Only those amounts which can at any time be withdrawn without notice or for which a maturity or period of notice of 24 hours or one working day has been agreed shall be regarded as repayable on demand.
Article 12
1. Sale and repurchase transactions shall mean transactions which involve the transfer by a credit institution or customer (the ‘transferor’) to another credit institution or customer (the ‘transferee’) of assets, for example, bills, debts or transferable securities, subject to an agreement that the same assets will subsequently be transferred back to the transferor at a specified price.
2. If the transferee undertakes to return the assets on a date specified or to be specified by the transferor, the transaction in question shall be deemed to be a genuine sale and repurchase transaction.
3. If, however, the transferee is merely entitled to return the assets at the purchase price or for a different amount agreed in advance on a date specified or to be specified, the transaction in question shall be deemed to be a sale with an option to repurchase.
4. In the case of the sale and repurchase transactions referred to in paragraph 2, the assets transferred shall continue to appear in the transferor’s balance sheet; the purchase price received by the transferor shall be shown as an amount owed to the transferee. In addition, the value of the assets transferred shall be disclosed in a note in the transferor’s accounts. The transferee shall not be entitled to show the assets transferred in his balance sheet; the purchase price paid by the transferee shall be shown as an amount owed by the transferor.
5. In the case of the sale and repurchase transactions referred to in paragraph 3, however, the transferor shall not be entitled to show in his balance sheet the assets transferred; those items shall be shown as assets in the transferee’s balance sheet. The transferor shall enter under Off-balance sheet item 2 an amount equal to the price agreed in the event of repurchase.
6. No forward exchange transactions, options, transactions involving the issue of debt securities with a commitment to repurchase all or part of the issue before maturity of any similar transactions shall be regarded as sale and repurchase transactions within the meaning of this Article.
Section 4. Special provisions relating to certain balance sheet items
Article 13
Assets: Item 1 - Cash in hand, balances with central banks and post office banks
1. Cash in hand shall comprise legal tender including foreign notes and coins.
2. This item may include only balances with the central banks and post office banks of the country or countries in which a credit institution is established. Such balances must be readily available at all times. Other claims on such bodies must be shown as loans and advances to credit institutions (Assets item 3) or as loans and advances to customers (Assets item 4).
Article 14
Assets: Item 2 - Treasury bills and other bills eligible far refinancing with central banks
1. This item shall comprise, under (a), treasury bills and similar securities, i.e. treasury bills, treasury certificates and similar debt instruments issued by public bodies which are eligible for refinancing with the central banks of the country or countries in which a credit institution is established. Those debt instruments issued by public bodies which fail to meet the above condition shall be shown under Assets sub-item 5(a).
2. This item shall comprise, under (b), bills eligible for refinancing with central banks, i.e. all bills held in portfolio that were purchased from credit institutions or from customers to the extent that they are eligible, under national law, for refinancing with the central banks of the country or countries in which a credit institution is established.
Article 15
Assets: Item 3 - Loans and advances to credit institutions
1. Loans and advances to credit institutions shall comprise all loans and advances arising out of banking transactions to domestic or foreign credit institutions by the credit institution drawing up the balance sheet, regardless of their actual designations.
The only exception shall be loans and advances represented by debt securities or any other security, which must be shown under Assets item 5.
2. For the purposes of this Article credit institutions shall comprise all undertakings on the list published in the Official Journal of the European Communities pursuant to Article 3(7) of Directive 77/780/EEC, as well as central banks and official domestic and international banking organizations and all private and public undertakings which are not established in the Community but which satisfy the definition in Article 1 of Directive 77/780/EEC.
Loans and advances to undertakings which do not satisfy the above conditions shall be shown under Assets item 4.
Article 16
Assets: Item 4 - Loans and advances to customers
Loans and advances to customers shall comprise all types of assets in the form of claims on domestic and foreign customers other than credit institutions, regardless of their actual designations.
The only exception shall be loans and advances represented by debt securities or any other security, which must be shown under Assets item 5.
Article 17
Assets: Item 5 - Debt securities including fixed-income securities
1. This item shall comprise negotiable debt securities including fixed-income securities issued by credit institutions, by other undertakings or by public bodies; such securities issued by the latter, however, shall be included only if they are not to be shown under Assets item 2.
2. Securities bearing interest rates that vary in accordance with specific factors, for example the interest rate on the inter-bank market or on the Euromarket, shall also be regarded as debt securities including fixed-income securities.
3. Only repurchased and negotiable own-debt securities may be included in sub-item 5(b).
Article 18
Liabilities: Item 1 - Amounts owed to credit institutions
1. Amounts owed to credit institutions shall include all amounts arising out of banking transactions owed to other domestic or foreign credit institutions by the credit institution drawing up the balance sheet, regardless of their actual designations.
The only exception shall be liabilities represented by debt securities or by any other security, which must be shown under Liabilities item 3.
2. For the purposes of this Article credit institutions shall comprise all undertakings on the list published in the Official Journal of the European Communities pursuant to Article 3(7) of Directive 77/780/EEC, as well as central banks and official domestic and international banking organizations and all private and public undertakings which are not established in the Community but which satisfy the definition in Article 1 of Directive 77/780/EEC.
Article 19
Liabilities: Item 2 - Amounts owed to customers
1. Amounts owed to customers shall include all amounts owed to creditors that are not credit institutions within the meaning of Article 18, regardless of their actual designations.
The only exception shall be liabilities represented by debt securities or by any other security, which must be shown under Liabilities item 3.
2. Only deposits which satisfy the conditions laid down in national law shall be treated as savings deposit.
3. Savings bonds shall be shown under the corresponding sub-item only if they are not represented by negotiable certificates.
Article 20
Liabilities: Item 3 - Debts evidenced by certificates
1. This items shall include both debt securities and debts for which negotiable certificates have been issued, in particular deposit receipts, ‘ bons de caisse’ and liabilities arising out of own acceptances and promissory notes.
2. Only acceptances which a credit institution has issued for its own refinancing and in respect of which it is the first party liable (‘drawee’) shall be treated as own acceptances.
Article 21
Liabilities: Item 8 - Subordinated liabilities
Where it has been contractually agreed that, in the event of winding up or of bankruptcy, liabilities, whether or not evidenced by certificates, are to be repaid only after the claims of all other creditors have been met, the liabilities in question shall be shown under this item.
Article 22
Liabilities: Item 9 - Subscribed capital
This item shall comprise all amounts, regardless of their actual designations, which, in accordance with the legal structure of the institution concerned, are regarded under national law as equity capital subscribed by the shareholders or other proprietors.
Article 23
Liabilities: Item 11 - Reserves
This item shall comprise all the types of reserves listed in Article 9 of Directive 78/660/EEC under Liabilities item A.IV, as defined therein. The Member States may also prescribe other types of reserves if necessary for credit institutions the legal structures of which are not covered by Directive 78/660/EEC.
The types of reserve referred to in the first paragraph shall be shown separately, as sub-items of Liabilities item 11, in the balance sheets of the credit institutions concerned, with the exception of the revaluation reserve which shall be shown under item 12.
Article 24
Off-balance sheet: Item 1 - Contingent liabilities
This item shall comprise all transactions whereby an institution has underwritten the obligations of a third party.
Notes on accounts shall state the nature and amount of any type of contingent liability which is material in relation to an institution’s activities.
Liabilities arising out of the endorsement of rediscounted bills shall be included in this item only if national law does not require otherwise. The same shall apply to acceptances other than own acceptances.
Sureties and assets pledged as collateral security shall include all guarantee obligations incurred and assets pledged as collateral security on behalf of third parties, particularly in respect of sureties and irrevocable letters of credit.
Article 25
Off-balance sheet: Item 2 - Commitments
This item shall include every irrevocable commitment which could give rise to a risk.
Notes on accounts shall state the nature and amount of any type of commitment which is material in relation to an institution’s activities.
Commitments arising out of sale and repurchase transactions shall include commitments entered into by a credit institution in the context of sale and repurchase transactions (on the basis of firm agreements to sell with options to repurchase) within the meaning of Article 12(3).
Section 5. Layout of the Profit and Loss Account
Article 26
For the presentation of the profit and loss account, the Member States shall prescribe one or both of the layouts provided for in Articles 27 and 28. If a Member State prescribes both layouts it may allow undertakings to choose between them.
Article 27
Vertical layout
1. Interest receivable and similar income, showing separately that arising from fixed-income securities
2. Interest payable and similar charges
3. Income from securities:
(a) Income from shares and other variable-yield securities
(b) Income from participating interests
(c) Income from shares in affiliated undertakings
4. Commissions receivable
5. Commissions payable
6. Net profit or net loss on financial operations
7. Other operating income
8. General administrative expenses:
(a) Staff costs, showing separately:
wages and salaries
social security costs, with a separate indication of those relating to pensions
(b) Other administrative expenses
9. Value adjustments in respect of Assets items 9 and 10
10. Other operating charges
11. Value adjustments in respect of loans and advances and provisions for contingent liabilities and for commitments
12. Value re-adjustments in respect of loans and advances and provisions for contingent liabilities and for commitments
13. Value adjustments in respect of transferable securities held as financial fixed assets, participating interests and shares in affiliated undertakings
14. Value re-adjustments in respect of transferable securities held as financial fixed assets, participating interests and shares in affiliated undertakings
15. Tax on profit or loss on ordinary activities
16. Profit or loss on ordinary activities after tax
17. Extraordinary income
18. Extraordinary charges
19. Extraordinary profit or loss
20. Tax on extraordinary profit or loss
21. Extraordinary profit or loss after tax
22. Other taxes not shown under the preceding items
23. Profit or loss for the financial year
Article 28
Horizontal layout
A. Charges
B. Income
Section 6. Special provisions relating to certain items in the profit and loss accounts
Article 29
Article 27, items 1 and 2 (vertical layout)
Article 28, items A1 and B1 (horizontal layout)
Interest receivable and similar income and interest payable and similar charges
These items shall include all profits and losses arising out of banking activities, including:
(1) all income from assets entered under Assets items 1 to 5 in the balance sheet, however calculated. Such income shall also include income arising from the spreading on a time basis of the discount on assets acquired at an amount below, and liabilities contracted at an amount above, the sum payable at maturity;
(2) all charges arising out of liabilities entered under Liabilities items 1, 2, 3 and 8, however calculated. Such charges shall also include charges arising from the spreading on a time basis of the premium on assets acquired at an amount above, and liabilities contracted at an amount below, the sum payable at maturity;
(3) income and charges resulting from covered forward contracts, spread over the actual duration of the contract and similar in nature to interest;
(4) fees and commission similar in nature to interest and calculated on a time basis or by reference to the amount of the claim or liability.
Article 30
Article 27, item 3 (vertical layout)
Article 28, item B2 (horizontal layout)
Income from shares and other variable-yield securities, from participating interests, and from shares in affiliated undertakings
This item shall comprise all dividends and other income from variable-yield securities, from participating interest and from shares in affiliated undertakings. Income from shares in investment companies shall also be included under this item.
Article 31
Article 27, items 4 and 5 (vertical layout)
Article 28, items A2 and B3 (horizontal layout)
Commissions receivable and commissions payable
Without prejudice to Article 29, commissions receivable shall include income in respect of all services supplied to third parties, and commissions payable shall include charges for services rendered by third parties, in particular
commissions for guarantees, loans administration on behalf of other lenders and securities transactions on behalf of third parties,
commissions and other charges and income in respect of payment transactions, account administration of securities,
commissions for foreign currency transactions and for the sale and purchase of coin and precious metals on behalf of third parties,
commissions charged for brokerage services in connection with savings and insurance contracts and loans.
Article 32
Article 27, item 6 (vertical layout) Article
28, item A3 or item B4 (horizontal layout)
Net profit or net loss on financial operations
This item covers:
Article 33
Article 27, items 11 and 12 (vertical layout) Article
28, items A7 and B5 (horizontal layout)
Value adjustments in respect of loans and advances and provisions for contingent liabilities and for commitments
Value re-adjustments in respect of loans and advances and provisions for contingent liabilities and for commitments
1. These items shall include, on the one hand, charges for value adjustments in respect of loans and advances to be shown under Assets items 3 and 4 and provisions for contingent liabilities and for commitments to be shown under Off-balance sheet items 1 and 2 and, on the other hand, credits from the recovery of written-off loans and advances and amounts written back following earlier value adjustments and provisions.
2. In those Member States which exercise the option provided for in Article 37, this item shall also include the net profit or loss on transactions in securities included in Assets items 5 and 6 which are neither held as financial fixed assets as defined in Article 35(2) nor included in a trading portfolio, together with value adjustment and value re-adjustments on such securities taking into account, where Article 36(2) has been applied, the difference resulting from application of that article. The nomenclature of this item shall be adapted accordingly.
3. The Member States may permit the charges and income covered by these items to be set off against each other, so that only a net item (income or charge) is shown.
4. Value adjustments in respect of loans and advances to credit institutions, to customers, to undertakings with which a credit institution is linked by virtue of participating interest and to affiliated undertakings shall be shown separately in the notes on the accounts where they are material. This provision need not be applied if a Member State permits setting-off pursuant to paragraph 3.
Article 34
Article 27, items 13 and 14 (vertical layout)
Article 28, items A8 and B5 (horizontal layout)
Value adjustments in respect of transferable securities held as financial fixed assets, participating interests and shares in affiliated undertakings
Value re-adjustments in respect of transferable securities held as financial fixed assets, participating interests and shares in affiliated undertakings
1. These items shall include, on the one hand, charges for value adjustments in respect of assets shown in Assets items 5 to 8 and, on the other hand, all the amounts written back following earlier value adjustments, in so far as the charges and income relate to transferable securities held as financial fixed assets as defined in Article 35(2), participating interests and shares in affiliated undertakings.
2. The Member States may permit the charges and income covered by these items to be set off against each other, so that only a net item (income or charge) is shown.
3. Value adjustments in respect of these transferable securities, participating interests and shares in affiliated undertakings shall be shown separately in the notes on the accounts where they are material. This provision need not be applied if a Member State permits setting off pursuant to paragraph 2.
Section 7. Valuation Rules
Article 35
1.Assets items 9 and 10 must always be valued as fixed assets. The assets included in other balance sheet items shall be valued as fixed assets where they are intended for use on a continuing basis in the normal course of an undertaking’s activities.
2. Where reference is made to financial fixed assets in Section 7 of Directive 78/660/EEC, this term shall in the case of credit institutions be taken to mean participating interests, shares in affiliated undertakings and securities intended for use on a continuing basis in the normal course of an undertaking’s activities.
3.(a) Debt securities including fixed-income securities held as financial fixed assets shall be shown in the balance sheet at purchase price. The Member States may, however, require or permit such debt securities to be shown in the balance sheet at the amount repayable at maturity.
(b) Where the purchase price of such debt securities exceeds the amount repayable at maturity the amount of the difference must be charged to the profit and loss account. The Member States may, however, require or permit the amount of the difference to be written off in instalments so that it is completely written off by the time when the debt securities are repaid. The difference must be shown separately in the balance sheet or in the notes on the accounts.
(c) Where the purchase price of such debt securities is less than the amount repayable at maturity, the Member States may require or permit the amount of the difference to be released to income in installments over the period remaining until repayment. The difference must be shown separately in the balance sheet or in the notes on the accounts.
Article 36
1. Where transferable securities which are not held as financial fixed assets are shown in the balance sheet at purchase price, credit institutions shall disclose in the notes on their accounts the difference between the purchase price and the higher market value of the balance sheet date.
2. The Member States may, however, require or permit those transferable securities to be shown in the balance sheet at the higher market value at the balance sheet date. The difference between the purchase price and the higher market value shall be disclosed in the notes on the accounts.
Article 37
1. Article 39 of Directive 78/660/EEC shall apply to the valuation of credit institutions’ loans and advances, debt securities, shares and other variable-yield securities which are not held as financial fixed assets.
2. Pending subsequent coordination, however, the Member States may permit:
(a) loans and advances to credit institutions and customers (Assets items 3 and 4) and debt securities, shares and other variable-yield securities included in Assets items 5 and 6 which are neither held as financial fixed assets as defined in Article 35(2) nor included in a trading portfolio to be shown at a value lower than that which would result from the application of Article 39(1) of Directive 78/660/EEC, where that is required by the prudence dictated by the particular risks associated with banking. Nevertheless, the difference between the two values must not be more than 4% of the total amount of the assets mentioned above after application of the aforementioned Article 39;
(b) that the lower value resulting from the application of subparagraph (a) be maintained until the credit institution decides to adjust it;
(c) where a Member State exercises the option provided for in sub-paragraph (a), neither Article 36(1) of this Directive nor Article 40(20) of Directive 78/660/EED shall apply.
Article 38
1. Pending subsequent coordination, those Member States which exercise the option provided for in Article 37 must permit and those member States which do not exercise that option may permit the introduction of a Liabilities item 6A entitled ‘Fund for general banking risks’. That item shall include those amounts which a credit institution decides to put aside to cover such risks where that is required by the particular risks associated with banking.
2. The net balance of the increases and decreases of the ‘Fund for general banking risks’ must be shown separately in the profit and loss account.
Article 39
1. Assets and liabilities denominated in foreign currency shall be translated at the spot rate of exchange ruling on the balance sheet date. The Member States may, however, require or permit assets held as financial fixed assets and tangible and intangible assets, not covered or not specifically covered in either the spot or forward markets, to be translated at the rates ruling on the dates of their acquisition.
2. Uncompleted forward and spot exchange transactions shall be translated at the spot rates of exchange ruling on the balance sheet date.
The Member States may, however, require forward transactions to be translated at the forward rate ruling on the balance sheet date.
3. Without prejudice to Article 29(3), the differences between the book values of the assets, liabilities and forward transactions and the amounts produced by translation in accordance with paragraphs 1 and 2 shall be shown in the profit and loss account. The Member States may, however, require or permit differences produced by translation in accordance with paragraphs 1 and 2 to be included, in whole or in part, in reserves not available for distribution, where they arise on assets held as financial fixed assets, on tangible and intangible assets and on any transactions undertaken to cover those assets.
4. The Member States may provide that positive translation differences arising out of forward transactions, assets or liabilities not covered or not specifically covered by other forward transactions, or by assets or liabilities shall not be shown in the profit and loss account.
5. If a method specified in Article 59 of Directive 78/660/EEC is used, the Member States may provide that any translation differences shall be transferred, in whole or in part, directly to reserves. Positive and negative translation differences transferred to reserves shall be shown separately in the balance sheet or in the notes on the accounts.
6. The Member States may require or permit translation differences arising on consolidation out of the re-translation of an affiliated undertaking’s capital and reserves or the share of a participating interest’s capital and reserves at the beginning of the accounting period to be included, in whole or in part, in consolidated reserves, together with the translation differences arising on the translation of any transactions undertaken to cover that capital and those reserves.
7. The Member States may require or permit the income and expenditure of affiliated undertakings and participating interests to be translated on consolidation at the average rates of exchange ruling during the accounting period.
Section 8. Contents of the notes on the accounts
Article 40
1. Article 43(1) of Directive 78/660/EEC shall apply, subject to Article 37 of this Directive and to the following provisions.
2. In addition to the information required under Article 43(1)(5) of Directive 78/660/EEC, credit institutions shall disclose the following information relating to Liabilities item 8 (Subordinated liabilities):
(a) in respect of each borrowing which exceeds 10% of the total amount of the subordinated liabilities:
(i) the amount of the borrowing, the currency in which it is denominated, the rate of interest and the maturity date or the fact that it is a perpetual issue;
(ii) whether there are any circumstances in which early repayment is required;
(iii) the terms of the subordination, the existence of any provisions to convert the subordinated liability into capital or some other form of liability and the terms of any such provisions.
(b) an overall indication of the rules governing other borrowings.
3. (a) In place of the information required under Article 43(1) (6) of Directive 78/660/EEC, credit institutions shall in the notes on their accounts state separately for each of the Assets items 3(b) and 4 and the Liabilities items 1(b), 2(a), 2(b) (bb) and 3(b) the amounts of those loans and advances and liabilities on the basis of their remaining maturity as follows:
not more than three months,
more than three months but not more than one year,
more than one year but not more than five years,
more than five years.
For Assets item 4, loans and advances on call and at short notice must also be shown.
If loans and advances or liabilities involve payment by installments, the remaining maturity shall be the period between the balance sheet date and the date on which each instalment falls due.
However, for five years after the date referred to in Article 47(2) the Member States may require or permit the listing by maturity of the assets and liabilities referred to in this Article to be based on the originally agreed maturity or period of notice. In that event, where a credit institution has acquired an existing loan not evidenced by a certificate, the Member States shall require classification of that loan to be based on the remaining maturity as at the date on which it was acquired. For the purposes of this subparagraph, the originally agreed maturity for loans shall be the period between the date of first drawing and the date of repayment; the period of notice shall be deemed to be the period between the date on which notice is given and the date on which repayment is to be made; if loans and advances or liabilities are redeemable by installments, the agreed maturity shall be the period between the date on which such loans and advances or liabilities arose and the date on which the last installment falls due. Credit institutions shall also indicate for the balance sheet items referred to in this subparagraph what proportion of those assets and liabilities will become due within one year of the balance sheet date.
(b) Credit institutions shall, in respect of Assets item 5 (Debt securities including fixed-income securities) and Liabilities item 3(a) (Debt securities in issue), indicate what proportion of assets and liabilities will become due within one year of the balance sheet date.
(c) The Member States may require the information referred to in subparagraphs (a) and (b) to be given in the balance sheet.
(d) Credit institutions shall give particulars of the assets which they have pledged as security for their own liabilities or for those of third parties (including contingent liabilities); the particulars should be in sufficient detail to indicate for each Liabilities time and for each Off-balance sheet item the total amount of the assets pledged as security.
4. Where credit institutions have to provide the information referred to in Article 43(1)(7) of Directive 78/66/EEC in Off-balance sheet items, such information need not be repeated in the notes on the accounts.
5. In place of the information required under Article 43(1)(8) of Directive 78/660/EEC, a credit institution shall indicate in the notes on its accounts the proportion of its income relating to items 1, 3, 4, 6 and 7 or Article 27 or to items B1, B2, B3, B4 and B7 of Article 28 by geographical markets, in so far as, taking account of the manner in which the credit institution is organized, those markets differ substantially from one another. Article 45(1)(b) of Directive 78/660/EEC shall apply.
6. The reference in Article 43(1)(9) of Directive 78/660/EEC to Article 23(6) of that Directive shall be deemed to be a reference to Article 27(8) or Article 28(A4) of this Directive.
7. By way of derogation from Article 43 (1)(13) of Directive 78/660/EEC, credit institutions need disclose only the amounts of advances and credits granted to the members of their administrative, managerial and supervisory bodies, and the commitments entered into on their behalf by way of guarantees of any kind. That information must be given in the form of a total for each category.
Article 41
1. The information prescribed in Article 15(3) of Directive 78/660/EEC must be given in respect of assets held as fixed assets as defined in Article 35 of this Directive. The obligation to show value adjustments separately shall not, however, apply where a Member State has permitted set-offs between value adjustments pursuant to Article 34(2) of this Directive. In that event value adjustments may be combined with other items.
2. The Member States shall require credit institutions to give the following information as well as in the notes on their accounts:
(a) a breakdown of the transferable securities shown under Assets items 5 to 8 into listed and unlisted securities;
(b) a breakdown of the transferable securities shown under Assets items 5 and 6 into securities which, pursuant to Article 35, are or are not held as financial fixed assets and the criterion used to distinguish between the two categories of transferable securities;
(c) the value of leasing transactions, apportioned between the relevant balance sheet items;
(d) a breakdown of Assets item 13, Liabilities item 4, items 10 and 18 in the vertical layout or A6 and A11 in the horizontal layout and items 7 and 17 in the vertical layout or B7 and B9 in the horizontal layout in the profit and loss account into their main component amounts, where such amounts are important for the purpose of assessing the annual accounts, as well as explanations of their nature and amount;
(e) the charges paid on account of subordinated liabilities by a credit institution in the year under review;
(f) the fact that an institution provides management and agency services to third parties where the scale of business of that kind is material in relation to the institution’s activities as a whole;
(g) the aggregate amount of assets and of liabilities denominated in foreign currencies translated into the currency in which the annual accounts are drawn up;
(h) a statement of the types of unmatured forward transactions outstanding at the balance sheet date indicating, in particular, for each type of transaction, whether they are made to a material extent for the propose of hedging the effects of fluctuations in interest rates, exchange rates and market prices, and whether they are made to a material extent for dealing proposes. These types of transaction shall include all those in connection with which the income or expenditure is to be included in Article 27, item 6, Article 28, items A3 or B4 or Article 29(3), for example, foreign currencies, precious metals, transferable securities, certificates of deposit and other assets.
Section 9, Provisions relating to consolidated accounts
Article 42
1. Credit institutions shall draw up consolidated accounts and consolidated annual reports in accordance with Directive 83/349/EEC, in so far as this section does not provide otherwise.
2. Insofar as a Member State does not have recourse to Article 5 of Directive 83/349/EEC, paragraph 1 of this Article shall also apply to parent undertakings the sole object of which is to acquire holdings in subsidiary undertakings and to manage such holdings and turn them to profit, where those subsidiary undertakings are either exclusively or mainly credit institutions.
Article 43
1. Directive 83/349/EEC shall apply, subject to Article 1 of this Directive and paragraph 2 of this Article.
2. (a) Articles 4, 6, 15 and 40 of Directive 83/349/EEC shall not apply.
(b) The Member States may make application of Article 7 of Directive 83/349/EEC subject to the following additional conditions:
the parent undertaking must have declared that it guarantees the commitments entered into by the exempted undertaking; the existence of that declaration shall be disclosed in the accounts of the exempted undertaking;
the parent undertaking must be a credit institution within the meaning of Article 2(l)(a) of this Directive.
(c) The information referred to in the first two indents of Article 9(2) of Directive 83/349/EEC, namely:
the amount of the fixed assets and
the net turnover shall be replaced by:
the sum of items 1, 2, 4, 6 and 7 in Article 27 or B1, B2, B3, B4 and B7 in Article 28 of this Directive.
(d) Where, as a result of applying Article 13(3)(c) of Directive 83/349/EEC, a subsidiary undertaking which is a credit institution is not included in consolidated accounts but where the shares of that undertaking are temporarily held as a result of a financial assistance operation with a view to the reorganization or rescue of the undertaking in question, the annual accounts of that undertaking shall be attached to the consolidated accounts and additional information shall be given in the notes on the accounts concerning the nature and terms of the financial assistance operation.
(e) A Member State may also apply Article 12 of Directive 83/349/EEC to two or more credit institutions which are not connected as described in Article 1(1) or (2) of that Directive but are managed on a unified basis other than pursuant to a contract or provisions in the memorandum or articles of association.
(f) Article 14 of Directive 83/349/EEC, with the exception of paragraph 2, shall apply subject to the following provision.
Where a parent undertaking is a credit institution and where one or more subsidiary undertakings to be consolidated do not have that status, those subsidiary undertakings shall be included in the consolidation if their activities are a direct extension of banking or concern services ancillary to banking, such as leasing, factoring, the management of unit trusts, the management of dataprocessing services or any other similar activity.
(g) For the purposes of the layout of consolidated accounts:
Articles 3, 5 to 26 and 29 to 34 of this Directive shall apply;
the reference in Article 17 of Directive 83/349/EEC to Article 15(3) of Directive 78/660/EEC shall apply to the assets deemed to be fixed assets pursuant to Article 35 of this Directive.
(h) Article 34 of Directive 83/349/EEC shall apply in respect of the contents of the notes on consolidated accounts, subject to Articles 40 and 41 of this Directive.
Section 10. Publication
Article 44
1. The duly approved annual accounts of credit institutions, together with the annual reports and the reports by the persons responsible for auditing the accounts shall be published as laid down by national law in accordance with Article 3 of Directive 68/151/EEC.
National law may, however, permit the annual report not to be published as stipulated above. In that case, it shall be made available to the public at the company’s registered office in the Member State concerned. It must be possible to obtain a copy of all or part of any such report on request. The price of such a copy must not exceed its administrative cost.
2. Paragraph 1 shall also apply to the duly approved consolidated accounts, the consolidated annual reports and the reports by the persons responsible for auditing the accounts.
3. However, where a credit institution which has drawn up annual accounts or consolidated accounts is not established as one of the types of company listed in Article 1(1) of Directive 78/660/EEC and is not required by its national law to publish the documents referred to in paragraphs 1 and 2 of this Article as prescribed in Article 3 of Directive 68/151/EEC, it must at least make them available to the public at its registered office or, in the absence of a registered office, at its principal place of business. It must be possible to obtain copies of such documents on request. The prices of such copies must not exceed their administrative cost.
4. The annual accounts and consolidated accounts of a credit institution must be published in every Member State in which that credit institution has branches within the meaning of the third indent of Article 1 of Directive 77/780/EEC. Such Member States may require that those documents be published in their official languages.
5. The Member States shall provide for appropriate sanctions for failure to comply with the publication rules referred to in this Article.
Section 11. Auditing
Article 45
A Member State need not apply Article 2(1) (b)(iii) of Directive 84/253/EEC to public savings banks where the statutory auditing of the documents of those undertakings referred to in Article 1(1) of that Directive is reserved to an existing supervisory body for those savings banks at the time of the entry into force of this Directive and where the person responsible complies at least with the conditions laid down in Article 3 to 9 of Directive 84/253/EEC.
Section 12. Final provisions
Article 46
The Contact Committee established in accordance with Article 52 of Directive 78/660/EEC shall, when meeting as constituted appropriately, also have the following functions:
(a) to facilitate, without prejudice to Articles 169 and 170 of the Treaty, harmonized application of this Directive through regular meetings dealing in particular with practical problems arising in connection with its application:
(b) to advise the Commission, if necessary, on additions or amendments to this Directive.
Article 47
1. The Member States shall bring into force the laws, regulations and administrative provisions necessary for them to comply with this Directive by 31 December 1990. They shall forthwith inform the Commission thereof.
2. A Member State may provide that the provisions referred to in paragraph 1 shall first apply to annual accounts and consolidated accounts for financial years beginning on 1 January 1993 or during the calendar year 1993.
3. The Member States shall communicate to the Commission the texts of the main provisions of national law which they adopt in the field governed by this Directive.
Article 48
Five years after the date referred to in Article 47(2), the Council, acting on a proposal from the Commission, shall examine and if need be revise all those provisions of this Directive which provide for Member State options, together with Articles 2(1), 27, 28 and 41, in the light of the experience acquired in applying this Directive and in particular of the aims of greater transparency and harmonization of the provisions referred to by this Directive.
Article 49
This Directive is addressed to the Member States.
Done at Brussels, 8 December 1986.
For the Council
The President
N. LAWSON
Appendix II 6 EC Directive on Prevention of the Use of the Financial System for the Purpose of Money Laundering
Council Directive1 10 June 1991 on prevention of the use of the financial system for the purpose of money laundering (91/308/EEC)
The Council of the European Communities,
Having regard to the Treaty establishing the European Economic Community, and in particular Article 57 (2), first and third sentences, and Article 100a thereof,
Having regard to the proposal from the Commission,2
In cooperation with the European Parliament,3
Having regard to the opinion of the Economic and Social Committee,4
Whereas when credit and financial institutions are used to launder proceeds from criminal activities (hereinafter referred to as ‘money laundering’), the soundness and stability of the institution concerned and confidence in the financial system as a whole could be seriously jeopardized, thereby losing the trust of the public;
Whereas lack of Community action against money laundering could lead Member States, for the purpose of protecting their financial systems, to adopt measures which could be inconsistent with completion of the single market;
Whereas, in order to facilitate their criminal activities, launderers could try to take advantage of the freedom of capital movement and freedom to supply financial services which the integrated financial area involves, if certain coordinating measures are not adopted at Community level;
Whereas money laundering has an evident influence on the rise of organized crime in general and drug trafficking in particular;
Whereas there is more and more awareness that combating money laundering is one of the most effective means of opposing this form of criminal activity, which constitutes a particular threat to Member States’ societies;
Whereas money laundering must be combated mainly by penal means and within the framework of international cooperation among judicial and law enforcement authorities, as has been undertaken, in the field of drugs, by the United Nations Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances, adopted on 19 December 1988 in Vienna (hereinafter referred to as the ‘Vienna Convention’) and more generally in relation to all criminal activities, by the Council of Europe Convention on laundering, tracing, seizure and confiscation of proceeds of crime, opened for signature on 8 November 1990 in Strasbourg;
Whereas a penal approach should, however, not be the only way to combat money laundering, since the financial system can play a highly effective role;
Whereas reference must be made in this context to the recommendation of the Council of Europe of 27 June 1980 and to the declaration of principles adopted in December 1988 in Basle by the banking supervisory authorities of the Group of Ten, both of which constitute major steps towards preventing the use of the financial system for money laundering;
Whereas money laundering is usually carried out in an international context so that the criminal origin of the funds can be better disguised;
Whereas measures exclusively adopted at a national level, without taking account of international coordination and cooperation, would have very limited effects;
Whereas any measures adopted by the Community in this field should be consistent with other action undertaken in other international fora;
Whereas in this respect any Community action should take particular account of the recommendations adopted by the financial action task force on money laundering, set up in July 1989 by the Paris summit of the seven most developed countries;
Whereas the European Parliament has requested, in several resolutions, the establishment of a global Community programme to combat drug trafficking, including provisions on prevention of money laundering;
Whereas for the purposes of this Directive the definition of money laundering is taken from that adopted in the Vienna Convention;
Whereas, however, since money laundering occurs not only in relation to the proceeds of drug-related offences but also in relation to the proceeds of other criminal activities (such as organized crime and terrorism), the Member States should, within the meaning of their legislation, extend the effects of the Directive to include the proceeds of such activities, to the extent that they are likely to result in laundering operations justifying sanctions on that basis;
Whereas prohibition of money laundering in Member States’ legislation backed by appropriate measures and penalties is a necessary condition for combating this phenomenon;
Whereas ensuring that credit and financial institutions require identification of their customers when entering into business relations or conducting transactions, exceeding certain thresholds, are necessary to avoid launderers’ taking advantage of anonymity to carry out their criminal activities;
Whereas such provisions must also be extended, as far as possible, to any beneficial owners;
Whereas credit and financial institutions must keep for at least five years copies or references of the identification documents required as well as supporting evidence and records consisting of documents relating to transactions or copies thereof similarly admissible in court proceedings under the applicable national legislation for use as evidence in any investigation into money laundering;
Whereas ensuring that credit and financial institutions examine with special attention any transaction which they regard as particularly likely, by its nature, to be related to money laundering is necessary in order to preserve the soundness and integrity of the financial system as well as to contribute to combating this phenomenon;
Whereas to this end they should pay special attention to transactions with third countries which do not apply comparable standards against money laundering to those established by the Community or to other equivalent standards set out by international fora and endorsed by the Community;
Whereas, for those purposes, Member States may ask credit and financial institutions to record in writing the results of the examination they are required to carry out and to ensure that those results are available to the authorities responsible for efforts to eliminate money laundering;
Whereas preventing the financial system from being used for money laundering is a task which cannot be carried out by the authorities responsible for combating this phenomenon without the cooperation of credit and financial institutions and their supervisory authorities;
Whereas banking secrecy must be lifted in such cases;
Whereas a mandatory system of reporting suspicious transactions which ensures that information is transmitted to the abovementioned authorities without alerting the customers concerned, is the most effective way to accomplish such cooperation;
Whereas a special protection clause is necessary to exempt credit and financial institutions, their employees and their directors from responsibility for breaching restrictions on disclosure of information;
Whereas the information received by the authorities pursuant to this Directive may be used only in connection with combating money laundering;
Whereas Member States may nevertheless provide that this information may be used for other purposes;
Whereas establishment by credit and financial institutions of procedures of internal control and training programmes in this field are complementary provisions without which the other measures contained in this Directive could become ineffective;
Whereas, since money laundering can be carried out not only through credit and financial institutions but also through other types of professions and categories of undertakings, Member States must extend the provisions of this Directive in whole or in part, to include those professions and undertakings whose activities are particularly likely to be used for money laundering purposes;
Whereas it is important that the Member States should take particular care to ensure that coordinated action is taken in the Community where there are strong grounds for believing that professions or activities the conditions governing the pursuit of which have been harmonized at Community level are being used for laundering money;
Whereas the effectiveness of efforts to eliminate money laundering is particularly dependent on the close coordination and harmonization of national implementing measures;
Whereas such coordination and harmonization which is being carried out in various international bodies requires, in the Community context, cooperation between Member States and the Commission in the framework of a contact committee;
Whereas it is for each Member State to adopt appropriate measures and to penalize infringement of such measures in an appropriate manner to ensure full application of this Directive.
HAS ADOPTED THIS DIRECTIVE:
Article 1
For the purpose of this Directive:
‘credit institution’ means a credit institution, as defined as in the first indent of Article 1 of Directive 77/780/EEC5, as last amended by Directive 89/646/EEC6, and includes branches within the meaning of the third indent of that Article and located in the Community, of credit institutions having their head offices outside the Community,
‘financial institution’ means an undertaking other than a credit institution whose principal activity is to carry out one or more of the operations included in numbers 2 to 12 and number 14 of the list annexed to Directive 89/646/EEC, or an insurance company duly authorized in accordance with Directive 79/267/EEC7, as last amended by Directive 90/619/EEC8, in so far as it carries out activities covered by that Directive; this definition includes branches located in the Community of financial institutions whose head offices are outside the Community,
‘money laundering’ means the following conduct when committed intentionally:,
the conversion or transfer of property, knowing that such property is derived from criminal activity or from an act of participation in such activity, for the purpose of concealing or disguising the illicit origin of the property or of assisting any person who is involved in the commission of such activity to evade the legal consequences of his action,
the concealment or disguise of the true nature, source, location, disposition, movement, rights with respect to, or ownership of property, knowing that such property is derived from criminal activity or from an act of participation in such activity,
the acquisition, possession or use of property, knowing, at the time of receipt, that such property was derived from criminal activity or from an act of participation in such activity,
participation in, association to commit, attempts to commit and aiding, abetting, facilitating and counselling the commission of any of the actions mentioned in the foregoing paragraphs.
Knowledge, intent or purpose required as an element of the abovementioned activities may be inferred from objective factual circumstances.
Money laundering shall be regarded as such even where the activities which generated the property to be laundered were perpetrated in the territory of another Member State or in that of a third country.
‘property’ means assets of every kind, whether corporeal or incorporeal, movable or immovable, tangible or intangible, and legal documents or instruments evidencing title to or interests in such assets.
‘criminal activity’ means a crime specified in Article 3 (1) (a) of the Vienna Convention and any other criminal activity designated as such for the purposes of this Directive by each Member State.
‘competent authorities’ means the national authorities empowered by law or regulation to supervise credit or financial institutions.
Article 2
Member States shall ensure that money laundering as defined in this Directive is prohibited.
Article 3
1. Member States shall ensure that credit and financial institutions require identification of their customers by means of supporting evidence when entering into business relations, particularly when opening an account or savings accounts, or when offering safe custody facilities.
2. The identification requirement shall also apply for any transaction with customers other than those referred to in paragraph 1, involving a sum amounting to ECU 15,000 or more, whether the transaction is carried out in a single operation or in several operations which seem to be linked. Where the sum is not known at the time when the transaction is undertaken, the institution concerned shall proceed with identification as soon as it is apprised of the sum and establishes that the threshold has been reached.
3. By way of derogation from paragraphs 1 and 2, the identification requirements with regard to insurance policies written by insurance undertakings within the meaning of Directive 79/267/EEC, where they perform activities which fall within the scope of that Directive shall not be required where the periodic premium amount or amounts to be paid in any given year does or do not exceed ECU 1,000 or where a single premium is paid amounting to ECU 2,500 or less. If the periodic premium amount or amounts to be paid in any given year is or are increased so as to exceed the ECU 1,000 threshold, identification shall be required.
4. Member States may provide that the identification requirement is not compulsory for insurance policies in respect of pension schemes taken out by virtue of a contract of employment or the insured’s occupation, provided that such policies contain no surrender clause and may not be used as collateral for a loan.
5. In the event of doubt as to whether the customers referred to in the above paragraphs are acting on their own behalf, or where it is certain that they are not acting on their own behalf, the credit and financial institutions shall take reasonable measures to obtain information as to the real identity of the persons on whose behalf those customers are acting.
6. Credit and financial institutions shall carry out such identification, even where the amount of the transaction is lower than the threshold laid down, wherever there is suspicion of money laundering.
7. Credit and financial institutions shall not be subject to the identification requirements provided for in this Article where the customer is also a credit or financial institution covered by this Directive.
8. Member States may provide that the identification requirements regarding transactions referred to in paragraphs 3 and 4 are fulfilled when it is established that the payment for the transaction is to be debited from an account opened in the customer’s name with a credit institution subject to this Directive according to the requirements of paragraph 1.
Article 4
Member States shall ensure that credit and financial institutions keep the following for use as evidence in any investigation into money laundering:
in the case of identification, a copy or the references of the evidence required, for a period of at least five years after the relationship with their customer has ended,
in the case of transactions, the supporting evidence and records, consisting of the original documents or copies admissible in court proceedings under the applicable national legislation for a period of at least five years following execution of the transactions.
Article 5
Member States shall ensure that credit and financial institutions examine with special attention any transaction which they regard as particularly likely, by its nature, to be related to money laundering.
Article 6
Member States shall ensure that credit and financial institutions and their directors and employees cooperate fully with the authorities responsible for combating money laundering:
by informing those authorities, on their own initiative, of any fact which might be an indication of money laundering,
by furnishing those authorities, at their request, with all necessary information, in accordance with the procedures established by the applicable legislation.
The information referred to in the first paragraph shall be forwarded to the authorities responsible for combating money laundering of the Member State in whose territory the institution forwarding the information is situated. The person or persons designated by the credit and financial institutions in accordance with the procedures provided for in Article 11(1) shall normally forward the information.
Information supplied to the authorities in accordance with the first paragraph may be used only in connection with the combating of money laundering. However, Member States may provide that such information may also be used for other purposes.
Article 7
Member States shall ensure that credit and financial institutions refrain from carrying out transactions which they know or suspect to be related to money laundering until they have apprised the authorities referred to in Article 6. Those authorities may, under conditions determined by their national legislation, give instructions not to execute the operation. Where such a transaction is suspected of giving rise to money laundering and where to refrain in such manner is impossible or is likely to frustrate efforts to pursue the beneficiaries of a suspected money-laundering operation, the institutions concerned shall apprise the authorities immediately afterwards.
Article 8
Credit and financial institutions and their directors and employees shall not disclose to the customer concerned nor to other third persons that information has been transmitted to the authorities in accordance with Articles 6 and 7 or that a money laundering investigation is being carried out.
Article 9
The disclosure in good faith to the authorities responsible for combating money laundering by an employee or director of a credit or financial institution of the information referred to in Articles 6 and 7 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 the credit or financial institution, its directors or employees in liability of any kind.
Article 10
Member States shall ensure that if, in the course of inspections carried out in credit or financial institutions by the competent authorities, or in any other way, those authorities discover facts that could constitute evidence of money laundering, they inform the authorities responsible for combating money laundering.
Article 11
Member States shall ensure that credit and financial institutions:
Article 12
Member States shall ensure that the provisions of this Directive are extended in whole or in part to professions and to categories of undertakings, other than the credit and financial institutions referred to in Article 1, which engage in activities which are particularly likely to be used for money-laundering purposes.
Article 13
1. A contact committee (hereinafter referred to as ‘the Committee’) shall be set up under the aegis of the Commission. Its function shall be:
(a) without prejudice to Articles 169 and 170 of the Treaty, to facilitate harmonized implementation of this Directive through regular consultation on any practical problems arising from its application and on which exchanges of view are deemed useful;
(b) to facilitate consultation between the Member States on the more stringent or additional conditions and obligations which they may lay down at national level;
(c) to advise the Commission, if necessary, on any supplements or amendments to be made to this Directive or on any adjustments deemed necessary, in particular to harmonize the effects of Article 12;
(d) to examine whether a profession or a category of undertaking should be included in the scope of Article 12 where it has been established that such profession or category of undertaking has been used in a Member State for money laundering.
2. It shall not be the function of the Committee to appraise the merits of decisions taken by the competent authorities in individual cases.
3. The Committee shall be composed of persons appointed by the Member States and of representatives of the Commission. The secretariat shall be provided by the Commission. The chairman shall be a representative of the Commission. It shall be convened by its chairman, either on his own initiative or at the request of the delegation of a Member State.
Article 14
Each Member State shall take appropriate measures to ensure full application of all the provisions of this Directive and shall in particular determine the penalties to be applied for infringement of the measures adopted pursuant to this Directive.
Article 15
The Member States may adopt or retain in force stricter provisions in the field covered by this Directive to prevent money laundering.
Article 16
1. Member States shall bring into force the laws, regulations and administrative decisions necessary to comply with this Directive before 1 January 1993 at the latest.
2. Where Member States adopt these measures, they shall contain a reference to this Directive or shall be accompanied by such reference on the occasion of their official publication. The methods of making such a reference shall be laid down by the Member States.
3. Member States shall communicate to the Commission the text of the main provisions of national law which they adopt in the field governed by this Directive.
Article 17
One year after 1 January 1993, whenever necessary and at least at three yearly intervals thereafter, the Commission shall draw up a report on the implementation of this Directive and submit it to the European Parliament and the Council.
Article 18
This Directive is addressed to the Member States.
Done at Luxembourg, 10 June 1991.
For the Council
The President
J.C. JUNCKER
Statement by the representatives of the Governments of the Member States meeting within the Council
The representatives of the Governments of the Member States, meeting within the Council,
Recalling that the Member States signed the United Nations Convention against illicit traffic in narcotic drugs and psychotropic substances, adopted on 19 December 1988 in Vienna;
Recalling also that most Member States have already signed the Council of Europe Convention on laundering, tracing, seizure and confiscation of proceeds of crime on 8 November 1990 in Strasbourg;
Conscious of the fact that the description of money laundering contained in Article 1 of Council Directive 91/308/EEC derives its wording from the relevant provisions of the aforementioned Conventions;
Hereby undertake to take all necessary steps by 31 December 1992 at the latest to enact criminal legislation enabling them to comply with their obligations under the aforementioned instruments.
Appendix II 7 EC Directive on the Supervision of Credit Institutions on a Consolidated Basis
Council Directive1 6 April 1992 on the supervision of credit institutions on a consolidated basis (92/30/EEC) as corrected2
The Commission of the European Communities,
Having regard to the Treaty establishing the European Economic Community, and in particular the first and third sentences of Article 57(2) thereof,
Having regard to the proposal from the Commission,
In cooperation with the European Parliament,3
Having regard to the opinion of the Economic and Social Committee,4
Whereas Council Directive 83/350/EEC of 13 June 1983 on the supervision of credit institutions on a consolidated basis5 established the necessary framework for the introduction of supervision of credit institutions on a consolidated basis; whereas, following the transposition of that Directive into the national law of the Member States, the principle of supervision on a consolidated basis is now applied throughout the Community;
Whereas, in order to be effective, supervision on a consolidated basis must be applied to all banking groups, including those the parent undertakings of which are not credit institutions; whereas the competent authorities must hold the necessary legal instruments to be able to exercise such supervision;
Whereas, in the case of groups with diversified activities the parent undertakings of which control at least one credit institution subsidiary, the competent authorities must be able to assess the financial situation of a credit institution in such a group; whereas, pending subsequent coordination, the Member States may lay down appropriate methods of consolidation for the achievement of the objective of this Directive; whereas the competent authorities must at least have the means of obtaining from all undertakings within a group the information necessary for the performance of their function; whereas cooperation between the authorities responsible for the supervision of different financial sectors must be established in the case of groups of undertakings carrying on a range of financial activities;
Whereas rules limiting the risks taken by a credit institution on the mixed-activity holding company of which it is a subsidiary, as well as those taken on the other subsidiaries of the same mixed-activity holding company, can be particularly useful; whereas it would, however, appear to be preferable to settle this question in a more systematic manner in the framework of a future Directive on the limitation of large exposures;
Whereas the Member States can, furthermore, refuse or withdraw banking authorization in the case of certain group structures considered inappropriate for carrying on banking activities, in particular because such structures could not be supervised effectively; whereas in this respect the competent authorities have the powers mentioned in Article 8(1)(c) of the First Council Directive (77/780/EEC) of 12 December 1977 on the coordination of the laws, regulations and administrative provisions relating to the taking up and pursuit of the business of credit institutions6 and in Articles 5 and 11 of the 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,7 in order to ensure the sound and prudent management of credit institutions;
Whereas the Member States can equally apply appropriate supervision techniques to groups with structures not covered by this Directive; whereas, if such structures become common, this Directive should be extended to cover them;
Whereas supervision on a consolidated basis must take in all activities defined in the Annex to Directive 89/646/EEC; whereas all undertakings principally engaged in such activities must therefore be included in supervision on a consolidated basis; whereas, as a result, the definition of a financial institution given in Directive 83/350/EEC must be widened to cover such activities;
Whereas, regarding the consolidation of financial institutions involved in activities principally subject to market risks and subject to particular rules of supervision, the coordination of the methods for the consolidated supervision of market risks is possible in the framework of Community harmonization of capital adequacy of investment firms and credit institutions, for which the Commission has introduced a proposal for a Directive; whereas such harmonization concerns, inter alia, the conditions which must be applied when offsetting opposing positions in the group and the case where these financial institutions are subject to specific supervisory rules regarding their financial stability; whereas this implies that, until the future Directive on capital adequacy to cover market risks is brought into effect, the competent authorities shall include in consolidated supervision financial institutions which are principally exposed to market risks, in accordance with methods determined by those authorities in the light of the particular nature of the risks involved;
Whereas, following the adoption of Council Directive 86/635/EEC of 8 December 1986 on the annual accounts and consolidated accounts of banks and other financial institutions,8 which, together with the Seventh Council Directive (83/349/EEC) of 13 June 1983 on consolidated accounts,9 established the rules of consolidation applicable to consolidated accounts published by credit institutions, it is now possible to define more precisely the methods to be used in prudential supervision exercised on a consolidated basis;
Whereas this Directive is fully in keeping with the objectives defined in the Single European Act; whereas it will, in particular, ensure the homogeneous application throughout the Community of prudential rules established by other Community legislation, which must be observed on a consolidated basis; whereas this Directive is, in particular, necessary for the correct application of Council Directive 89/ 299/ EEC of 17 April 1989 on the own funds of credit institutions;10
Whereas supervision of credit institutions on a consolidated basis must be aimed at, in particular, protecting the interests of the depositors of the said institutions and at ensuring the stability of the financial system;
Whereas it is desirable that agreement 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;
Whereas the amendments to be made to Directive 83/350/EEC are so considerable that it is preferable that it be wholly replaced by this Directive,
Has Adopted this Directive:
Article 1. Definitions
For the purposes of this Directive:
‘credit institution’ shall mean a credit institution within the meaning of the first indent of Article 1 of Directive 77/780/EEC, or any private or public undertaking which corresponds to the definition in the first indent of Article 1 of Directive 77/780/EEC and has been authorized in a third country,
‘financial institution’ shall mean 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 referred to in numbers 2 to 12 of the list appearing in the Annex to Directive 89/646/EEC,
‘financial holding company’ shall mean a financial institution the subsidiary undertakings of which are either exclusively or mainly credit institutions or financial institutions, one at least of such subsidiaries being a credit institution,
‘mixed-activity holding company’ shall mean a parent undertaking, other than a financial holding company or a credit institution, the subsidiaries of which include at least one credit institution,
‘ancillary banking services’ undertaking shall mean 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 institution,
‘participation’ shall mean the ownership, direct or indirect, of 20% or more of the voting rights or capital of an undertaking,
‘parent undertaking’ shall mean a parent undertaking within the meaning of Article 1(1) of the Directive 83/349/EEC and any undertaking which, in the opinion of the competent authorities, effectively exercises a dominant influence over another undertaking,
‘subsidiary’ shall mean 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,
‘competent authorities’ shall mean the national authorities which are empowered by law or regulation to supervise credit institutions.
Article 2. Scope
This Directive shall apply to credit institutions that have obtained the authorization referred to in Article 3 of Directive 77/780/EEC, financial holding companies and mixed-activity holding companies which have their head offices in the Community.
The institutions permanently excluded by Article 2 of Directive 77/780/EEC, with the exception, however, of the Member States’ central banks, shall be treated as financial institutions for the purposes of this Directive.
Article 3. 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 5, 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 5, 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. 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 standing alone.
3. The Member States or the competent authorities responsible for exercising supervision on a consolidated basis pursuant to Article 4 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: ECU 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.
4. 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, 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.
5. Supervision of solvency, and of the adequacy of own funds to cover market risks and control of large exposures, as governed by the relevant Community acts in force, shall be exercised on a consolidated basis in accordance with this Directive. 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 12(1) and (2) of Directive 89/646/EEC shall be supervised and controlled on the basis of the consolidated or sub-consolidated 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 sub-consolidated 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 authorization 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, steps must be taken to ensure that capital is distributed adequately within the banking group.
If the competent authorities do 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 2(1) of Directive 89/299/EEC.
8. Where a credit institution the parent of which is a credit 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 paragraph 5 to that institution on an individual or, when appropriate, a subconsolidated basis.
9. Notwithstanding the requirements of paragraph 8, the competent authorities responsible for authorizing 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 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.
10. 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 6. In such a case, the procedures for transmitting and verifying the information laid down in that Article shall apply.
Article 4. Competent authorities responsible for exercising supervision on a consolidated basis
1. Where a parent undertaking is a credit institution, supervision on a consolidated basis shall be exercised by the competent authorities that authorized it under Article 3 of Directive 77/780/EEC.
2. Where the parent of a credit institution is a financial holding company, supervision on a consolidated basis shall be exercised by the competent authorities which authorized that credit institution under Article 3 of Directive 77/780/EEC.
However, where credit institutions authorized in two or more Member States have as their parent the same financial holding company, supervision on a consolidated basis shall be exercised by the competent authorities of the credit institution authorized in the Member State in which the financial holding company was set up.
If no credit institution subsidiary has been authorized 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 authorized 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 authorization referred to in Article 3 of Directive 77/780/EEC.
3. The competent authorities concerned may by common agreement waive the rules laid down in the first and second subparagraphs of paragraph 2.
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 objective of this Directive may be achieved.
5. Where 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 organize coordination between such authorities.
Article 5. Form and extent of consolidation
1. The competent authorities responsible for exercising supervision on a consolidated basis 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, proportional consolidation may be prescribed where, in the opinion of the competent authorities, the liability of a parent undertaking holding a share of the capital is limited to that share of that capital 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.
2. The competent authorities responsible for carrying out supervision on a consolidated basis 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 supervisory on a consolidated basis.
4. Without prejudice to paragraphs 1, 2 and 3, the competent authorities shall determine whether and how consolidation is to be carried out in the following cases:
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.
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,
where two or more credit institutions or financial institutions have administrative, management or supervisory bodies with the same persons constituting a majority.
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.
5. Where consolidated supervision is required pursuant to Article 3(1) and (2), ancillary banking services undertakings shall be included in consolidations in the cases, and in accordance with the methods, laid down in paragraphs 1 to 4, of this Article.
Article 6. 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 authorization 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 purposes of supervising the credit institution subsidiaries.
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 7(4) 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 7(7).
Article 7. Measures to facilitate the application of this Directive
1. Member States shall take the necessary steps to ensure that there are no legal impediments preventing the 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 3(10), from exchanging amongst themselves any information which would be relevant for the purposes of supervision in accordance with this Directive.
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 4, 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 authorize 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 authorize their competent authorities to exchange the information referred to in Article 6 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 3(10).
4. Where a credit institution, financial holding company or mixedactivity holding company controls one or more subsidiaries which are insurance companies or other undertakings providing investment services which are subject to authorization, 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.
5. Information received pursuant to this Directive 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 Article 12 of Directive 77/780/EEC.
6. The competent authorities responsible for supervision on a consolidated basis shall establish lists of the financial holding companies referred to in Article 3(2). Those lists shall be communicated to the competent authorities of the other Member States and to the Commission.
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 6 or a subsidiary of the kind covered in Article 3(10), situated in another Member State, they 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.
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, regulations or administrative provisions enacted to implement this Directive. In certain cases, such measures may require the intervention of the courts. The competent authorities shall cooperate closely to ensure that 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.
Article 8. Third countries
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:
credit institutions the parent undertakings of which have their head offices situated in a third country, and
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 both:
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 which hold participations in such institutions,
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 which hold participations in such institutions.
3. The Commission and the Advisory Committee set up under Article 11 of Directive 77/780/EEC shall examine the outcome of the negotiations referred to in paragraph 1 and the resulting situation.
Article 9. Final provisions
1. Member States shall bring into force the laws, regulations and administrative provisions necessary to comply with this Directive before 1 January 1993. They forthwith inform the Commission thereof.
When Member States adopt the abovementioned measures, the measures shall contain a reference to this Directive or be accompanied by such reference on the occasion of their official publication. The methods of making such a reference shall be laid down by the Member States.
2. Notwithstanding the provisions of Article 3(5) and until the future Directive on capital adequacy to cover market risks is brought into effect, the competent authorities shall include in consolidated supervision financial institutions which are principally exposed to market risks in accordance with methods to be determined by those authorities in the light of the particular nature of the risks involved.
3. Member States shall communicate to the Commission the texts of the main provisions of internal law which they adopt in the field governed by this Directive.
Article 10
1. Directive 83/350/EEC is hereby repealed with effect from 1 January 1993.
2. In the following provisions, the words ‘Directive 83/350/EEC’ shall be replaced by ‘Directive 92/350/EEC’:
Article 5 of Directive 89/299/EEC,
Articles 12(6), 13(3) and the fifth indent of the first subparagraph of Article 18(2) of Directive 89/646/EEC,
Article 3(3) of Directive 89/647/EEC.
3. In Article 1, point 5, of Directive 89/646/EEC and the first indent of Article 2(1) of Directive 89/647/EEC, the definition of competent authorities shall be replaced by the following:
‘the national authorities which are empowered by law or regulation to supervise credit institutions’.
4. In Article 15(2) of Directive 89/646/EEC the words ‘Article 5(4) of Directive 83/350/EEC shall be replaced by ‘Article 7(7) of Directive 92/30/EEC’.
Article 11
This Directive is addressed to the Member States.
Done at Luxembourg, 6 April 1992.
For the Council
The President
João PINHEIRO
Appendix II 8 EC Directive on the Monitoring and Control of Large Exposures of Credit Institutions
Council Directive1 21 December 1992 on the monitoring and control of large exposures of credit institutions (92/121/EEC)
The Council of the European Communities,
Having regard to the Treaty establishing the European Economic Community, and in particular the first and third sentences of Article 57(2) thereof,
Having regard to the proposal from the Commission,2
In cooperation with the European Parliament,3
Having regard to the opinion of the Economic and Social Committee,4
Whereas this Directive comes within the framework of the aims set out in the Commission’s White Paper on completing the internal market;
Whereas the essential rules for monitoring large exposures of credit institutions should be harmonized; whereas Member States should still be able to adopt provisions more stringent than those provided for by this Directive;
Whereas this Directive has been the subject of consultation with the Banking Advisory Committee, which, under Article 6(4) of 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,5 is responsible for making suggestions to the Commission with a view to coordinating the coefficients applicable in the Member States;
Whereas the monitoring and control of a credit institution’s exposures is an integral part of its supervision; whereas an excessive concentration of exposures to a single client or group of connected clients may result in an unacceptable risk of loss; whereas such a situation may be considered prejudicial to the solvency of a credit institution;
Whereas common guidelines for monitoring and controlling credit institutions’ large exposures were initially introduced by Commission recommendation 87/62/EEC;6 whereas that instrument was chosen because it permitted the gradual adjustment of existing systems and the establishment of new systems without dislocating the Community’s banking system; whereas, now that that first phase is over, a binding instrument applicable to all Community credit institutions should be adopted;
Whereas in a unified banking market credit institutions are engaged in direct competition with one another and monitoring requirements throughout the Community should therefore be equivalent; whereas, 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; whereas 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;
Whereas, for the precise accounting technique to be used for the assessment of exposures reference is made to Council Directive 86/635/EEC of 8 December 1986 on the annual accounts and consolidated accounts of banks and other financial institutions7;
Whereas Council Directive 89/647/EEC of 18 December 1989 on a solvency ratio for credit institutions8 includes a list of credit risks which may be incurred by credit institutions; whereas that list should therefore be used for the definition of exposures for the purposes of this Directive; whereas it is not, however, appropriate to refer on principle to the weightings or degrees of risk laid down in that Directive; whereas 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; whereas, in the context of the regulation of large exposures, the aim is to limit the maximum loss that a credit institution may incur through any single client or group of connected clients; whereas it 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 weightings or degrees of risk are applied;
Whereas, when a credit institution incurs an exposure to its own parent undertaking or to other subsidiaries of its parent undertaking, particular prudence is necessary; whereas the management of exposures incurred by credit institutions must be carried out in a fully autonomous manner, in accordance with the principles of sound banking management, without regard to any considerations other than those principles; whereas the 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 institutions9 requires that where 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 take appropriate measures to put an end to that situation; whereas, in the field of large exposures, specific standards 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; whereas more stringent restrictions 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; whereas 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; whereas under this approach banking groups will also be encouraged to organize their structures in such a way as to allow consolidated monitoring, which is desirable because a more comprehensive level of monitoring is possible;
Whereas, in order to ensure harmonious application of this Directive, Member States should be allowed to provide for the two-stage application of the new limits; whereas, 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;
Whereas implementing powers of the same type as those which the Council reserved for itself in Directive 89/299/EEC on the own funds of credit institutions10 were granted to the Commission in Directive 89/646/EEC;
Whereas, taking account of the specific characteristics of the sector in question, it is appropriate to give the Committee set up by Article 22 of Directive 89/646/EEC the role of assisting the Commission in exercising the powers conferred on it under the procedure laid down in Article 2 (Procedure III, Variant (b)) of Council Decision 87/373/EEC of 13 July 1987 laying down the procedures for the exercise of implementing powers conferred on the Commission;11
Whereas, with regard to the monitoring of large exposures concerning activities which are principally exposed to market risks, the necessary coordination of monitoring methods can be ensured under a Community act on the capital adequacy of investment firms and credit institutions; whereas that implies that until Community legislation on the aforementioned large exposures is adopted the monitoring of large exposures relating to activities which are principally exposed to market risks, such as the trading portfolio underwriting commitments for the issue of securities and claims related to the settlement of securities transactions may be left to the competent authorities of each Member State,
Has Adopted this Directive:
Article 1. Definitions
For the purposes of this Directive:
(a) “credit institution” shall mean a credit institution as defined in the first indent of Article 1 of Directive 77/780/EEC, including such a credit institution’s branches in third countries, and any private or public undertaking, including its branches, which satisfies the definition in the first indent of Article 1 of Directive 77/780/EEC and which has been authorized in a third country;
(b) “competent authorities” shall mean the competent authorities as defined in the ninth indent of Article 1 of Council Directive 92/30/EEC of 6 April 1992 on the supervision of credit institutions on a consolidated basis;12
(c) “parent undertaking” shall mean a parent undertaking as defined in the seventh indent of Article 1 of Directive 92/30/EEC;
(d) “subsidiary undertaking” shall mean a subsidiary undertaking as defined in the eighth indent of Article 1 of Directive 92/30/EEC;
(e) “financial holding company” shall mean a financial holding company as defined in the third indent of Article 1 of Directive 92/30/EEC;
(f) “financial institution” shall mean a financial institution as defined in the second indent of Article 1 of Directive 92/30/EEC;
(g) “ancillary banking-services undertaking” shall mean an undertaking as defined in the fifth indent of Article 1 of Directive 92/30/EEC;
(h) “exposures” shall mean the assets and off-balance-sheet items referred to in Article 6 of Directive 89/647/EEC and in Annexes I and III thereto, without application of the weightings or degrees of risk there provided for; the risks referred to in the aforementioned Annex III must be calculated in accordance with one of the methods set out in Annex II to that Directive, 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 calculation of the solvency ratio or of other monitoring ratios provided for in 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;
(i) “Zone A” shall mean the zone referred to in the second indent of Article 2(1) of Directive 89/647/EEC;
(j) “Zone B” shall mean the zone referred to in the third indent of Article 2(1) of Directive 89/647/EEC;
(k) “own funds” shall mean the own funds of a credit institution as defined in Directive 89/299/EEC;
(1) “control” shall mean 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;
(m) “group of connected clients” shall mean:
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
two or more natural or legal persons between whom there is no relationship of control as defined 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.
Article 2. Scope
This Directive shall apply to credit institutions which have obtained the authorization referred to in Article 3 of Directive 77/780/EEC.
Member States need not, however, apply this Directive to:
(a) the institutions listed in Article 2(2) of Directive 77/780/EEC, or
(b) the institutions in the same Member State which, as defined in Article 2(4)(a) of Directive 77/780/EEC, are affiliated to a central body established in that Member State, provided that, without prejudice to the application of this Directive to the central body, the whole as constituted by the central body and its affiliated institutions is subject to global monitoring.
Article 3. 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.
2. A credit institution shall report every large exposure within the meaning of paragraph 1 to the competent authorities. Member States shall provide that that reporting is to be carried out, at their discretion, in accordance with one of the following two methods:
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,
reporting of all large exposures at least four times a year.
3. Exposures exempted under Article 4(7)(a), (b), (c), (d), (f), (g) and (h) need not, however, be reported as laid down in paragraph 2. The reporting frequency laid down in the second indent of paragraph 2 may be reduced to twice a year for the exposures referred to in Article 4(7)(e) and (i) to (s), (8), (9) and (10).
4. The competent authorities shall require that every credit institution have sound administrative and accounting procedures and adequate internal control mechanisms for the purpose of identifying and recording all large exposures and subsequent changes to them, 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.
Where a credit institution invokes paragraph 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.
Article 4. 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 exceeds 25% of its own funds.
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 Banking Advisory Committee 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.
4. Member States may impose limits more stringent than those laid down in paragraphs 1, 2 and 3.
5. 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.
6. Member States may fully or partially exempt from the application of 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 Directive 92/30/EEC or with equivalent standards in force in a third country.
7. Member States may fully or partially exempt the following exposures from the application of paragraphs 1, 2 and 3:
(a) asset items constituting claims on Zone A central governments or central banks;
(b) asset items constituting claims on the European Communities;
(c) asset items constituting claims carrying the explicit guarantees of Zone A central governments or central banks or of the European Communities;
(d) other exposures attributable to, or guaranteed by, Zone A central governments or central banks or the European Communities;
(e) asset items constituting claims on and other exposures to Zone B central governments or central banks 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 Zone A central government or central bank securities, or securities issued by the European Communities or by Member State regional or local authorities for which Article 7 of Directive 89/647/EEC lays down a zero weighting for solvency purposes;
(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 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 institution or by a credit institution which is the parent undertaking or a subsidiary of the lending 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 as defined in Directive 89/299/EEC;
(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 8(2) of Directive 89/647/EEC, 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;
(1) debt securities as defined in Article 22(4) of Directive 85/611/EEC;13
(m) pending subsequent coordination, holdings in the insurance companies referred to in Article 12(3) of Directive 89/646/EEC 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 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;
(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 recognized 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 7 of Directive 89/647/EEC, and in the case of debt securities issued by the European Investment Bank and multilateral development banks as defined in Article 2 of Directive 89/647/EEC. Securities used as collateral may not constitute credit institutions’ own funds as defined in Directive 89/229/EEC;
(p) loans secured, to the satisfaction of the competent authorities, by mortgages on residential property 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 both 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 subparagraph residential property shall mean a residence to be occupied or let by the borrower;
(q) 50% of the medium/low-risk off-balance-sheet items referred to in Annex I to Directive 89/647/EEC;
(r) 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 as defined in Article 1(a), 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. Within five years of the adoption of this Directive, the Commission shall submit to the Council a report accompanied, if necessary, by appropriate proposals;
(s) the low-risk off-balance-sheet items referred to in Annex I to Directive 89/647/EEC, 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 paragraphs 1, 2 and 3 to be exceeded.
8. For the purposes of paragraphs 1, 2 and 3, Member States may apply a weighting of 20% to asset items constituting claims on Member State regional and local authorities and to other exposures to or guaranteed by such authorities; subject to the conditions laid down in Article 7 of Directive 89/647/EEC, however, Member States may reduce that rate to 0%.
9. For the purposes of 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 authorized by the competent authorities of the Member State of origin of the issuing credit institution. In no case may any of these items constitute own funds within the meaning of Directive 89/299/EEC.
10. By way of derogation from paragraphs 7 (i) and 9, Member States may apply a weighting of 20% to asset items constituting claims on and other exposures to credit institutions, regardless of their maturity.
11. 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(o), Member States may:
treat the exposure as having been incurred to the 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,
treat the exposure as having been incurred to the third party rather than to the client, if the exposure defined in paragraph 7(o) is guaranteed by collateral under the conditions there laid down.
12. Within five years of the date referred to in Article 8(1), 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.
Article 5. Supervision on a consolidated or unconsolidated basis
1. If the credit institution is neither a parent undertaking nor a subsidiary, compliance with the obligations imposed in Article 3 and 4 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 3 and 4 or in any other Community provision applicable to this area shall be monitored on a consolidated basis in accordance with Directive 92/30/EEC.
3. Member States may waive monitoring on an individual or subconsolidated basis of compliance with the obligations imposed in Articles 3 and 4 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 authorization and supervision and is covered by monitoring on a consolidated basis.
Member States may 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 that company is subject to the same monitoring as credit institutions.
In the cases referred to in the first and second subparagraphs measures must be taken to ensure the satisfactory allocation of risks within the group.
4. Where a credit institution the parent undertaking of which is a credit institution has been authorized and has its registered office in another Member State, the competent authorities which granted that authorization shall require compliance with the obligations imposed in Articles 3 and 4 or in any other Community provision applicable to this area on an individual basis or, when appropriate, a subconsolidated basis.
5. Notwithstanding paragraph 4, the competent authorities responsible for authorizing the subsidiary of a parent undertaking which is a credit institution which has been authorized by and has its registered office in another Member State may, by way of bilateral agreement, transfer responsibility for monitoring compliance with the obligations imposed in Articles 3 and 4 or in any other Community provision applicable to this area to the competent authorities which have authorized and which monitor the parent undertaking. The Commission and the Banking Advisory Committee shall be kept informed of the existence and content of such agreements.
Article 6. Transitional provisions relating to exposures in excess of the limits
1. If, when this Directive is published in the Official Journal of the European Communities, a credit institution has already incurred an exposure or exposures exceeding either the large exposure limit or the aggregate large exposure limit laid down in this Directive, 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 this Directive.
2. The process of having such an exposure or exposures brought within authorized 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 Banking Advisory Committee 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 the date of the publication of this Directive in the Official Journal of the European Communities.
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.
5. Until 31 December 1998, Member States may increase the limit laid down in Article 4(1) to 40% and the limit laid down in Article 4(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 limits laid down in Article 4 shall expire on 31 December 2001.
6. In the case of credit institutions the own funds of which, as defined in Article 2(1) of Directive 89/299/EEC, do not exceed ECU 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 Banking Advisory Committee 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.
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 3(2).
9. Member States may fully or partially exempt from the application of Article 4(1), (2) and (3) exposures incurred by a credit institution consisting of mortgage loans as defined in Article 11(4) of Directive 89/647/EEC concluded within eight years of the date laid down in Article 8(1) of this Directive, as well as property leasing transactions as defined in Article 11(5) of Directive 89/647/EEC concluded within eight years of the date laid down in Article 8(1) of this Directive, in both cases up to 50% of the value of the property concerned.
10. Without prejudice to paragraph 4, Portugal may, until 31 December 1998, fully or partially exempt from the application of Article 4(1) and (3) exposures incurred by a credit institution to Electricidade de Portugal (EDP) and Petrogal.
Article 7. Subsequent amendments
1. Technical amendments to the following points shall be adopted in accordance with the procedure laid down in paragraph 2:
the clarification of definitions to take account of developments on financial markets,
the clarification of definitions to ensure the uniform application of this Directive,
the alignment of the terminology and of the wording of the definitions on those in subsequent instruments concerning credit institutions and related matters,
the clarification of the exemptions provided for in Article 4(5) to (10).
2. The Commission shall be assisted by the committee provided for in the first subparagraph of Article 22(2) of Directive 89/646/EEC.
The Commission representative shall submit to the committee a draft of the measures to be taken. The committee shall deliver its opinion on that draft within a time limit which the chairman may lay down according to the urgency of the matter. The opinion shall be delivered by the majority laid down in Article 148(2) of the Treaty in the case of decisions which the Council is required to adopt on a proposal from the Commission. The votes of the Member States’ representatives on the committee shall be weighted as laid down in that Article. The chairman shall not vote.
The Commission shall adopt the measures envisaged if they are in accordance with the committee’s opinion.
If the measures envisaged are not in accordance with the committee’s opinion, or if no opinion is delivered, the Commission shall, without delay, submit to the Council a proposal concerning the measures to be taken. The Council shall act by a qualified majority.
If the Council does not act within three months of the referral to it the Commission shall adopt the measures proposed unless the Council has decided against those measures by a simple majority.
Article 8. Final provisions
1. Member States shall bring into force the laws, regulations and administrative provisions necessary to comply with this Directive by 1 January 1994. They shall forthwith inform the Commission thereof.
When Member States adopt these measures, they shall include a reference to this Directive or be accompanied by such a reference on the occasion of their official publication. The manner in which such a reference is to be made shall be laid down by the Member States.
2. Member States shall communicate to the Commission the texts of the main provisions of national law which they adopt in the field governed by this Directive.
3. Pending Community legislation on the monitoring on a consolidated or non-consolidated basis of large exposures concerning activities which are principally exposed to market risks the Member States shall deal with such large exposures in accordance with methods which they shall determine, having regard to the particular nature of the risks involved.
Article 9
This Directive is addressed to the Member States.
Done at Brussels, 21 December 1992.
For the Council
The President
D. HURD
Appendix II 9 EC Directive on Investment Services in the Securities Field
Council Directive1 10 May 1993 on investment services in the securities field (93/ 22/ EEC)
The Council of European Communities,
Having regard to the Treaty establishing the European Economic Community, and in particular Article 57(2) thereof,
Having regard to the proposal from the Commission,2
In cooperation with the European Parliament,3
Having regard to the opinion of the Economic and Social Committee,4
Whereas this Directive constitutes an instrument essential to 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 both of the right of establishment and of the freedom to provide financial services, in the field of investment firms;
Whereas firms that provide the investment services covered by this Directive must be subject to authorization by their home Member States in order to protect investors and the stability of the financial system;
Whereas the approach adopted is to effect only the essential harmonization necessary and sufficient to secure the mutual recognition of authorization and of prudential supervision systems, making possible the grant of a single authorization valid throughout the Community and the application of the principle of home Member State supervision; whereas, by virtue of mutual recognition, investment firms authorized in their home Member States may carry on any or all of the services covered by this Directive for which they have received authorization throughout the Community by establishing branches or under the freedom to provide services;
Whereas the principles of mutual recognition and of home Member State supervision require that the Member States’ competent authorities should not grant or should withdraw authorization where factors such as the content of programmes of operations, the geographical distribution or the activities actually carried on indicate clearly that an investment firm 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 the territory of which it intends to carry on or does carry on the greater part of its activities; whereas, for the purposes of this Directive, an investment firm which is a legal person must be authorized in the Member State in which it has its registered office; whereas an investment firm which is not a legal person must be authorized in the Member State in which it has its head office; whereas, in addition, Member States must require that an investment firm’s head office must always be situated in its home Member State and that it actually operates there;
Whereas it is necessary, for the protection of investors, to guarantee the internal supervision of every firm, either by means of two-man management or, where that is not required by this Directive, by other mechanisms that ensure an equivalent result;
Whereas in order to guarantee fair competition, it must be ensured that investment firms that are not credit institutions have the same freedom to create branches and provide services across frontiers as is provided for by the 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;5
Whereas an investment firm should not be able to invoke this Directive in order to carry out spot or forward exchange transactions other than as services connected with the provision or investment services; whereas, therefore, the use of a branch solely for such foreign-exchange transactions would constitute misuse of the machinery of this Directive;
Whereas an investment firm authorized in its home Member State may carry on business throughout the Community by whatever means it deems appropriate; whereas, to that end it may, if it deems it necessary, retain tied agents to receive and transmit orders for its account and under its full and unconditional responsibility; whereas, in these circumstances, such agents’ business must be regarded as that of the firm; whereas, moreover, this Directive does not prevent a home Member State from making the status of such agents subject to special requirements; whereas should the investment firm carry on cross-border business, the host Member State must treat those agents as being the firm itself; whereas, moreover, the door-to-door selling of transferable securities should not be covered by this Directive and the regulation thereof should remain a matter for national provisions;
Whereas ‘transferable securities’ means those classes of securities which are normally dealt in on the capital market, such as government securities, shares in companies, negotiable securities giving the right to acquire shares by subscription or exchange, depositary receipts, bonds issued as part of a series, index warrants and securities giving the right to acquire such bonds by subscription;
Whereas ‘money-market instruments’ means those classes of instruments which are normally dealt in on the money market such as treasury bills, certificates of deposit and commercial paper;
Whereas the very wide definitions of transferable securities and money-market instruments included in this Directive are valid only for this Directive and consequently in no way affect the various definitions of financial instruments used in national legislation for other purposes such as taxation; whereas, furthermore, the definition of transferable securities covers negotiable instruments only; whereas, consequently, shares and other securities equivalent to shares issued by bodies such as building societies and industrial and provident societies, ownership of which cannot in practice be transferred except by the issuing body’s buying them back, are not covered by this definition;
Whereas ‘instrument equivalent to a financial-futures contract’ means a contract which is settled by a payment in cash calculated by reference to fluctuations in interest or exchange rates, the value of any instrument listed in Section B of the Annex or an index of any such instruments;
Whereas, for the purposes of this Directive, the business of the reception and transmission of orders also includes bringing together two or more investors thereby bringing about a transaction between those investors;
Whereas no provision in this Directive affects the Community provisions or, failing such, the national provisions regulating public offers of the instruments covered by this Directive; whereas the same applies to the marketing and distribution of such instruments;
Whereas Member States retain full responsibility for implementing their own monetary-policy measures, without prejudice to the measures necessary to strengthen the European Monetary System;
Whereas it is necessary to exclude insurance undertakings the activities of which are subject to appropriate monitoring by the competent prudential-supervision authorities and which are coordinated at Community level and undertakings carrying out reinsurance and retrocession activities;
Whereas undertakings which do not provide services for third parties but the business of which consists in providing investment services solely for their parent undertakings, for their subsidiaries, or for other subsidiaries of their parent undertakings should not be covered by this Directive;
Whereas the purpose of this Directive is to cover undertakings the normal business of which is to provide third parties with investment services on a professional basis; whereas its scope should not therefore cover any person with a different professional activity (e.g. a barrister or solicitor) who provides investment services only on an incidental basis in the course of that other professional activity, provided that that activity is regulated and the relevant rules do not prohibit the provision, on an incidental basis, of investment services; whereas it is also necessary for the same reason to exclude from the scope of this Directive persons who provide investment services only for producers or users of commodities to the extent necessary for transactions in such products where such transactions constitute their main business;
Whereas firms which provide investment services consisting exclusively in the administration of employee-participation schemes and which therefore do not provide investment services for third parties should not be covered by this Directive;
Whereas it is necessary to exclude from the scope of this Directive central banks and other bodies performing similar functions as well as public bodies charged with or intervening in the management of the public debt, which concept covers the investment thereof; whereas, in particular, this exclusion does not cover bodies that are partly or wholly State-owned the role of which is commercial or linked to the acquisition of holdings;
Whereas it is necessary to exclude from the scope of this Directive any firms or persons whose business consists only of receiving and transmitting orders to certain counterparties and who do not hold funds or securities belonging to their clients; whereas, therefore, they will not enjoy the right of establishment and freedom to provide services under the conditions laid down in this Directive, being subject, when they wish to operate in another Member State, to the relevant provisions adopted by that State;
Whereas it is necessary to exclude from the scope of this Directive collective investment undertakings whether or not coordinated at Community level, and the depositaries or managers of such undertakings, since they are subject to specific rules directly adapted to their activities;
Whereas, where associations created by a Member State’s pension funds to permit the management of their assets confine themselves to such management and do not provide investment services for third parties, and where the pension funds are themselves subject to the control of the authorities charged with monitoring insurance undertakings, it does not appear to be necessary to subject such associations to the conditions for taking up business and for operation imposed by this Directive;
Whereas this Directive should not apply to ‘agenti di cambio’ as defined by Italian law since they belong to a category the authorization of which is not to be renewed, their activities are confined to the national territory and they do not give rise to a risk of the distortion of competition;
Whereas the rights conferred on investment firms by this Directive are without prejudice to the right of Member States, central banks and other national bodies performing similar functions to choose their counterparties on the basis of objective, non-discriminatory criteria;
Whereas responsibility for supervising the financial soundness of an investment firm will rest with the competent authorities of its home Member State pursuant to Council Directive 93/6/EEC of 15 March 1993 on the capital adequacy of investment firms and credit institutions,6 which coordinates the rules applicable to market risk;
Whereas a home Member State may, as a general rule, establish rules stricter than those laid down in this Directive, in particular as regards authorization conditions, prudential requirements and the rules of reporting and transparency;
Whereas the carrying on of activities not covered by this Directive is governed by the general provisions of the Treaty on the right of establishment and the freedom to provide services;
Whereas in order to protect investors an investor’s ownership and other similar rights in respect of securities and his rights in respect of funds entrusted to a firm should in particular be protected by being kept distinct from those of the firm; whereas this principle does not, however, prevent a firm from doing business in its name but on behalf of the investor, where that is required by the very nature of the transaction and the investor is in agreement, for example stock lending;
Whereas the procedures for the authorization of branches of investment firms authorized in third countries will continue to apply to such firms; whereas those branches will not enjoy the freedom to provide services under the second paragraph of Article 59 of the Treaty or the right of establishment in Member States other than those in which they are established; whereas, however, requests for the authorization of subsidiaries or of the acquisition of holdings by undertakings governed by the laws of third countries are subject to a procedure intended to ensure that Community investment firms receive reciprocal treatment in the third countries in question;
Whereas the authorizations granted to investment firms by the competent national authorities pursuant to this Directive will have Community-wide, and no longer merely nationwide application, and existing reciprocity clauses will henceforth have no effect; whereas a flexible procedure is therefore needed to make it possible to assess reciprocity on a Community basis; whereas 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 liberalization of the global financial markets in third countries; whereas, 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 authorization and the restriction of new authorizations;
Whereas one of the objectives of this Directive is to protect investors; whereas it is therefore appropriate to take account of the different requirements for protection of various categories of investors and of their levels of professional expertise;
Whereas the Member States must ensure that there are no obstacles to prevent activities that receive mutual recognition from being carried on in the same manner as in the home Member State, as long as they do not conflict with laws and regulations protecting the general good in force in the host Member State;
Whereas a Member State may not limit the right of investors habitually resident or established in that Member State to avail themselves of any investment service provided by an investment firm covered by this Directive situated outside that Member State and acting out with that Member State;
Whereas in certain Member States clearing and settlement functions may be performed by bodies separate from the markets on which transactions are effected; whereas, accordingly, any reference in this Directive to access to and membership of regulated markets should be read as including references to access to and membership of bodies performing clearing and settlement functions for regulated markets;
Whereas each Member State must ensure that within its territory, treatment of all investment firms authorized in any Member State and likewise all financial instruments listed on the Member States’ regulated markets is non-discriminatory; whereas investment firms must all have the same opportunities of joining or having access to regulated markets; whereas, regardless of the manner in which transactions are at present organized in the Member States, it is therefore important, subject to the conditions imposed by this Directive, to abolish the technical and legal restrictions on access to the regulated markets within the framework of this Directive;
Whereas some Member States authorize credit institutions to become members of their regulated markets only indirectly, by setting up specialized subsidiaries; whereas the opportunity which this Directive gives credit institutions of becoming members of regulated markets directly without having to set up specialized subsidiaries constitutes a significant reform for those Member States and all its consequences should be reassessed in the light of the development of the financial markets; whereas, in view of those factors, the report which the Commission will submit to the Council on this matter no later than 31 December 1998 will have to take account of all the factors necessary for the Council to be able to reassess the consequences for those Member States, and in particular the danger of conflicts of interest and the level of protection afforded to investors;
Whereas it is of the greatest importance that the harmonization of compensation systems be brought into effect on the same date as this Directive; whereas, moreover, until the date on which a Directive harmonizing compensation systems is brought into effect, host Member States will be able to impose application of their compensation systems on investment firms including credit institutions authorized by other Member States, where the home Member States have no compensation systems or where their systems do not offer equivalent levels of protection;
Whereas the structure of regulated markets must continue to be governed by national law, without thereby forming an obstacle to the liberalization of access to the regulated markets of host Member States for investment firms authorized to provide the services concerned in their home Member States; whereas, pursuant to that principle, the law of the Federal Republic of Germany and the law of the Netherlands govern the activities Kursmakler and hoekmannen respectively so as to ensure that they do not exercise their functions in parallel with other functions; whereas it should be noted that Kursmakler and hoekmannen may not provide services in other Member States; whereas no one, whatever his home Member State, may claim to act as a Kursmakler or a hoekman without being subject to the same rules on incompatibility as result from the status of Kursmakler or hoekman;
Whereas it should be noted that this Directive cannot affect the measures taken pursuant to Council Directive 79/279/EEC of 5 March 1979 coordinating the conditions for the admission of securities to official stock-exchange listing;7
Whereas the stability and sound operation of the financial system and the protection of investors presuppose that a host Member State has the right and responsibility both to prevent and to penalize any action within its territory by investment firms contrary to the rules of conduct and other legal or regulatory provisions it has adopted in the interest of the general good and to take action in emergencies; whereas, moreover, the competent authorities of the host Member State must, in discharging their responsibilities, be able to count on the closest cooperation with the competent authorities of the home Member State, particularly as regards business carried on under the freedom to provide services; whereas the competent authorities of the home Member State are entitled to be informed by the competent authorities of the host Member State of any measures involving penalties on an investment firm or restrictions on its activities which the latter have taken vis-à-vis the investment firms which the former have authorized so as to be able to perform their function of prudential supervision efficiently; whereas to that end cooperation between the competent authorities of home and host Member States must be ensured;
Whereas, with the two-fold aim of protecting investors and ensuring the smooth operation of the markets in transferable securities, it is necessary to ensure that transparency of transactions is achieved and that the rules laid down for that purpose in this Directive for regulated markets apply both to investment firms and to credit institutions when they operate on the market;
Whereas examination of the problems arising in the areas covered by the Council Directives on investment services and securities, as regards both the application of existing measures and the possibility of closer coordination in the future, requires cooperation between national authorities and the Commission within a committee; whereas the establishment of such a committee does not rule out other forms of cooperation between supervisory authorities in this field;
Whereas technical amendments 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 sector; whereas the Commission will make such amendments as are necessary, after referring the matter to the committee to be set up in the securities-markets field,
Has Adopted this Directive:
TITLE I. Definition and scope
Article 1
For the purposes of this Directive:
Article 2
TITLE II. Conditions for taking up business
Article 3
1. Each Member State shall make access to the business of investment firms subject to authorization for investment firms of which it is the home Member State. Such authorization shall be granted by the home Member State’s competent authorities designated in accordance with Article 22. The authorization shall specify the investment services referred to in Section A of the Annex which the undertaking is authorized to provide. The authorization may also cover one or more of the non-core services referred to in Section C of the Annex. Authorization within the meaning of this Directive may in no case be granted for services covered only by Section C of the Annex.
2. Each Member State shall require that:
any investment firm which is a legal person and which, under its national law, has a registered office shall have its head office in the same Member State as its registered office,
any other investment firm shall have its head office in the Member State which issued its authorization and in which it actually carries on its business.
3. Without prejudice to other conditions of general application laid down by national law, the competent authorities shall not grant authorization unless:
an investment firm has sufficient initial capital in accordance with the rules laid down in Directive 93/6/EEC having regard to the nature of the investment service in question,
the persons who effectively direct the business of an investment firm are of sufficiently good repute and are sufficiently experienced.
The direction of a firm’s business must be decided by at least two persons meeting the above conditions. Where an appropriate arrangement ensures that the same result will be achieved, however, particularly in the cases provided for in the last indent of the third subparagraph of Article 1(2), the competent authorities may grant authorization to investment firms which are natural persons or, taking account of the nature and volume of their activities, to investment firms which are legal persons where such firms are managed by single natural persons in accordance with their articles of association and national laws.
4. Member States shall also require that every application for authorization be accompanied by a programme of operations setting out inter alia the types of business envisaged and the organizational structure of the investment firm concerned.
5. An applicant shall be informed within six months of the submission of a complete application whether or not authorization has been granted. Reasons shall be given whenever an authorization is refused.
6. An investment firm may commence business as soon as authorization has been granted.
7. The competent authorities may withdraw the authorization issued to an investment firm subject to this Directive only where that investment firm:
(a) does not make use of the authorization within 12 months, expressly renounces the authorization or ceased to provide investment services more than six months previously unless the Member State concerned has provided for authorization to lapse in such cases;
(b) has obtained the authorization by making false statements or by any other irregular means;
(c) no longer fulfills the conditions under which authorization was granted;
(d) no longer complies with Directive 93/6/EEC;
(e) has seriously and systematically infringed the provisions adopted pursuant to Articles 10 or 11; or
(f) falls within any of the cases where national law provides for withdrawal.
Article 4
The competent authorities shall not grant authorization to take up the business of investment firms until 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.
The competent authorities shall refuse authorization if, taking into account the need to ensure the sound and prudent management of an investment firm, they are not satisfied as to the suitability of the aforementioned shareholders or members.
Article 5
In the case of branches of investment firms that have registered offices outwith the Community and are commencing or carrying on business, the Member States shall not apply provisions that result in treatment more favourable than that accorded to branches of investment firms that have registered offices in Member States.
Article 6
The competent authorities of the other Member State involved shall be consulted beforehand on the authorization of any investment firm which is:
a subsidiary of an investment firm or credit institution authorized in another Member State,
a subsidiary of the parent undertaking of an investment firm or credit institution authorized in another Member State, or
controlled by the same natural or legal persons as control an investment firm or credit institution authorized in another Member State.
TITLE III. Relations with third countries
Article 7
1. The competent authorities of the Member States shall inform the Commission:
(a) of the authorization of any firm which is the direct or indirect subsidiary of a parent undertaking governed by the law of a third country;
(b) whenever such a parent undertaking acquires a holding in a Community investment firm such that the latter would become its subsidiary.
In both cases the Commission shall inform the Council until such time as a committee on transferable securities is set up by the Council acting on a proposal from the Commission.
When authorization is granted to any firm which is the direct or indirect subsidiary of a parent undertaking governed by the law of a third country, the competent authorities shall specify the structure of the group in the notification which they address to the Commission.
2. The Member States shall inform the Commission of any general difficulties which their investment firms encounter in establishing themselves or providing investment services in any third country.
3. Initially no later than six months before this Directive is brought into effect and thereafter periodically the Commission shall draw up a report examining the treatment accorded to Community investment firms in third countries, in the terms referred to in paragraphs 4 and 5, as regards establishment, the carrying on of investment services activities and the acquisition of holdings in third-country investment firms. 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 provided for in paragraph 3 or on the basis of other information, that a third country does not grant Community investment firms effective market access comparable to that granted by the Community to investment firms from that third country, the Commission may submit proposals to the Council for an appropriate mandate for negotiation with a view to obtaining comparable competitive opportunities for Community investment firms. The Council shall act by a qualified majority.
5. 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 Community investment firms in a third country are not granted national treatment affording the same competitive opportunities as are available to domestic investment firms and that the conditions of effective market access are not fulfilled, the Commission may initiate negotiations in order to remedy the situation.
In the circumstances described in the first subparagraph it may also be decided, at any time and in addition to the initiation of negotiations, in accordance with the procedure to be laid down in the Directive by which the Council will set up the committee referred to in paragraph 1, that the competent authorities of the Member States must limit or suspend their decisions regarding requests pending or future requests for authorization and the acquisition of holdings by direct or indirect parent undertakings governed by the law of the third country in question. The duration of such measures 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.
Such limitations or suspensions may not be applied to the setting up of subsidiaries by investment firms duly authorized in the Community or by their subsidiaries, or to the acquisition of holdings in Community investment firms by such firms or subsidiaries.
6. Whenever it appears to the Commission that one of the situations described in paragraphs 4 and 5 obtains, the Member States shall inform it at its request:
(a) of any application for the authorization of any firm which is the direct or indirect subsidiary of a parent undertaking governed by the law of the third country in question;
(b) whenever they are informed in accordance with Article 10 that such a parent undertaking proposes to acquire a holding in a Community investment firm such that the latter would become its subsidiary.
This obligation to provide information shall lapse whenever agreement is reached with the third country referred to in paragraph 4 or 5 or when the measures referred to in the second and third subparagraphs of paragraph 5 cease to apply.
7. Measures taken under this Article shall comply with the Community’s obligations under any international agreements, bilateral or multilateral, governing the taking up or pursuit of the business of investment firms.
TITLE IV. Operating conditions
Article 8
1. The competent authorities of the home Member States shall require that an investment firm which they have authorized comply at all times with the conditions imposed in Article 3(3).
2. The competent authorities of the home Member State shall require that an investment firm which they have authorized comply with the rules laid down in Directive 93/6/EEC.
3. The prudential supervision of an investment firm shall be the responsibility of the competent authorities of the home Member State whether the investment firm establishes a branch or provides services in another Member State or not, without prejudice to those provisions of this Directive which give responsibility to the authorities of the host Member State.
Article 9
1. Member States shall require any person who proposes to acquire, directly or indirectly, a qualifying holding in an investment firm first to inform the competent authorities, telling them of the size of his intended holding. Such a person shall 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 that he holds would reach or exceed 20, 33, or 50% or so that the investment firm would become his subsidiary.
Without prejudice to paragraph 2, the competent authorities shall have up to three months from the date of the notification provided for in the first subparagraph to oppose such a plan if, in view of the need to ensure sound and prudent management of the investment firm, they are not satisfied as to the suitability of the person referred to in the first subparagraph. If they do not oppose the plan, they may fix a deadline for its implementation.
2. If the acquirer of the holding referred to in paragraph 1 is an investment firm authorized in another Member State or the parent undertaking of an investment firm authorized in another Member State or a person controlling an investment firm authorized in another Member State and if, as a result of that acquisition, the firm in which the acquirer proposes to acquire a holding would become the acquirer’s subsidiary or come under his control, the assessment of the acquisition must be the subject of the prior consultation provided for in Article 6.
3. Member States shall require any person who proposes to dispose, directly or indirectly, of a qualifying holding in an investment firm first to inform the competent authorities, telling them of the size of his holding. Such a person shall 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 investment firm would cease to be his subsidiary.
4. On becoming aware of them, investment firms shall inform the competent authorities of any acquisitions or disposals of holdings in their capital that cause holdings to exceed or fall below any of the thresholds referred to in paragraphs 1 and 3.
At least once a year they shall also inform the competent authorities 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 annual general meetings of shareholders and members or as a result of compliance with the regulations applicable to companies listed on stock exchanges.
5. Member States shall require that, where the influence exercised by the persons referred to in paragraph 1 is likely to be prejudicial to the sound and prudent management of an investment firm, the competent authorities take appropriate measures to put an end to that situation. Such measures may consist, for example, in injunctions, sanctions against directors and those responsible for management or 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 persons failing to comply with the obligation to provide prior information imposed in 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, for the nullity of the votes cast or for the possibility of their annulment.
Article 10
Each home Member State shall draw up prudential rules which investment firms shall observe at all times. In particular, such rules shall require that each investment firm:
have sound administrative and accounting procedures, control and safeguard arrangements for electronic data processing, and adequate internal control mechanisms including, in particular, rules for personal transactions by its employees,
make adequate arrangements for instruments belonging to investors with a view to safeguarding the latter’s ownership rights, especially in the event of the investment firm’s instruments for its own account except with the investors’ express consent,
make adequate arrangements for funds belonging to investors with a view to safeguarding the latter’s rights and, except in the case of credit institutions, preventing the investment firm’s using investors’ funds for its own accounts,
arrange for records to be kept of transactions executed which shall at least be sufficient to enable the home Member State’s authorities to monitor compliance with the prudential rules which they are responsible for applying; such records shall be retained for periods to be laid down by the competent authorities,
be structured and organized in such a way as to minimize the risk of clients’ interests being prejudiced by conflicts of interest between the firm and its clients or between one of its clients and another. Nevertheless, where a branch is set up the organizational arrangements may not conflict with the rules of conduct laid down by the host Member State to cover conflicts of interest.
Article 11
1. Member States shall draw up rules of conduct which investment firms shall observe at all times. Such rules must implement at least the principles set out in the following indents and must be applied in such a way as to take account of the professional nature of the person for whom the service is provided. The Member States shall also apply these rules where appropriate to the non-core services listed in Section C of the Annex. These principles shall ensure that an investment firm:
acts honestly and fairly in conducting its business activities in the best interests of its clients and the integrity of the market,
acts with due skill, care and diligence, in the best interests of its clients and the integrity of the market,
has and employs effectively the resources and procedures that are necessary for the proper performance of its business activities,
seeks from its clients information regarding their financial situations, investment experience and objectives as regards the services requested,
makes adequate disclosure of relevant material information in its dealings with its clients,
tries to avoid conflicts of interests and, when they cannot be avoided, ensures that its clients are fairly treated, and
complies with all regulatory requirements applicable to the conduct of its business activities so as to promote the best interests of its clients and the integrity of the market.
2. Without prejudice to any decisions to be taken in the context of the harmonization of the rules of conduct, their implementation and the supervision of compliance with them shall remain the responsibility of the Member State in which a service is provided.
3. Where an investment firm executes an order, for the purposes of applying the rules referred to in paragraph 1 the professional nature of the investor shall be assessed with respect to the investor from whom the order originates, regardless of whether the order was placed directly by the investor himself or indirectly through an investment firm providing the service referred to in Section A(1)(a) of the Annex.
Article 12
Before doing business with them, a firm shall inform investors which compensation fund or equivalent protection will apply in respect of the transactions envisaged, what cover is offered by whichever system applies, or if there is no fund or compensation.
The Council notes the Commission’s statement to the effect that it will submit proposals on the harmonization of compensation systems covering transactions by investment firms by 31 July 1993 at the latest. The Council will act on those proposals within the shortest possible time with the aim of bringing the systems proposed into effect on the same date as this Directive.
Article 13
This Directive shall not prevent investment firms authorized in other Member States from advertising their services through all available means of communication in their host Member States, subject to any rules governing the form and the content of such advertising adopted in the interest of the general good.
TITLE V. The right of establishment and the freedom to provide services
Article 14
1. Member States shall ensure that investment services and the other services listed in Section C of the Annex may be provided within their territories in accordance with Articles 17, 18 and 19 either by the establishment of a branch or under the freedom to provide services by any investment firm authorized and supervised by the competent authorities of another Member State in accordance with this Directive, provided that such services are covered by the authorization.
This Directive shall not affect the powers of host Member States in respect of the units of collective investment undertakings to which Directive 85/ 611/ EEC15 does not apply.
2. Member States may not make the establishment of a branch or the provision of services referred to in paragraph 1 subject to any authorization requirement, to any requirement to provide endowment capital or to any other measure having equivalent effect.
3. A Member State may require that transactions relating to the services referred to in paragraph 1 must, where they satisfy all the following criteria, be carried out on a regulated market:
the investor must be habitually resident or established in that Member State,
the investment firm must carry out such transactions through a main establishment, through a branch situated in that Member State or under the freedom to provide services in that Member State,
the transaction must involve an instrument dealt in on a regulated market in that Member State.
4. Where a Member State applies paragraph 3 it shall give investors habitually resident or established in that Member State the right not to comply with the obligation imposed in paragraph 3 and have the transactions referred to in paragraph 3 carried out away from a regulated market. Member States may make the exercise of this right subject to express authorization, taking into account investors’ differing needs for protection and in particular the ability of professional and institutional investors to act in their own best interests. It must in any case be possible for such authorization to be given in conditions that do not jeopardize the prompt execution of investors’ orders.
5. The Commission shall report on the operation of paragraphs 3 and 4 not later than 31 December 1998 and shall, if appropriate, propose amendments thereto.
Article 15
1. Without prejudice to the exercise of the right of establishment or the freedom to provide services referred to in Article 14, host Member States shall ensure that investment firms which are authorized by the competent authorities of their home Member States to provide the services referred to in Section A(1)(b) and (2) of the Annex can, either directly or indirectly, become members of or have access to the regulated markets in their host Member States where similar services are provided and also become members of or have access to the clearing and settlement systems which are provided for the members of such regulated markets there.
Member States shall abolish any national rules or laws or rules of regulated markets which limit the number of persons allowed access thereto. If, by virtue of its legal structure or its technical capacity, access to a regulated market is limited, the Member State concerned shall ensure that its structure and capacity are regularly adjusted.
2. Membership of or access to a regulated market shall be conditional on investment firms’ complying with capital adequacy requirements and home Member States’ supervising such compliance in accordance with Directive 93/6/EEC.
Host Member States shall be entitled to impose additional capital requirements only in respect of matters not covered by that Directive.
Access to a regulated market, admission to membership thereof and continued access or membership shall be subject to compliance with the rules of the regulated market in relation to the constitution and administration of the regulated market and to compliance with the rules relating to transactions on the market, with the professional standards imposed on staff operating on and in conjunction with the market, and with the rules and procedures for clearing and settlement. The detailed arrangements for implementing these rules and procedures may be adapted as appropriate, inter alia to ensure fulfilment of the ensuing obligations, provided, however, that Article 28 is complied with.
3. In order to meet the obligation imposed in paragraph 1, host Member States shall offer the investment firms referred to in that paragraph the choice of becoming members of or of having access to their regulated markets either:
directly, by setting up branches in the host Member States, or
indirectly, by setting up subsidiaries in the host Member States or by acquiring firms in the host Member States that are already members of their regulated markets or already have access thereto.
However, those Member States which, when this Directive is adopted, apply laws which do not permit credit institutions to become members of or have access to regulated markets unless they have specialized subsidiaries may continue until 31 December 1996 to apply the same obligation in a non-discriminatory way to credit institutions from other Member States for purposes of access to those regulated markets.
The Kingdom of Spain, the Hellenic Republic and the Portuguese Republic may extend that period until 31 December 1999. One year before that date the Commission shall draw up a report, taking into account the experience acquired in applying this Article and shall if appropriate, submit a proposal. The Council may, acting by qualified majority on the basis of that proposal, decide to review those arrangements.
4. Subject to paragraphs 1, 2 and 3, where the regulated market of the host Member State operates without any requirement for a physical presence the investment firms referred to in paragraph 1 may become members of or have access to it on the same basis without having to be established in the host Member State. In order to enable their investment firms to become members of or have access to host Member States’ regulated markets in accordance with this paragraph home Member States shall allow those host Member States’ regulated markets to provide appropriate facilities within the home Member States’ territories.
5. This Article shall not affect the Member States’ right to authorize or prohibit the creation of new markets within their territories.
6. This Article shall have no effect:
in the Federal Republic of Germany, on the regulation of the activities of Kursmakler, or
in the Netherlands, on the regulation of the activities of hoekmannen.
Article 16
For the purposes of mutual recognition and the application of this Directive, it shall be for each Member State to draw up a list of the regulated markets for which it is the home Member State and which comply with its regulations, and to forward that list for information, together with the relevant rules of procedures and operation of those regulated markets, to the other Member States and the Commission. A similar communication shall be effected in respect of each change to the aforementioned list or rules. The Commission shall publish the lists of regulated markets and updates thereto in the Official Journal of the European Communities at least once a year.
No later than 31 December 1996 the Commission shall report on the information thus received and, where appropriate, propose amendments to the definition of regulated market for the purposes of this Directive.
Article 17
1. In addition to meeting the conditions imposed in Article 3, any investment firm wishing to establish a branch within the territory of another Member State shall notify the competent authorities of its home Member State.
2. Member States shall require every investment firm wishing to establish a branch within the territory of another Member State to provide the following information when effecting the notification provided for 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 organizational structure of the branch;
(c) the address in the host Member State from which documents may be obtained;
(d) the names of those 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 an investment firm, taking into account the activities envisaged, they shall, within three months of receiving all the information referred to in paragraph 2, communicate that information to the competent authorities of the host Member State and shall inform the investment firm concerned accordingly.
They shall also communicate details of any compensation scheme intended to protect the branch’s investors.
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 investment firm concerned within three months of receiving all the information. That refusal or failure to reply shall be subject to the right to apply to the courts in the home Member States.
4. Before the branch of an investment firm commences business the competent authorities of the host Member State shall, within two months of receiving the information referred to in paragraph 3, prepare for the supervision of the investment firm in accordance with Article 19 and, if necessary, indicate the conditions, including the rules of conduct, under which, in the interest of the general good, that business must be carried on in the host Member State.
5. On receipt of a communication from the competent authorities of the host Member State or on the expiry of the period provided for in paragraph 4 without receipt of any communication from those authorities, the branch may be established and commence business.
6. In the event of a change in any of the particulars communicated in accordance with paragraph 2(b), (c) or (d), an investment firm shall give written notice of that change to the competent authorities of the home and host Member States at least one month before implementing the change so that the competent authorities of the Member State may take a decision on the change under paragraph 3 and the competent authorities of the host Member State may do so under paragraph 4.
7. In the event of a change in the particulars communicated in accordance with the second subparagraph of paragraph 3, the authorities of the home Member State shall inform the authorities of the host Member State accordingly.
Article 18
1. Any investment firm wishing to carry on business within the territory of another Member State for the first time under the freedom to provide services shall communicate the following information to the competent authorities of its home Member State:
the Member State in which it intends to operate,
a programme of operations stating in particular the investment service or services which it intends to provide.
2. The competent authorities of the home Member State shall, within one month of receiving the information referred to in paragraph 1, forward it to the competent authorities of the host Member State. The investment firm may then start to provide the investment service or services in question in the host Member State.
Where appropriate, the competent authorities of the host Member State shall, on receipt of the information referred to in paragraph 1, indicate to the investment firm the conditions, including the rules of conduct, with which, in the interest of the general good, the providers of the investment services in question must comply in the host Member State.
3. Should the content of the information communicated in accordance with the second indent of paragraph 1 be amended, the investment firm shall give notice of the amendment in writing to the competence authorities of the home Member State and of the host Member State before implementing the change, so that the competent authorities of the host Member State may, if necessary, inform the firm of any change or addition to be made to the information communicated under paragraph 2.
Article 19
1. Host Member States may, for statistical purposes, require all investment firms with branches within their territories to report periodically on their activities in those host Member States to the competent authorities of those host Member States.
In discharging their responsibilities in the conduct of monetary policy, without prejudice to the measures necessary for the strengthening of the European Monetary System, host Member States may within their territories require all branches of investment firms originating in other Member States to provide the same particulars as national investment firms for that purpose.
2. In discharging their responsibilities under this Directive, host Member States may require branches of investment firms to provide the same particulars as national firms for that purpose.
Host Member States may require investment firms carrying on business within their territories under the freedom to provide services to provide the information necessary for the monitoring of their compliance with the standards set by the host Member State that apply to them, although those requirements may not be more stringent than those which the same Member State imposes on established firms for the monitoring of their compliance with the same standards.
3. Where the competent authorities of a host Member State ascertain that an investment firm that has a branch or provides services within its territory is in breach of the legal or regulatory provisions adopted in that State pursuant to those provisions of this Directive which confer powers on the host Member State’s competent authorities, those authorities shall require the investment firm concerned to put an end to its irregular situation.
4. If the investment firm 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 latter shall, at the earliest opportunity, take all appropriate measures to ensure that the investment firm concerned puts an end to its irregular situation. The nature of those measures shall be communicated to the competent authorities of the host Member State.
5. If, despite the measures taken by the home Member State or because such measures prove inadequate or are not available in the State in question, the investment firm persists in violating the legal or regulatory provisions referred to in paragraph 2 in force in the host Member State, the latter may, after informing the competent authorities of the home Member State, take appropriate measures to prevent or to penalize further irregularities and, in so far as necessary, to prevent that investment firm from initiating any further transactions within its territory. The Member State shall ensure that within their territories it is possible to serve the legal documents necessary for those measures on investment firms.
6. The foregoing provisions shall not affect the powers of host Member States to take appropriate measures to prevent or to penalize irregularities committed within their territories which are contrary to the rules of conduct introduced pursuant to Article 11 as well as to other legal or regulatory provisions adopted in the interest of the general good. This shall include the possibility of preventing offending investment firms from initiating any further transactions within their territories.
7. Any measure adopted pursuant to paragraphs 4, 5 or 6 involving penalties or restrictions on the activities of an investment firm must be properly justified and communicated to the investment firm concerned. Every such measure shall be subject to the right to apply to the courts in the Member State which adopted it.
8. Before following the procedure laid down in paragraphs 3, 4 or 5 the competent authorities of the host Member State may, in emergencies, take any precautionary measures necessary to protect the interests of investors and others for 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.
After consulting the competent authorities of the Member States concerned, the Commission may decide that the Member State in question must amend or abolish those measures.
9. In the event of the withdrawal of authorization, the competent authorities of the host Member State shall be informed and shall take appropriate measures to prevent the investment firm concerned from initiating any further transactions within its territory and to safeguard investors’ interests. Every two years the Commission shall submit a report on such cases to the committee set up at a later stage in the securities field.
10. The Member States shall inform the Commission of the number and type of cases in which there have been refusals pursuant to Article 17 or measures have been taken in accordance with paragraph 5. Every two years the Commission shall submit a report on such cases to the committee set up at a later date in the securities field.
Article 20
1. In order to ensure that the authorities responsible for the markets and for supervision have access to the information necessary for the performance of their duties, home Member States shall at least require:
(a) without prejudice to steps taken in implementation of Article 10, that investment firms keep at the disposals of the authorities for at least five years the relevant data on transactions relating to the services referred to in Article 14(1) which they have carried out in instruments dealt in on a regulated market, whether such transactions were carried out on a regulated market or not;
(b) that investment firms report to competent authorities in their home Member States all the transactions referred to in (a) where those transactions cover:
shares or other instruments giving access to capital,
bonds and other forms of securitized debt,
standardized forward contracts relating to shares or
standardized options on shares.
Such reports must be made available to the relevant authority at the earliest opportunity. The time limit shall be fixed by that authority. It may be extended to the end of the following working day where operational or practical reasons so dictate but in no circumstances may it exceed that limit.
Such reports must, in particular, include details of the names and numbers of the instruments bought or sold, the dates and times of the transactions, the transaction prices and means of identifying the investment firms concerned.
Home Member States may provide that the obligation imposed in (b) shall, in the case of bonds and other forms of securitized debt, apply only to aggregated transactions in the same instrument.
2. Where an investment firm carries out a transaction on a regulated market in its host Member State, the home Member State may waive its own requirements as regards reporting if the investment firm is subject to equivalent requirements to report the transaction in question to the authorities in charge of that market.
3. Member States shall provide that the report referred to in paragraph 1(b) shall be made either by the investment firm itself or by a trade-matching system, or through stock-exchange authorities or those of another regulated market.
4. Member States shall ensure that the information available in accordance with this Article is also available for the proper application of Article 23.
5. Each Member State may, in a non-discriminatory manner, adopt or maintain provisions more stringent in the field governed by this Article with regard to substance and form in respect of the conservation and reporting of data relating to transactions:
carried out on a regulated market of which it is the home Member State or
carried out by investment firms of which it is the home Member State.
Article 21
1. In order to enable investors to assess at any time the terms of a transaction they are considering and to verify afterwards the conditions in which it has been carried out, each competent authority shall, for each of the regulated markets which it has entered on the list provided for in Article 16, take measures to provide investors with the information referred to in paragraph 2. In accordance with the requirements imposed in paragraph 2, the competent authorities shall determine the form in which and the precise time within which the information is to be provided, as well as the means by which it is to be made available, having regard to the nature, size and needs of the market concerned and of the investors operating on that market.
2. The competent authorities shall require for each instrument at least:
(a) publication at the start of each day’s trading on the market of the weighted average price, the highest and the lowest prices and the volume dealt in on the regulated market in question for the whole of the preceding day’s trading;
(b) in addition, for continuous order-driven and quote-driven markets, publication:
at the end of each hour’s trading on the markets of the weighted average price and the volume dealt in on the regulated market in question for a six-hour trading period ending so as to leave two hours’ trading on the market before publication, and
every 20 minutes, of the weighted average price and the highest and lowest prices on the regulated market in question for a two-hour trading period ending so as to leave one hour’s trading on the market before publication.
Where investors have prior access to information on the prices and quantities for which transactions may be undertaken:
(i) such information shall be available at all times during market trading hours;
(ii) the terms announced for a given price and quantity shall be terms on which it is possible for an investor to carry out such a transaction.
The competent authorities may delay or suspend publication where that proves to be justified by exceptional market conditions or, in the case of small markets, to preserve the anonymity of firms and investors. The competent authorities may apply special provisions in the case of exceptional transactions that are very large in scale compared with average transactions in the security in question on that market and in the case of highly illiquid securities defined by means of objective criteria and made public. The competent authorities may also apply more flexible provisions, particularly as regards publication deadlines, for transactions concerning bonds and other forms of securitized debt.
3. In the field governed by this Article each Member State may adopt or maintain more stringent provisions or additional provisions with regard to the substance and form in which information must be made available to investors concerning transactions carried out on regulated markets of which it is the home Member State, provided that those provisions apply regardless for the Member State in which the issuer of the financial instrument is located or of the Member State on the regulated market of which the instrument was listed for the first time.
4. The Commission shall report on the application of this Article no later than 31 December 1997; the Council may, on a proposal from the Commission, decide by a qualified majority to amend this Article.
TITLE VI. Authorities responsible for authorization and supervision
Article 22
1. Member States shall designate the competent authorities which are to carry out the duties provided for in this Directive. They shall inform the Commission thereof, indicating any division of those duties.
2. The authorities referred to in paragraph 1 must be either public authorities, bodies recognized by national law or bodies recognized by public authorities expressly empowered for that purpose by national law.
3. The authorities concerned must have all the powers necessary for the performance of their functions.
Article 23
1. Where there are two or more competent authorities in the same Member State, they shall collaborate closely in supervising the activities of investment firms operating in that Member State.
2. Member States shall ensure that such collaboration takes place between such competent authorities and the public authorities responsible for the supervision of financial markets, credit and other financial institutions and insurance undertakings, as regards the entities which those authorities supervise.
3. Where, through the provision of services or by the establishment of branches, an investment firm operates in one or more Member States other than its home Member State the competent authorities of all the Member States concerned shall collaborate closely in order more effectively to discharge their respective responsibilities in the area covered by this Directive.
They shall supply one another on request with all the information concerning the management and ownership of such investment firms that is likely to facilitate their supervision and all information likely to facilitate the monitoring of such firms. In particular, the authorities of the home Member State shall cooperate to ensure that the authorities of the host Member State collect the particulars referred to in Article 19(2).
In so far as it is necessary for the purpose of exercising their powers of supervision, the competent authorities of the home Member State shall be informed by the competent authorities of the host Member State of any measures taken by the host Member State pursuant to Article 19(6) which involve penalties imposed on an investment firm or restrictions on an investment firm’s activities.
Article 24
1. Each host Member State shall ensure that, where an investment firm authorized in another Member State carries on business within its territory through a branch, the competent authorities of the home Member State may, after informing the competent authorities of the host Member State, themselves or through the intermediary of persons they instruct for the purpose carry out on-the-spot verification of the information referred to in Article 23(3).
2. The competent authorities of the home Member State may also ask the competent authorities of the host Member State to have such verification carried out. Authorities which receive such requests must, within the framework of their powers, act upon them by carrying out the verifications themselves, by allowing the authorities who have requested them to carry them out or by allowing auditors or experts to do so.
3. This Article shall not affect the right of the competent authorities of a host Member State, in discharging their responsibilities under this Directive, to carry out on-the-spot verifications of branches established within their territory.
Article 25
1. Member States shall provide that all persons who work or who have worked for the competent authorities, as well as auditors and experts instructed by the competent authorities, shall be bound by the obligation of professional secrecy. Accordingly no confidential information which they may receive in the course of their duties may be divulged to any person or authority whatsoever, save in summary or aggregate form such that individual investment firms cannot be identified, without prejudice to cases covered by criminal law.
Nevertheless, where an investment firm has been declared bankrupt or is being compulsorily wound up, confidential information which does not concern third parties involved in attempts to rescue that investment firm may be divulged in civil or commercial proceedings.
2. Paragraph 1 shall not prevent the competent authorities of different Member States from exchanging information in accordance with this Directive or other Directives applicable to investment firms. That information shall be subject to the conditions of professional secrecy imposed in paragraph 1.
3. Member States may conclude cooperation agreements providing for exchanges of information with the competent authorities of third countries only if the information disclosed is covered by guarantees of professional secrecy at least equivalent to those provided for in this Article.
4. Competent authorities receiving confidential information under paragraph 1 or 2 may use it only in the course of their duties:
to check that the conditions governing the taking up of the business of investment firms are met and to facilitate the monitoring, on a non-consolidated or consolidated basis, of the conduct of that business, especially with regard to the capital adequacy requirements imposed in Directive 93/6/EEC, administrative and accounting procedures and internal-control mechanisms,
to impose sanctions,
in administrative appeals against decisions by the competent authorities, or
in court proceedings initiated under Article 26.
5. Paragraphs 1 and 4 shall not preclude the exchange of information:
(a) within a Member State, where there are two or more competent authorities, or
(b) within a Member State or between Member States, between competent authorities and
authorities responsible for the supervision of credit institutions, other financial organizations and insurance undertakings and the authorities responsible for the supervision of financial markets,
bodies responsible for the liquidation and bankruptcy of investment firms and other similar procedures and
persons responsible for carrying out statutory audits of the accounts of investment firms and other financial institutions in the performance of their supervisory functions, or the disclosure to bodies which administer compensation schemes of information necessary for the performance of their functions. Such information shall be subject to the conditions of professional secrecy imposed in paragraph 1.
6. This Article shall not prevent a competent authority from disclosing to those central banks which do not supervise credit institutions or investment firms individually such information as they may need to act as monetary authorities. Information received in this context shall be subject to the conditions of professional secrecy imposed in paragraph 1.
7. This Article shall not prevent the competent authorities from communicating the information referred to in paragraphs 1 to 4 to a clearing house or other similar body recognized under national law for the provision of clearing or settlement services for one of their Member State’s 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 shall be subject to the conditions of professional secrecy imposed in paragraph 1. The Member States shall, however, ensure that information received under paragraph 2 may not be disclosed in the circumstances referred to in this paragraph without the express consent of the competent authorities which disclosed it.
8. In addition, notwithstanding the provisions referred to in paragraphs 1 and 4, Member States may, by virtue of provisions laid down by law, authorize 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 firms and insurance undertakings and to inspectors instructed by those departments.
Such disclosures may, however, be made only where necessary for reasons of prudential control.
Member States shall, however, provide that information received under paragraphs 2 and 5 and that obtained by means of the on-the-spot verifications referred to in Article 24 may never be disclosed in the cases referred it in this 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 the on-the-spot verification was carried out.
9. If, at the time of the adoption of this Directive, a Member State provides for the exchange of information between authorities in order to check compliance with the laws on prudential supervision, on the organization, operation and conduct of commercial companies and on the regulation of financial markets, that Member State may continue to authorize the forwarding of such information pending coordination of all the provisions governing the exchange of information between authorities for the entire financial sector but not in any case after 1 July 1996.
Member States shall, however, ensure that, where information comes from another Member State, it may not be disclosed in the circumstances referred to in the first subparagraph without the express consent of the competent authorities which disclosed it and it may be used only for the purposes for which those authorities gave their agreement.
The Council shall effect the coordination referred to in the first sub-paragraph on the basis of a Commission proposal. The Council notes the Commission’s statement to the effect that it will submit proposals by 31 July 1993 at the latest. The Council will act on those proposals within the shortest possible time with the intention of bringing the rules proposed into effect on the same date as this Directive.
Article 26
Member States shall ensure that decisions taken in respect of an investment firm under laws, regulations and administrative provisions adopted in accordance with this Directive are 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 the authorization which provides all the information required under the provisions in force.
Article 27
Without prejudice to the procedures for the withdrawal of authorization or to the provisions of criminal law, Member States shall provide that their respective competent authorities may, with regard to investment firms or those who effectively control the business of such firms that infringe laws, regulations or administrative provisions concerning the supervision or carrying on of their activities, adopt or impose in respect of them measures or penalties aimed specifically at ending observed breaches or the causes of such breaches.
Article 28
Member States shall ensure that this Directive is implemented without discrimination.
TITLE VII. Final provisions
Article 29
Pending the adoption of a further Directive laying down provisions adapting this Directive to technical progress in the areas specified below, the Council shall, in accordance with Decision 87/373/EEC,16 20 acting by a qualified majority on a proposal from the Commission, adopt any adaptations which may be necessary, as follows:
expansion of the list in Section C of the Annex,
adaptation of the terminology of the lists in the Annex to take account of developments on financial markets,
the areas in which the competent authorities must exchange information as listed in Article 23,
clarification of the definitions in order to ensure uniform application of this Directive in the Community,
clarification of the definitions in order to take account in the implementation of this Directive of developments on financial markets,
the alignment of terminology and the framing of definitions in accordance with subsequent measures on investment firms and related matters,
the other tasks provided for in Article 7(5).
Article 30
1. Investment firms already authorized in their home Member States to provide investment services before 31 December 1995 shall be deemed to be so authorized for the purpose of this Directive, if the laws of those Member States provide that to take up such activities they must comply with conditions equivalent to those imposed in Articles 3(3) and 4.
2. Investment firms which are already carrying on business on 31 December 1995 and are not included among those referred to in paragraph 1 may continue their activities provided that, no later than 31 December 1996 and pursuant to the provisions of their home Member States, they obtain authorization to continue such activities in accordance with the provisions adopted in implementation of this Directive.
Only the grant of such authorization shall enable such firms to qualify under the provisions of this Directive on the right of establishment and the freedom to provide services.
3. Where before the date of the adoption of this Directive investment firms have commenced business in other Member States either through branches or under the freedom to provide services, the authorities of each home Member State shall, between 1 July and 31 December 1995, communicate, for the purposes of Articles 17(1) and (2) and 18, to the authorities of each of the other Member States concerned the list of firms that comply with this Directive and operate in those States, indicating the business carried on.
4. Natural persons authorized in a Member State on the date of the adoption of this Directive to offer investment services shall be deemed to be authorized under this Directive, provided that they fulfill the requirements imposed in Article 1(2), second subparagraph, second indent, and third subparagraph, all four indents.
Article 31
No later than 1 July 1995 Member States shall adopt the laws, regulations and administrative provisions necessary for them to comply with this Directive.
These provisions shall enter into force no later than 31 December 1995. The Member States shall forthwith inform the Commission thereof.
When Member States adopt the provisions referred to in the first paragraph they shall include a reference to this Directive or accompany them with such a reference on the occasion of their official publication. The manner in which such references are to be made shall be laid down by the Member States.
Article 32
This Directive is addressed to the Member States.
Done at Brussels, 10 May 1993.
For the Council
The President
N. HELVEG PETERSEN
Annex
Section A
Services
Section B
Instruments
Section C
Non-core services
Appendix II 10 EC Directive on the Capital Adequacy of Investment Firms and Credit Institutions
Council Directive1 15 March 1993 on the capital adequacy of investment firms and credit institutions (93/ 6/ EEC)
The Council of the European Communities,
Having regard to the Treaty establishing the European Economic Community, and in particular the first and third sentences of Article 57 (2) thereof,
Having regard to the proposal from the Commission2,
In cooperation with the European Parliament3,
Having regard to the opinion of the Economic and Social Committee4,
Whereas the main objective of Council Directive 93/ 22/ EEC of 10 May 1993 on investment services in the securities field5 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 that Directive accordingly provides for the coordination of the rules governing the authorization and pursuit of the business of investment firms;
Whereas that 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 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;
Whereas the approach that has been adopted is to effect only the essential harmonization that is necessary and sufficient to secure the mutual recognition of authorization and of prudential supervision systems;
Whereas the adoption of measures 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;
Whereas it is appropriate to establish different amounts of initial capital depending on the range of activities that investment firms are authorized to undertake;
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 firms;
Whereas the Member States may also establish rules stricter than those provided for in this Directive;
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’);
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;
Whereas in a common financial market, institutions, whether they are investment firms or credit institutions, engage in direct competition with one another;
Whereas it is therefore desirable to achieve equality in the treatment of credit institutions and investment firms;
Whereas, as regards credit institutions, common standards are already established for the supervision and monitoring of credit risks in Council Directive 89/647/EEC of 18 December 1989 on a solvency ratio for credit institutions;6
Whereas it 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;
Whereas it is necessary to introduce 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;
Whereas it is desirable that institutions with negligible trading-book business, in both absolute and relative terms, should be able to apply Directive 89/647/EEC, rather than the requirements imposed in Annexes I and II to this Directive;
Whereas it is important that monitoring of settlement/delivery risks should take account of the existence of systems offering adequate protection that reduces that risk;
Whereas, in any case, institutions must comply with this Directive as regards the coverage of the foreign-exchange risks on their overall business;
Whereas lower 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;
Whereas the existence, in all institutions, of internal systems for monitoring and controlling interest-rate risks on all of their business is a particularly important way of minimizing such risks;
Whereas, consequently, such systems must be subject to overview by the competent authorities;
Whereas Council Directive 92/121/EEC of 21 December 1992 on the monitoring and control of large exposures of credit institutions7 is not aimed at establishing common rules for monitoring large exposures in activities which are principally subject to market risks;
Whereas that Directive makes reference to another Community initiative intended to adopt the requisite coordination of methods in that field;
Whereas it is necessary to adopt common rules for the monitoring and control of large exposures incurred by investment firms;
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 institutions8;
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;
Whereas Council Directive 92/30/EEC of 6 April 1992 on the supervision of credit institutions on a consolidated basis9 states the principle of consolidation;
Whereas it 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;
Whereas Directive 92/30/EEC does not apply to groups which include one or more investment firms but no credit institutions;
Whereas it was, however, felt desirable to provide a common framework for the introduction of the supervision of investment firms on a consolidated basis;
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;
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 Commission10;
Whereas meanwhile the Council itself, on a proposal from the Commission, should carry out such adaptations;
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;
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,
Has Adopted this Directive:
Article 1
1. 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 authorized.
Article 2. Definitions
For the purposes of this Directive:
1. credit institutions shall mean 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 institutions11 which are subject to the requirements imposed by Directive 89/647/EEC;
2. investment firms shall mean all institutions that satisfy the definition in point 2 of Article 1 of Directive 93/22/EEC, which are subject to the requirements imposed by the same Directive, excluding:
- credit institutions,
- local firms as defined in 20, and
- firms which only receive and transmit orders from investors without 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;
3. institutions shall mean credit institutions and investment firms;
4. recognized third-country investment firms shall mean firms which, if they were established within the Community, would be covered by the definition of investment firm in 2, which are authorized in a third country 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;
5. financial instruments shall mean the instruments listed in Section B of the Annex to Directive 93/22/EEC;
6. the trading book of an institution shall consist of:
(a) its proprietary positions in financial instruments 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 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 lending which are based on securities 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 transactions described in the same paragraph, provided the competent authorities so approve, which meet either the 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 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;
7. parent undertaking, subsidiary undertaking and financial institution shall be defined in accordance with Article 1 of Directive 92/30/EEC;
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;
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;
10. over-the-counter (OTC) derivative instruments shall mean the interest-rate and foreign-exchange contracts referred to in Annex II to Directive 89/647/EEC and off-balance-sheet contracts based on equities, provided that no such contracts are traded on recognized exchanges where they are subject to daily margin requirements and, in the case of foreign-exchange contracts, that every such contract has an original maturity of more than 14 calendar days;
11. regulated market shall mean a market that satisfies the definition given in Article 1(13) of Directive 93/22/EEC;
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;
14. convertible shall mean a security which, at the option of the holder, can be exchanged for another security, usually the equity of the issuer;
15. warrant shall mean an instrument which gives the holder the right to purchase a number of shares of common stock or bonds at a stipulated price until the warrant’s expiry date. They may be settled by the delivery of the securities themselves or their equivalent in cash;
16. covered warrant shall mean an instrument issued by an entity other than the issuer of the underlying instrument which gives the holder the right to purchase a number of shares of common stock or bonds at a stipulated price or a right to secure a profit or avoid a loss by reference to fluctuations in an index relating to any of the financial instruments listed in Section B of the Annex to Directive 93/22/EEC until the warrant’s expiry date;
17. repurchase agreement and reverse repurchase agreement shall mean any agreement in which an institution or its counter-party transfers securities or guaranteed rights relating to title to securities where that guarantee is issued by a recognized exchange which holds the rights to the securities and the agreement does not allow an institution to transfer or pledge a particular security to more than one counter-party at one time, subject to a commitment to repurchase them (or substituted securities 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 and a reverse repurchase agreement for the institution buying them.
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;
18. securities lending and securities borrowing shall mean any transaction in which an institution or its counter-party transfers securities against appropriate collateral subject to a commitment that the borrower will return equivalent securities at some future date or when requested to do so by the transferor, being securities lending for the institution transferring the securities and securities borrowing for the institution to which they are transferred.
Securities borrowing shall be considered an interprofessional transaction when the counterparty 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 transaction is concluded with a recognized clearing house or exchange;
19. clearing member shall mean 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;
20. local firm shall mean a firm dealing only for its own account on a financial-futures or options exchange or for the accounts of or making a price to other members of the same exchange and guaranteed by a clearing member of the same exchange. Responsibility for ensuring the performance of contracts entered into by such a firm must be assumed by a clearing member of the same exchange, 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;
21. delta shall mean the expected change in an option price as a proportion of a small change in the price of the instrument underlying the option;
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;
23. own funds shall mean own funds as defined in Directive 89/299/EEC. This definition may, however, be amended in the circumstances described in Annex V;
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 4, less the sum of items 9, 10 and 11 of Article 2(1) of Directive 89/299/EEC;
26. capital shall mean own funds;
27. modified duration shall be calculated using the formula set out in paragraph 26 of Annex I.
Article 3. Initial Capital
1. Investment firms which hold clients’ money and/or securities and which offer one or more of the following services shall have initial capital of ECU 125,000:
the reception and transmission of investors’ orders for financial instruments,
the execution of investors’ orders for financial instruments,
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.
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:
such positions arise only as a result of the firm’s failure to match investors’ orders precisely,
the total market value of all such positions is subject to a ceiling of 15% of the firm’s initial capital,
the firm meets the requirements imposed in Articles 4 and 5, and
such positions are incidental and provisional in nature and strictly limited to the time required to carry out the transaction in question.
2. Member States may reduce the amount referred to in paragraph 1 to ECU 50,000 where a firm is not authorized to hold clients’ money or securities, to deal for its own account, or to underwrite issues on a firm commitment basis.
3. All other investment firms shall have initial capital of ECU 730,000.
4. The firms referred to in the second and third indents of Article 2 (2) shall have initial capital of ECU 50,000 in so far as they benefit from freedom of establishment or provide services under Articles 14 or 15 of Directive 93/22/EEC.
5. Notwithstanding paragraphs 1 to 4, Member States may continue the authorization of investment firms and firms covered by paragraph 4 in existence before this Directive is applied the own funds of which are less than the initial capital levels specified for them in 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. 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.
6. If control of a firm covered by paragraph 5 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 paragraphs 1 to 4, except in the following situations:
(i) in the case of the first transfer by inheritance after 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.
7. 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 4, the own funds of the firm produced by the merger need not attain the level specified in paragraphs 1 to 4. Nevertheless, during any period when the levels specified in paragraphs 1 to 4 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.
8. The own funds of investment firms and firms covered by paragraph 4 may not fall below the level specified in paragraphs 1 to 5 and 7. 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.
Article 4. Provisions against risks
1. The competent authorities shall require institutions to provide own funds which are always more than or equal to the sum of:
(i) the capital requirements, calculated in accordance with Annexes I, II and VI, for their trading-book business;
(ii) the capital requirements, calculated in accordance with Annex III, for all of their business activities;
(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. 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.
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.
6. Notwithstanding 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:
(i) the trading-book business of such institutions does not normally exceed 5% of their total business;
(ii) their total trading-book positions do not normally exceed ECU 1.5 million; and
(iii) the trading-book business of such institutions never exceeds 6% of their total business and their total trading-book positions never exceed ECU 20 million.
7. In order to calculate the proportion that trading-book business bears to total business as in paragraph 6(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.
8. If an institution should happen for more than a short period to exceed either or both of the limits imposed in paragraph 6(i) and (ii) or to exceed either or both of the limits imposed in paragraph 6(iii), it shall be required to meet the requirements imposed in Article 4(1)(i) rather than those of Directive 89/647/EEC in respect of its trading-book business and to notify the competent authority.
Article 5. Monitoring and control of large exposures
1. Institutions shall monitor and control their large exposures in accordance with Directive 92/121/EEC.
2. Notwithstanding paragraph 1, those institutions which calculate the capital requirements for their trading-book business in accordance with Annexes I and II shall monitor and control their large exposures in accordance with Directive 92/121/EEC subject to the modifications laid down in Annex VI to this Directive.
Article 6. Valuation of positions for reporting purposes
1. Institutions shall mark to market their trading books on a daily basis unless they are subject to Article 4(6).
2. 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 paragraph 1 and require institutions to use alternative methods of valuation provided that those methods are sufficiently prudent and have been approved by competent authorities.
Article 7. Supervision on a consolidated basis
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 above mentioned Directive and in paragraphs 7 to 14 of this Article.
3. When a group covered by paragraph 2 does not include a credit institution, Directive 92/30/EEC shall apply, subject to the following adaptations:
financial holding company shall mean a financial institution the subsidiary undertakings of which are either exclusively or mainly investment firms or other financial institutions one at least of which is an investment firm,
mixed-activity holding company shall mean a parent undertaking, other than a financial holding company or an investment firm, the subsidiaries of which include at least one investment firm,
competent authorities shall mean the national authorities which are empowered by law or regulation to supervise investment firms,
every reference to credit institutions shall be replaced by a reference to investment firms,
the second subparagraph of Article 3(5) of Directive 92/30/EEC shall not apply,
in Articles 4(1) and (2) and 7(5) of Directive 92/30/EEC each reference to Directive 77/780/EEC shall be replaced by a reference to Directive 93/22/EEC,
for the purposes of Articles 3(9) and 8(3) of Directive 92/30/EEC the references to the Banking Advisory Committee shall be substituted by references to the Council and the Commission,
the first sentence of Article 7(4) of Directive 92/30/EEC 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’.
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.
5. The competent authorities shall require investment firms in a group which has been granted the waiver provided for in paragraph 4 to notify them of those risks, including those associated with the composition and sources of their capital and funding, which could undermine their financial positions. 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 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.
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.
Calculating the consolidated requirements
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 Annex I and the exposures to clients set out in Annex VI on a consolidated basis, permit net 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 and VI respectively.
In addition, they may allow foreign-exchange positions subject to Annex III in one institution to offset foreign-exchange positions subject to Annex III in another institution in accordance with the rules set out in Annex III.
11. The competent authorities may also permit offsetting of the trading book and of the foreign-exchange positions of undertakings located in third countries, subject to the simultaneous fulfillment of the following conditions:
(i) 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 of Directive 77/780/EEC or are recognized third-country investment firms;
(ii) such undertakings comply, on a solo basis, with capital adequacy rules equivalent to those laid down in this Directive;
(iii) no regulations exist in the countries in question which might significantly affect the transfer of funds within the group.
12. The competent authorities may also allow the offsetting provided for in paragraph 10 between institutions within a group that have been authorized in the Member State in question, provided that:
(i) there is a satisfactory allocation of capital within the group;
(ii) the regulatory, legal or contractual framework in which the institutions operate is such as to guarantee mutual financial support within the group.
13. Furthermore, the competent authorities may allow the offsetting provided for in paragraph 10 between institutions within a group that fulfill the conditions imposed in paragraph 12 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 on a solo basis.
Definition of consolidated own funds
14. In the calculation of own funds on a consolidated basis Article 5 of Directive 89/299/EEC shall apply.
15. The competent authorities responsible for exercising supervision on a consolidated basis may recognize the validity of the specific own-funds definitions applicable to the institutions concerned under Annex V in the calculation of their consolidated own funds.
Article 8. Reporting requirements
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 permit the verification of their compliance with such rules at all times.
2. Investment firms shall be obliged to report 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), at least once every three months in the case of firms covered by Article 3(1) and at least once every six months in the case of firms covered by Article 3(2).
3. Notwithstanding paragraph 2, investment firms covered by Article 3(1) and (3) shall be required to provide the information on a consolidated or subconsolidated 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.
5. The competent authorities shall oblige institutions to report to them immediately any case in which their counterparties in repurchase and reverse repurchase agreements or securities-lending and securities-borrowing transactions default on their obligations. The 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 reports 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 that referred to in 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 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.
Article 9. Competent authorities
1. Member States shall designate the authorities which are to carry out the duties provided for in this Directive. They shall inform the Commission thereof, indicating any division of duties.
2. The authorities referred to in paragraph 1 must 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 authorities concerned must be granted all the powers necessary for the performance of their tasks, and in particular that of overseeing the constitution of trading books.
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.
Article 10
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 from the Commission, in accordance with Decision 87/373/EEC, adopt those adaptations which may be necessary, as follows:
clarification of the definitions in Article 2 in order to ensure uniform application of this Directive throughout the Community,
clarification of the definitions in Article 2 to take account of developments on financial markets,
alteration of the amounts of initial capital prescribed in Article 3 and the amount referred to in Article 4 (6) to take account of developments in the economic and monetary field,
the alignment of terminology on and the framing of definitions in accordance with subsequent acts on institutions and related matters.
Article 11. Transitional provisions
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.
Article 12. Final provisions
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. When Member States adopt these provisions they shall include a reference to this Directive or add such a reference on the occasion of their official publication. The manner in which such references are to be made shall be laid down by the Member States.
2. Member States shall communicate to the Commission the main provisions of national law which they adopt in the field covered by this Directive.
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.
Article 14. Review clause
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.
Article 15
This Directive is addressed to the Member States.
Done at Brussels, 15 March 1993.
For the Council
The President
M. JELVED
ANNEX I
POSITION RISK
Introduction
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.
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
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 of Table 1 in paragraph 14 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 of Table 1 for purposes of specific risk, and the debt instrument under whichever column is appropriate for it in the same table. 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 the method used to calculate the margin is equivalent to the method of calculation set out in the remainder of this Annex.
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.
The competent authorities shall require that the other risks, apart from the dealt risk, associated with options are 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 the method used to calculate the margin is equivalent to the method of calculation set out in the remainder of this Annex for such options. 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.
6. Warrants and covered warrants shall be treated in the same way as options under paragraph 5.
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.
8. However, institutions 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 amortized 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. The positions shall be included in the calculation of capital requirements according to the provisions laid down in paragraphs 15 to 30.
9. Institutions which do not use models under paragraph 8 may 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:
(i) the positions are of the same value and denominated in the same currency;
(ii) the reference rate (for floating-rate positions) or coupon (for fixed-rate positions) is closely matched;
(iii) the next interest-fixing date or, for fixed coupon positions, residual maturity corresponds with the following limits:
less than one month hence: same day;
between one month and one year hence: within seven days;
over one year hence: within 30 days.
10. 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).
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.
| Central government items | Qualifying items | |||
|---|---|---|---|---|
| Up to 6 months | Over 6 and up to 24 months | Over 24 months | Other items | |
| 0,00% | 0,25% | 1,00% | 1,60% | 8,00% |
| Central government items | Qualifying items | |||
|---|---|---|---|---|
| Up to 6 months | Over 6 and up to 24 months | Over 24 months | Other items | |
| 0,00% | 0,25% | 1,00% | 1,60% | 8,00% |
| Maturity band | Annual interest rate change in % | |||
|---|---|---|---|---|
| Zone | Coupon of 3% or more | Coupon of less than 3% | Weighting (in %) | |
| (1) | (2) | (3) | (4) | (5) |
| 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 | ||
| > 20,0 years | 12,50 | 0,60 | ||
| Maturity band | Annual interest rate change in % | |||
|---|---|---|---|---|
| Zone | Coupon of 3% or more | Coupon of less than 3% | Weighting (in %) | |
| (1) | (2) | (3) | (4) | (5) |
| 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 | ||
| > 20,0 years | 12,50 | 0,60 | ||
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 net positions 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
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.
General risk
(a) Maturity-based
15. 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), 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 or maturity bands) altogether.
16. 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. 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.
17. 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.
18. 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.
19. 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 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.
20. The institution may, if it wishes, reverse the order in paragraph 19 so as to calculate the matched weighted position between zones two and three before working out that between zones one and two.
21. 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.
22. Residual positions, following the three separate matching calculations in paragraphs 19, 20 and 21, shall be summed.
23. 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);
(f) 150% of the matched weighted position between zones one and three;
(g) 100% of the residual unmatched weighted positions.
(b) Duration-based
24. 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, provided that the institution does so on a consistent basis.
25. Under such a system 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.
- 26. The institution shall then calculate the modified duration of each debt instrument on the basis of the formula:
Where: r = yield to maturity (see paragraph 25),
Ct = cash payment in time t,
m = total maturity (see paragraph 25).
27. 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.
28. 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).
29. 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. 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.
30. 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
31. 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
32. It shall multiply its overall gross position by 4% in order to calculate its capital requirement against specific risk.
33. Notwithstanding paragraph 32, 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:
(i) the equities shall not be those of issuers which have issued traded debt instruments that currently attract an 8% requirement in Table 1 appearing in paragraph 14;
(ii) the equities must be adjudged highly liquid by the competent authorities according to objective criteria;
(iii) no individual position shall comprise more than 5% of the value of the institution’s whole equity portfolio. However, the competent authorities may authorize individual positions of up to 10% provided that the total of such positions does not exceed 50% of the portfolio.
General risk
34. Its capital requirement against general risk shall be its overall net position multiplied by 8%.
Stock-index futures
35. 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, subject to the approval of the competent authorities, they may be netted against opposite positions in the underlying equities themselves.
36. 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.
37. Notwithstanding paragraphs 35 and 36, 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, but disregarded in the calculation of the overall gross position in the same paragraph.
38. 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
39. In the case of the underwriting of debt and equity instruments, the component 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, it shall reduce the net positions by the following reduction factors:
• 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% • 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% 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.
ANNEX II
SETTLEMENT AND COUNTER-PARTY RISK
Settlement/Delivery Risk
1. In the case transactions in which debt instruments and equities (excluding repurchase and reverse repurchase agreements and securities lending and securities 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 or equity 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.
2. Notwithstanding 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 table below. 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.
| Number of working days after due settlement date | Column A (%) | Column B (%) |
|---|---|---|