Directive 2006/49/EC of the European Parliament and of the Council of 14 June 2006 on the capital adequacy of investment firms and credit institutions (recast)
Modified by
- Directive 2008/23/EC of the European Parliament and of the Councilof 11 March 2008amending Directive 2006/49/EC on the capital adequacy of investment firms and credit institutions, as regards the implementing powers conferred on the Commission, 32008L0023, March 19, 2008
- Commission Directive 2009/27/ECof 7 April 2009amending certain Annexes to Directive 2006/49/EC of the European Parliament and of the Council as regards technical provisions concerning risk management(Text with EEA relevance), 32009L0027, April 8, 2009
-
(a) every reference to credit institutions shall be construed as a reference to investment firms; (b) in Articles 125 and 140(2) of Directive 2006/48/EC, each reference to other articles of that Directive shall be construed as a reference to Directive 2004/39/EC; (c) for the purposes of Article 39(3) of Directive 2006/48/EC, references to the European Banking Committee shall be construed as references to the Council and the Commission; and (d) by way of derogation from Article 140(1) of Directive 2006/48/EC, where a group does not include a credit institution, the first sentence of that Article 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".
-
(a) "credit institutions" means credit institutions as defined in Article 4(1) of Directive 2006/48/EC; (b) "investment firms" means institutions as defined in Article 4(1)(1) of Directive 2004/39/EC, which are subject to the requirements imposed by that Directive, excluding: -
(i) credit institutions; (ii) local firms as defined in point (p); and (iii) firms which are only authorised to provide the service of investment advice and/or 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 debt with those clients;
-
(c) "institutions" means credit institutions and investment firms; (d) "recognised third-country investment firms" means firms meeting the following conditions: -
(i) firms which, if they were established within the Community, would be covered by the definition of investment firm; (ii) firms which are authorised in a third country; and (iii) firms which are subject to and comply with prudential rules considered by the competent authorities as at least as stringent as those laid down by this Directive;
-
(e) "financial instruments" means any contract that gives rise to both a financial asset of one party and a financial liability or equity instrument of another party; (f) "parent investment firm in a Member State" means an investment firm which has an institution or financial institution as a subsidiary or which holds a participation in one or both such entities, and which is not itself a subsidiary of another institution authorised in the same Member State or of a financial holding company set up in the same Member State; (g) "EU parent investment firm" means a parent investment firm in a Member State which is not a subsidiary of another institution authorised in any Member State or of a financial holding company set up in any Member State; (h) "over-the-counter (OTC) derivative instruments" means the items falling within the list in Annex IV to Directive 2006/48/EC other than those items to which an exposure value of zero is attributed under point 6 of Part 2 of Annex III to that Directive; (i) "regulated market" means a market as defined in Article 4(1)(14) of Directive 2004/39/EC; (j) "convertible" means a security which, at the option of the holder, may be exchanged for another security; (k) "warrant" means a security which gives the holder the right to purchase an underlying asset at a stipulated price until or at the expiry date of the warrant and which may be settled by the delivery of the underlying itself or by cash settlement; (l) "stock financing" means positions where physical stock has been sold forward and the cost of funding has been locked in until the date of the forward sale; (m) "repurchase agreement" and "reverse repurchase agreement" mean any agreement in which an institution or its counterparty transfers securities or commodities or guaranteed rights relating to title — to securities or commodities where that guarantee is issued by a recognised exchange which holds the rights to the securities or commodities and the agreement does not allow an institution to transfer or pledge a particular security or commodity to more than one counterparty at one time, subject to a commitment to repurchase them — or substituted securities or commodities of the same description — at a specified price on a future date specified, or to be specified, by the transferor, being a repurchase agreement for the institution selling the securities or commodities and a reverse repurchase agreement for the institution buying them; (n) "securities or commodities lending" and "securities or commodities borrowing" mean any transaction in which an institution or its counterparty transfers securities or commodities against appropriate collateral, subject to a commitment that the borrower will return equivalent securities or commodities at some future date or when requested to do so by the transferor, that transaction being securities or commodities lending for the institution transferring the securities or commodities and being securities or commodities borrowing for the institution to which they are transferred; (o) "clearing member" means a member of the exchange or the clearing house which has a direct contractual relationship with the central counterparty (market guarantor); (p) "local firm" means a firm dealing for its own account on markets in financial futures or options or other derivatives and on cash markets for the sole purpose of hedging positions on derivatives markets, or dealing for the accounts of other members of those markets and being guaranteed by clearing members of the same markets, where responsibility for ensuring the performance of contracts entered into by such a firm is assumed by clearing members of the same markets; (q) "delta" means the expected change in an option price as a proportion of a small change in the price of the instrument underlying the option; (r) "own funds" means own funds as defined in Directive 2006/48/EC; and (s) "capital" means own funds.
-
(a) "financial holding company" means a financial institution the subsidiary undertakings of which are either exclusively or mainly investment firms or other financial institutions, at least one of which is an investment firm, and which is not a mixed financial holding company within the meaning of Directive 2002/87/EC of the European Parliament and of the Council of 16 December 2002 on the supplementary supervision of credit institutions, insurance undertakings and investment firms in a financial conglomerateOJ L 35, 11.2.2003, p. 1 . Directive as amended by Directive 2005/1/EC. (b) "mixed-activity holding company" means a parent undertaking, other than a financial holding company or an investment firm or a mixed financial holding company within the meaning of Directive 2002/87/EC, the subsidiaries of which include at least one investment firm; and (c) "competent authorities" means the national authorities which are empowered by law or regulation to supervise investment firms.
-
(a) the reception and transmission of investors' orders for financial instruments; (b) the execution of investors' orders for financial instruments; or (c) the management of individual portfolios of investments in financial instruments.
-
(a) such positions arise only as a result of the firm's failure to match investors' orders precisely; (b) the total market value of all such positions is subject to a ceiling of 15 % of the firm's initial capital; (c) the firm meets the requirements laid down in Articles 18, 20 and 28; and (d) such positions are incidental and provisional in nature and strictly limited to the time required to carry out the transaction in question.
-
(a) initial capital of EUR 50000 ; (b) professional indemnity insurance covering the whole territory of the Community or some other comparable guarantee against liability arising from professional negligence, representing at least EUR 1000000 applying to each claim and in aggregate EUR1500000 per year for all claims; or(c) a combination of initial capital and professional indemnity insurance in a form resulting in a level of coverage equivalent to that referred to in points (a) or (b).
-
(a) initial capital of EUR 25000 ; (b) professional indemnity insurance covering the whole territory of the Community or some other comparable guarantee against liability arising from professional negligence, representing at least EUR 500000 applying to each claim and in aggregate EUR750000 per year for all claims; or(c) a combination of initial capital and professional indemnity insurance in a form resulting in a level of coverage equivalent to that referred to in points (a) or (b).
-
(a) own funds as defined in Directive 2006/48/EC , excluding only points (l) to (p) of Article 57 of that Directive for those investment firms which are required to deduct item (d) of this paragraph from the total of items (a) to (c); (b) an institution's net trading-book profits net of any foreseeable charges or dividends, less net losses on its other business, provided that none of those amounts has already been included in item (a) of this paragraph as one of the items set out in points (b) or (k) of Article 57 of Directive 2006/48/EC; (c) subordinated loan capital and/or the items referred to in paragraph 5 of this Article, subject to the conditions set out in paragraphs 3 and 4 of this Article and in Article 14; and (d) illiquid assets as specified in Article 15.
-
(a) tangible fixed assets, except to the extent that land and buildings may be allowed to count against the loans which they are securing; (b) holdings in, including subordinated claims on, credit or financial institutions which may be included in the own funds of those institutions, unless they have been deducted under points (l) to (p) of Article 57 of Directive 2006/48/EC or under Article 16(d) of this Directive; (c) holdings and other investments in undertakings other than credit or financial institutions, which are not readily marketable; (d) deficiencies in subsidiaries; (e) deposits made, other than those which are available for repayment within 90 days, and also excluding payments in connection with margined futures or options contracts; (f) loans and other amounts due, other than those due to be repaid within 90 days; and (g) physical stocks, unless they are already subject to capital requirements at least as stringent as those set out in Articles 18 and 20.
-
(a) the illiquid assets referred to in Article 13(2)(d) shall be deducted; (b) the exclusion referred to in point (a) of Article 13(2) shall not cover those components of points (l) to (p) of Article 57 of Directive 2006/48/EC which an investment firm holds in respect of undertakings included in the scope of consolidation as defined in Article 2(1) of this Directive; (c) the limits referred to in points (a) and (b) of Article 66(1) of Directive 2006/48/EC shall be calculated with reference to the original own funds less the components of points (l) to (p) of Article 57 of that Directive as referred to in point (b) of this Article which are elements of the original own funds of those undertakings; and (d) the components of points (l) to (p) of Article 57 of Directive 2006/48/EC referred to in point (c) of this Article shall be deducted from the original own funds rather than from the total of all items as laid down in Article 66(2) of that Directive for the purposes in particular of Articles 13(4), 13(5) and 14 of this Directive.
-
(a) value adjustments made to take account of the credit quality of the counterparty may be included in the sum of value adjustments and provisions made for the exposures indicated in Annex II; and (b) subject to the approval of the competent authorities, if the credit risk of the counterparty is adequately taken into account in the valuation of a position included in the trading book, the expected loss amount for the counterparty risk exposure shall be zero.
-
(a) the capital requirements, calculated in accordance with the methods and options laid down in Articles 28 to 32 and Annexes I, II and VI and, as appropriate, Annex V, for their trading-book business; and (b) the capital requirements, calculated in accordance with the methods and options laid down in Annexes III and IV and, as appropriate, Annex V, for all of their business activities.
-
(a) the trading-book business of such institutions does not normally exceed 5 % of their total business; (b) their total trading-book positions do not normally exceed EUR 15 million; and (c) the trading-book business of such institutions never exceeds 6 % of their total business and their total trading-book positions never exceed EUR 20 million.
-
(a) the sum of the capital requirements contained in points (a) to (c) of Article 75 of Directive 2006/48/EC; and (b) the amount laid down in Article 21 of this Directive.
-
(a) investment firms that deal on own account only for the purpose of fulfilling or executing a client order or for the purpose of gaining entrance to a clearing and settlement system or a recognised exchange when acting in an agency capacity or executing a client order; and b) investment firms: -
(i) that do not hold client money or securities; (ii) that undertake only dealing on own account; (iii) that have no external customers; (iv) the execution and settlement of whose transactions takes place under the responsibility of a clearing institution and are guaranteed by that clearing institution.
-
-
(a) each EU investment firm in such a group uses the calculation of own funds set out in Article 16; (b) all investment firms in such a group fall within the categories in Article 20(2) and (3); (c) each EU investment firm in such a group meets the requirements imposed in Articles 18 and 20 on an individual basis and at the same time deducts from its own funds any contingent liability in favour of investment firms, financial institutions, asset management companies and ancillary services undertakings, which would otherwise be consolidated and; (d) any financial holding company which is the parent financial holding company in a Member State of any investment firm in such a group holds at least as much capital, defined here as the sum of points (a) to (h) of Article 57 of Directive 2006/48/EC, as the sum of the full book value of any holdings, subordinated claims and instruments as referred to in Article 57 of that Directive in investment firms, financial institutions, asset management companies and ancillary services undertakings which would otherwise be consolidated, and the total amount of any contingent liability in favour of investment firms, financial institutions, asset management companies and ancillary services undertakings which would otherwise be consolidated.
-
(a) the sum of the capital requirements contained in points (a) to (c) of Article 75 of Directive 2006/48/EC; and (b) the amount prescribed in Article 21 of this Directive.
-
(a) the sum of the capital requirements contained in points (a) to (c) of Article 75 of Directive 2006/48/EC; and (b) the amount prescribed in Article 21 of this Directive.
-
(a) such undertakings have been authorised in a third country and either satisfy the definition of credit institution set out in Article 4(1) of Directive 2006/48/EC or are recognised third-country investment firms; (b) such undertakings comply, on an individual basis, with capital adequacy rules equivalent to those laid down in this Directive; and (c) no regulations exist in the third countries in question which might significantly affect the transfer of funds within the group.
-
(a) there is a satisfactory allocation of capital within the group; and (b) the regulatory, legal or contractual framework in which the institutions operate is such as to guarantee mutual financial support within the group.
-
(a) the excess — where positive — of an institution's long positions over its short positions in all the financial instruments issued by the client in question, the net position in each of the different instruments being calculated according to the methods laid down in Annex I; (b) the net exposure, in the case of the underwriting of a debt or an equity instrument; and (c) the exposures due to the transactions, agreements and contracts referred to in Annex II with the client in question, such exposures being calculated in the manner laid down in that Annex, for the calculation of exposure values.
-
(a) the exposure on the non-trading book to the client or group of clients in question does not exceed the limits laid down in Articles 111 to 117 of Directive 2006/48/EC, those limits being calculated with reference to own funds as specified in that Directive, so that the excess arises entirely on the trading book; (b) the institution meets an additional capital requirement on the excess in respect of the limits laid down in Article 111(1) and (2) of Directive 2006/48/EC, that additional capital requirement being calculated in accordance with Annex VI to that Directive; (c) where 10 days or less has elapsed since the excess occurred, the trading-book exposure to the client or group of connected clients in question shall not exceed 500 % of the institution's own funds; (d) any excesses that have persisted for more than 10 days must not, in aggregate, exceed 600 % of the institution's own funds; and (e) institutions shall report to the competent authorities every three months all cases where the limits laid down in Article 111(1) and (2) of Directive 2006/48/EC have been exceeded during the preceding three months.
-
(a) references to Article 6 of Directive 2006/48/EC shall be construed as references to Article 5 of Directive 2004/39/EC; (b) references to Article 22 and 123 of Directive 2006/48/EC shall be construed s references to Article 34 of this Directive; and (c) references to Articles 44 to 52 of Directive 2006/48/EC shall be construed as references to Articles 54 and 58 of Directive 2004/39/EC.
-
(a) for investment firms, those imposed in Article 54 and 58 of Directive 2004/39/EC; and (b) for credit institutions, those imposed in Articles 44 to 52 of Directive 2006/48/EC.
-
(a) clarification of the definitions in Article 3 in order to ensure uniform application of this Directive; (b) clarification of the definitions in Article 3 to take account of developments on financial markets; (c) adjustment of the amounts of initial capital prescribed in Articles 5 to 9 and the amount referred to in Article 18(2) to take account of developments in the economic and monetary field; (d) adjustment of the categories of investment firms in Article 20(2) and (3) to take account of developments on financial markets; (e) clarification of the requirement laid down in Article 21 to ensure uniform application of this Directive; (f) alignment of terminology on and the framing of definitions in accordance with subsequent acts on institutions and related matters; (g) adjustment of the technical provisions in Annexes I to VII as a result of developments on financial markets, risk measurement, accounting standards or requirements which take account of Community legislation or which have regard to convergence of supervisory practices; or (h) technical adaptations to take account of the outcome of the review referred to in Article 65(3) of Directive 2004/39/EC.
-
(a) the investment firm provides investment services or investment activities related to the financial instruments listed in points 5, 6, 7, 9 and 10 of Section C of Annex I to Directive 2004/39/EC; (b) the investment firm does not provide such investment services or undertake such investment activities for, or on behalf of, retail clients; c) breaches of the limits referred to in the introductory part of this paragraph arise in connection with exposures resulting from contracts that are financial instruments as listed in point (a) and relate to commodities or underlyings within the meaning of point 10 of Section C of Annex I to Directive 2004/39/EC (MiFID) and are calculated in accordance with Annexes III and IV of Directive 2006/48/EC, or in connection with exposures resulting from contracts concerning the delivery of commodities or emission allowances; and (d) the investment firm has a documented strategy for managing and, in particular, for controlling and limiting risks arising from the concentration of exposures. The investment firm shall inform the competent authorities of this strategy and all material changes to it without delay. The investment firm shall make appropriate arrangements to ensure a continuous monitoring of the creditworthiness of borrowers, according to their impact on concentration risk. These arrangements shall enable the investment firm to react adequately and sufficiently promptly to any deterioration in that creditworthiness.
-
(a) the capital requirements arising from point (d) of Article 75 of Directive 2006/48/EC; and b) 12/88 of the higher of the following: -
(i) the sum of the capital requirements contained in points (a) to (c) of Article 75 of Directive 2006/48/EC; and (ii) the amount laid down in Article 21 of this Directive, notwithstanding Article 20(5).
-
-
(a) an appropriate regime for the prudential supervision of investment firms whose main business consists exclusively of the provision of investment services or activities in relation to the commodity derivatives or derivatives contracts set out in points 5, 6, 7, 9 and 10 of Section C of Annex I to Directive 2004/39/EC; and (b) the desirability of amending Directive 2004/39/EC to create a further category of investment firm whose main business consists exclusively of the provision of investment services or activities in relation to the financial instruments set out in points 5, 6, 7, 9 and 10 of Section C of Annex I to Directive 2004/39/EC relating to energy supplies (including electricity, coal, gas and oil).
-
(a) references in point 7 of Annex II to this Directive to Directive 2006/48/EC shall be read as references to Directive 2000/12/EC as that Directive stood prior to 1 January 2007 ; and (b) point 4 of Annex II to this Directive shall apply as it stood prior to 1 January 2007 .
-
(i) A total return swap creates a long position in the general market risk of the reference obligation and a short position in the general market risk of a government bond with a maturity equivalent to the period until the next interest fixing and which is assigned a 0 % risk weight under Annex VI of Directive 2006/48/EC. It also creates a long position in the specific risk of the reference obligation. (ii) A credit default swap does not create a position for general market risk. For the purposes of specific risk, the institution must record a synthetic long position in an obligation of the reference entity, unless the derivative is rated externally and meets the conditions for a qualifying debt item, in which case a long position in the derivative is recorded. If premium or interest payments are due under the product, these cash flows must be represented as notional positions in government bonds. (iii) A single name credit linked note creates a long position in the general market risk of the note itself, as an interest rate product. For the purpose of specific risk, a synthetic long position is created in an obligation of the reference entity. An additional long position is created in the issuer of the note. Where the credit linked note has an external rating and meets the conditions for a qualifying debt item, a single long position with the specific risk of the note need only be recorded. (iv) In addition to a long position in the specific risk of the issuer of the note, a multiple name credit linked note providing proportional protection creates a position in each reference entity, with the total notional amount of the contract assigned across the positions according to the proportion of the total notional amount that each exposure to a reference entity represents. Where more than one obligation of a reference entity can be selected, the obligation with the highest risk weighting determines the specific risk. Where a multiple name credit linked note has an external rating and meets the conditions for a qualifying debt item, a single long position with the specific risk of the note need only be recorded. (v) A first-asset-to-default credit derivative creates a position for the notional amount in an obligation of each reference entity. If the size of the maximum credit event payment is lower than the capital requirement under the method in the first sentence of this point, the maximum payment amount may be taken as the capital requirement for specific risk. A second-asset-to-default credit derivative creates a position for the notional amount in an obligation of each reference entity less one (that with the lowest specific risk capital requirement). If the size of the maximum credit event payment is lower than the capital requirement under the method in the first sentence of this point, this amount may be taken as the capital requirement for specific risk. If a first or second-asset to default derivative is externally rated and meets the conditions for a qualifying debt item, then the protection seller need only calculate one specific risk charge reflecting the rating of the derivative.
-
(a) the positions are of the same value and denominated in the same currency; (b) the reference rate (for floating-rate positions) or coupon (for fixed-rate positions) is closely matched; and (c) the next interest-fixing date or, for fixed coupon positions, residual maturity corresponds with the following limits: -
(i) less than one month hence: same day; (ii) between one month and one year hence: within seven days; and (iii) over one year hence: within 30 days.
-
| Categories | Specific risk capital charge |
|---|---|
| Debt securities issued or guaranteed by central governments, issued by central banks, international organisations, multilateral development banks or Member States′ regional government or local authorities which would qualify for credit quality step 1 or which would receive a 0 % risk weight under the rules for the risk weighting of exposures under Articles 78 to 83 of Directive 2006/48/EC. | |
| Debt securities issued or guaranteed by central governments, issued by central banks, international organisations, multilateral development banks or Member States′ regional governments or local authorities or institutions which would qualify for credit quality step 4 or 5 under the rules for the risk weighting of exposures under Articles 78 to 83 of Directive 2006/48/EC, and debt securities issued or guaranteed by institutions which would qualify for credit quality step 3 under the rules for the risk weighting of exposures under point 26 of Part 1 of Annex VI to Directive 2006/48/EC, and debt securities issued or guaranteed by corporates which would qualify for credit quality step 4 under the rules for the risk weighting of exposures under Articles 78 to 83 of Directive 2006/48/EC. Exposures for which a credit assessment by a nominated ECAI is not available. | |
| Debt securities issued or guaranteed by central governments, issued by central banks, international organisations, multilateral development banks or Member States′ regional governments or local authorities or institutions which would qualify for credit quality step 6 under the rules for the risk weighting of exposures under Articles 78 to 83 of Directive 2006/48/EC, and debt securities issued or guaranteed by corporates which would qualify for credit quality step 5 or 6 under the rules for the risk weighting of exposures under Articles 78 to 83 of Directive 2006/48/EC. |
-
(a) long and short positions in assets qualifying for a credit quality step corresponding at least to investment grade in the mapping process described in Title V, Chapter 2, Section 3, Sub-section 1 of Directive 2006/48/EC; (b) long and short positions in assets which, because of the solvency of the issuer, have a PD which is not higher than that of the assets referred to under (a), under the approach described in Title V, Chapter 2, Section 3, Sub-section 2 of Directive 2006/48/EC; (c) long and short positions in assets for which a credit assessment by a nominated external credit assessment institution is not available and which meet the following conditions: -
(i) they are considered by the institutions concerned to be sufficiently liquid; (ii) their investment quality is, according to the institution's own discretion, at least equivalent to that of the assets referred to under point (a); and (iii) they are listed on at least one regulated market in a Member State or on a stock exchange in a third country provided that the exchange is recognised by the competent authorities of the relevant Member State;
-
(d) long and short positions in assets issued by institutions subject to the capital adequacy requirements set out in Directive 2006/48/EC which are considered by the institutions concerned to be sufficiently liquid and whose investment quality is, according to the institution's own discretion, at least equivalent to that of the assets referred to under point (a); and (e) securities issued by institutions that are deemed to be of equivalent, or higher, credit quality than those associated with credit quality step 2 under the rules for the risk weighting of exposures to institutions set out in Articles 78 to 83 of Directive 2006/48/EC and that are subject to supervisory and regulatory arrangements comparable to those under this Directive.
-
(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 point 21); (f) 150 % of the matched weighted position between zones one and three; and (g) 100 % of the residual unmatched weighted positions.
-
(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; and (d) 100 % of the residual unmatched duration-weighted positions.
-
(a) the equities shall not be those of issuers which have issued only traded debt instruments that currently attract an 8 % or 12 % requirement in Table 1 to point 14 or that attract a lower requirement only because they are guaranteed or secured; (b) the equities must be adjudged highly liquid by the competent authorities according to objective criteria; and (c) no individual position shall comprise more than 5 % of the value of the institution's whole equity portfolio.
-
(a) the two legs consist of completely identical instruments; or (b) a long cash position is hedged by a total rate of return swap (or vice versa) and there is an exact match between the reference obligation and the underlying exposure (i.e., the cash position). The maturity of the swap itself may be different from that of the underlying exposure.
-
(a) the position falls under point 43(b) but there is an asset mismatch between the reference obligation and the underlying exposure. However, the positions meet the following requirements: -
(i) the reference obligation ranks pari passu with or is junior to the underlying obligation; and (ii) the underlying obligation and reference obligation share the same obligor and have legally enforceable cross-default or cross-acceleration clauses;
-
(b) the position falls under point 43(a) or point 44 but there is a currency or maturity mismatch between the credit protection and the underlying asset (currency mismatches should be included in the normal reporting foreign exchange risk under Annex III); or (c) the position falls under point 44 but there is an asset mismatch between the cash position and the credit derivative. However, the underlying asset is included in the (deliverable) obligations in the credit derivative documentation.
-
(a) the CIU's prospectus or equivalent document shall include: -
(i) the categories of assets the CIU is authorised to invest in; (ii) if investment limits apply, the relative limits and the methodologies to calculate them; (iii) if leverage is allowed, the maximum level of leverage; and (iv) if investment in OTC financial derivatives or repo-style transactions are allowed, a policy to limit counterparty risk arising from these transactions;
-
(b) the business of the CIU shall be reported in half-yearly and annual reports to enable an assessment to be made of the assets and liabilities, income and operations over the reporting period; (c) the units/shares of the CIU are redeemable in cash, out of the undertaking's assets, on a daily basis at the request of the unit holder; (d) investments in the CIU shall be segregated from the assets of the CIU manager; and (e) there shall be adequate risk assessment of the CIU, by the investing institution.
-
(a) the purpose of the CIU's mandate is to replicate the composition and performance of an externally generated index or fixed basket of equities or debt securities; and (b) a minimum correlation of 0.9 between daily price movements of the CIU and the index or basket of equities or debt securities it tracks can be clearly established over a minimum period of six months. "Correlation" in this context means the correlation coefficient between daily returns on the CIU and the index or basket of equities or debt securities it tracks.
-
(a) it will be assumed that the CIU first invests to the maximum extent allowed under its mandate in the asset classes attracting the highest capital requirement for position risk (general and specific), and then continues making investments in descending order until the maximum total investment limit is reached. The position in the CIU will be treated as a direct holding in the assumed position; (b) institutions shall take account of the maximum indirect exposure that they could achieve by taking leveraged positions through the CIU when calculating their capital requirement for position risk, by proportionally increasing the position in the CIU up to the maximum exposure to the underlying investment items resulting from the mandate; and (c) should the capital requirement for position risk (general and specific) according to this point exceed that set out in point 48, the capital requirement shall be capped at that level.
-
(a) it has paid for securities, foreign currencies or commodities before receiving them or it has delivered securities, foreign currencies or commodities before receiving payment for them; and (b) in the case of cross-border transactions, one day or more has elapsed since it made that payment or delivery. Table 2 Capital treatment for free deliveries Transaction Type Up to first contractual payment or delivery leg From first contractual payment or delivery leg up to four days after second contractual payment or delivery leg From 5 business days post second contractual payment or delivery leg until extinction of the transaction Free delivery No capital charge Treat as an exposure Deduct value transferred plus current positive exposure from own funds
-
(a) OTC derivative instruments and credit derivatives; (b) Repurchase agreements, reverse repurchase agreements, securities or commodities lending or borrowing transactions based on securities or commodities included in the trading book; (c) margin lending transactions based on securities or commodities; and (d) long settlement transactions.
-
where the reference obligation is one that if it gave rise to a direct exposure of the institution it would be a qualifying item for the purposes of Annex I: 5 %; and where the reference obligation is one that if it gave rise to a direct exposure of the institution it would not be a qualifying item for the purposes of Annex I: 10 %.
-
(a) all transactions are marked to market daily; and (b) any items borrowed, purchased or received under the transactions may be recognised as eligible financial collateral under Title V, Chapter 2, Section 3, Subsection 3 of Directive 2006/48/EC without the application of point 9 of this Annex.
-
(a) the net spot position (i.e. all asset items less all liability items, including accrued interest, in the currency in question or, for gold, the net spot position in gold); (b) the net forward position (i.e. all amounts to be received less all amounts to be paid under forward exchange and gold transactions, including currency and gold futures and the principal on currency swaps not included in the spot position); (c) irrevocable guarantees (and similar instruments) that are certain to be called and likely to be irrecoverable; (d) net future income/expenses not yet accrued but already fully hedged (at the discretion of the reporting institution and with the prior consent of the competent authorities, net future income/expenses not yet entered in accounting records but already fully hedged by forward foreign-exchange transactions may be included here). Such discretion must be exercised on a consistent basis; (e) the net delta (or delta-based) equivalent of the total book of foreign-currency and gold options; and (f) the market value of other (i.e. non-foreign-currency and non-gold) options.
-
(a) positions in different sub-categories of commodities in cases where the sub-categories are deliverable against each other; and (b) positions in similar commodities if they are close substitutes and if a minimum correlation of 0,9 between price movements can be clearly established over a minimum period of one year.
-
(a) positions in contracts maturing on the same date; and (b) positions in contracts maturing within 10 days of each other if the contracts are traded on markets which have daily delivery dates.
-
(a) the sum of the matched long and short positions, multiplied by the appropriate spread rate as indicated in the second column of Table 1 to point 13 for each maturity band and by the spot price for the commodity; (b) the matched position between two maturity bands for each maturity band into which an unmatched position is carried forward, multiplied by 0,6 % (carry rate) and by the spot price for the commodity; and(c) the residual unmatched positions, multiplied by 15 % (outright rate) and by the spot price for the commodity.
-
(a) 15 % of the net position, long or short, multiplied by the spot price for the commodity; and (b) 3 % of the gross position, long plus short, multiplied by the spot price for the commodity.
-
(a) undertake significant commodities business; (b) have a diversified commodities portfolio; and (c) are not yet in a position to use internal models for the purpose of calculating the capital requirement on commodities risk in accordance with Annex V.
-
(a) the internal risk-measurement model is closely integrated into the daily risk-management process of the institution and serves as the basis for reporting risk exposures to senior management of the institution; (b) the institution has a risk control unit that is independent from business trading units and reports directly to senior management. The unit must be responsible for designing and implementing the institution's risk-management system. It shall produce and analyse daily reports on the output of the risk-measurement model and on the appropriate measures to be taken in terms of trading limits. The unit shall also conduct the initial and on-going validation of the internal model; (c) the institution's board of directors and senior management are actively involved in the risk-control process and the daily reports produced by the risk-control unit are reviewed by a level of management with sufficient authority to enforce both reductions of positions taken by individual traders as well as in the institution's overall risk exposure; (d) the institution has sufficient numbers of staff skilled in the use of sophisticated models in the trading, risk-control, audit and back-office areas; (e) the institution has established procedures for monitoring and ensuring compliance with a documented set of internal policies and controls concerning the overall operation of the risk-measurement system; (f) the institution's model has a proven track record of reasonable accuracy in measuring risks; (g) the institution frequently conducts a rigorous programme of stress testing and the results of these tests are reviewed by senior management and reflected in the policies and limits it sets . This process shall particularly address illiquidity of markets in stressed market conditions, concentration risk, one way markets, event and jump-to-default risks, non-linearity of products, deep out-of-the-money positions, positions subject to the gapping of prices and other risks that may not be captured appropriately in the internal models. The shocks applied shall reflect the nature of the portfolios and the time it could take to hedge out or manage risks under severe market conditions; and(h) the institution must conduct, as part of its regular internal auditing process, an independent review of its risk-measurement system.
-
(a) the adequacy of the documentation of the risk-management system and process and the organisation of the risk-control unit; (b) the integration of market risk measures into daily risk management and the integrity of the management information system; (c) the process the institution employs for approving risk-pricing models and valuation systems that are used by front and back-office personnel; (d) the scope of market risks captured by the risk-measurement model and the validation of any significant changes in the risk-measurement process; (e) the accuracy and completeness of position data, the accuracy and appropriateness of volatility and correlation assumptions, and the accuracy of valuation and risk sensitivity calculations; (f) the verification process the institution employs to evaluate the consistency, timeliness and reliability of data sources used to run internal models, including the independence of such data sources; and (g) the verification process the institution uses to evaluate back-testing that is conducted to assess the models' accuracy.
-
(a) tests to demonstrate that any assumptions made within the internal model are appropriate and do not underestimate or overestimate the risk; (b) in addition to the regulatory back-testing programmes, institutions shall carry out their own internal model validation tests in relation to the risks and structures of their portfolios; and (c) the use of hypothetical portfolios to ensure that the internal model is able to account for particular structural features that may arise, for example material basis risks and concentration risk.
-
(a) it explains the historical price variation in the portfolio; (b) it captures concentration in terms of magnitude and changes of composition of the portfolio; (c) it is robust to an adverse environment; (d) it is validated through back-testing aimed at assessing whether specific risk is being accurately captured. If competent authorities allow this back-testing to be performed on the basis of relevant sub-portfolios, these must be chosen in a consistent manner; (e) it captures name-related basis risk, that is institutions shall demonstrate that the internal model is sensitive to material idiosyncratic differences between similar but not identical positions; and (f) it captures event risk.
-
where an institution is subject to event risk that is not reflected in its value-at-risk measure, because it is beyond the 10-day holding period and 99 percent confidence interval (low probability and high severity events), the institution shall ensure that the impact of such events is factored in to its internal capital assessment; and the institution's internal model shall conservatively assess the risk arising from less liquid positions and positions with limited price transparency under realistic market scenarios. In addition, the internal model shall meet minimum data standards. Proxies shall be appropriately conservative and may be used only where available data is insufficient or is not reflective of the true volatility of a position or portfolio.
-
(a) its previous day's value-at-risk measure according to the parameters specified in this Annex plus, where appropriate, the incremental default risk charge required under point 5; or (b) an average of the daily value-at-risk measures on each of the preceding 60 business days, multiplied by the factor mentioned in point 7, adjusted by the factor referred to in point 8 plus, where appropriate, the incremental default risk charge required under point 5.
-
(a) at least daily calculation of the value-at-risk measure; (b) a 99th percentile, one-tailed confidence interval; (c) a 10-day equivalent holding period; (d) an effective historical observation period of at least one year except where a shorter observation period is justified by a significant upsurge in price volatility; and (e) three-monthly data set updates.
-
(a) there must be a clearly documented trading strategy for the position/instrument or portfolios, approved by senior management, which shall include expected holding horizon; (b) there must be clearly defined policies and procedures for the active management of the position, which shall include the following: -
(i) positions entered into on a trading desk; (ii) position limits are set and monitored for appropriateness; (iii) dealers have the autonomy to enter into/manage the position within agreed limits and according to the approved strategy; (iv) positions are reported to senior management as an integral part of the institution's risk management process; and (v) positions are actively monitored with reference to market information sources and an assessment made of the marketability or hedge-ability of the position or its component risks, including the assessment of, the quality and availability of market inputs to the valuation process, level of market turnover, sizes of positions traded in the market; and
-
(c) there must be clearly defined policy and procedures to monitor the position against the institution's trading strategy including the monitoring of turnover and stale positions in the institution's trading book.
-
(a) documented policies and procedures for the process of valuation. This includes clearly defined responsibilities of the various areas involved in the determination of the valuation, sources of market information and review of their appropriateness, frequency of independent valuation, timing of closing prices, procedures for adjusting valuations, month end and ad-hoc verification procedures; and (b) reporting lines for the department accountable for the valuation process that are clear and independent of the front office.
-
(a) senior management shall be aware of the elements of the trading book which are subject to mark to model and shall understand the materiality of the uncertainty this creates in the reporting of the risk/performance of the business; (b) market inputs shall be sourced, where possible, in line with market prices, and the appropriateness of the market inputs of the particular position being valued and the parameters of the model shall be assessed on a frequent basis; (c) where available, valuation methodologies which are accepted market practice for particular financial instruments or commodities shall be used; (d) where the model is developed by the institution itself, it shall be based on appropriate assumptions, which have been assessed and challenged by suitably qualified parties independent of the development process; (e) there shall be formal change control procedures in place and a secure copy of the model shall be held and periodically used to check valuations; (f) risk management shall be aware of the weaknesses of the models used and how best to reflect those in the valuation output; and (g) the model shall be subject to periodic review to determine the accuracy of its performance (e.g. assessing the continued appropriateness of assumptions, analysis of profit and loss versus risk factors, comparison of actual close out values to model outputs).
-
(a) internal hedges shall not be primarily intended to avoid or reduce capital requirements; (b) internal hedges shall be properly documented and subject to particular internal approval and audit procedures; (c) the internal transaction shall be dealt with at market conditions; (d) the bulk of the market risk that is generated by the internal hedge shall be dynamically managed in the trading book within the authorised limits; and (e) internal transactions shall be carefully monitored.
-
(a) the activities the institution considers to be trading and as constituting part of the trading book for capital requirement purposes; (b) the extent to which a position can be marked-to-market daily by reference to an active, liquid two-way market; (c) for positions that are marked-to-model, the extent to which the institution can: -
(i) identify all material risks of the position; (ii) hedge all material risks of the position with instruments for which an active, liquid two-way market exists; and (iii) derive reliable estimates for the key assumptions and parameters used in the model;
-
(d) the extent to which the institution can, and is required to, generate valuations for the position that can be validated externally in a consistent manner; (e) the extent to which legal restrictions or other operational requirements would impede the institution's ability to effect a liquidation or hedge of the position in the short term; (f) the extent to which the institution can, and is required to, actively risk manage the position within its trading operation; and (g) the extent to which the institution may transfer risk or positions between the non-trading and trading books and the criteria for such transfers.