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Erhvervsudvalget 2009-10
KOM (2009) 0362 Bilag 7
Offentligt

Proposal for a

DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL

amending Directives 2006/48/EC and 2006/49/EC as regards capital requirements for the

trading book and for re-securitisations, and the supervisory review of remuneration policies

(Text with EEA relevance)

THE EUROPEAN PARLIAMENT AND THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty on the Functioning of the European Union, and in particular Article

53(1) thereof,

Having regard to the proposal from the Commission,

Having regard to the opinion of the European Central Bank,

After consulting the European Economic and Social Committee

Acting in accordance with the procedure laid down in Article 294 of the Treaty on the Functioning

of the European Union

Whereas:

OJ C , , p. .

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(1) Excessive and imprudent risk-taking in the banking sector has led to the failure of individual

financial institutions and systemic problems in Member States and globally. While the causes of

such risk-taking are many and complex, there is agreement by supervisors and regulatory bodies,

including the G20 and the Committee of European Banking Supervisors, that the inappropriate

remuneration structures of some financial institutions have been a contributory factor.

Remuneration policies which give incentives to take risks that exceed the general level of risk

tolerated by the institution can undermine sound and effective risk management and exacerbate

excessive risk-taking behaviour. The internationally agreed and endorsed principles of the Financial

Stability Board for sound compensation practices are therefore of particular importance.

(2) Directive 2006/48/EC of the European Parliament and of the Council of 14 June 2006 relating to

the taking up and pursuit of the business of credit institutions1 requires credit institutions to have

arrangements, strategies, processes and mechanisms to manage the risks to which they are exposed.

By virtue of 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 institutions2 that requirement applies to

investment firms within the meaning of Directive 2004/39/EC of the European Parliament and of

the Council of 21 April 2004 on markets in financial instruments amending Council Directives

85/611/EEC and 93/6/EEC and Directive 2000/12/EC of the European Parliament and of the

Council and repealing Council Directive 93/22/EEC3. Directive 2006/48/EC requires competent

authorities to review those arrangements, strategies, processes and mechanisms, and to determine

whether the own funds held by the credit institution or investment firm concerned ensure a sound

management and coverage of the risks to which the institution or firm is or might be exposed. That

supervision is carried out on a consolidated basis in relation to banking groups, and includes

financial holding companies and affiliated financial institutions in all jurisdictions.

OJ L 177, 30.6.2006, p. 1.

J L 177, 30.6.2006, p.201.

OJ L 145, 30.4.2004, p.1.

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(3) In order to address the potentially detrimental effect of poorly designed remuneration structures

on the sound management of risk and control of risk-taking behaviour by individuals, the

requirements of Directive 2006/48/EC should be supplemented by an express obligation for credit

institutions and investment firms to establish and maintain, for those categories of staff whose

professional activities have a material impact on their risk profile, remuneration policies and

practices that are consistent with effective risk management. Those categories of staff should

include at least senior management, risk takers and control functions, and would normally include

any employee whose total remuneration, including discretionary pensions benefits provisions, takes

them into the same remuneration bracket as senior management and risk takers.

(4) Because excessive and imprudent risk-taking may undermine the financial soundness of

financial institutions and destabilise the banking system, it is important that the new obligation

concerning remuneration policies and practices should be implemented in a consistent manner and

should cover all aspects of remuneration including salaries, discretionary pensions benefit and any

other similar benefits. In this context, discretionary pension benefits means discretionary payments

granted by a credit institution to an employee on an individual basis payable by reference to or

expectation of retirement and which can be assimilated to variable remuneration. It is therefore

appropriate to specify clear principles on sound remuneration to ensure that the structure of

remuneration does not encourage excessive risk-taking by individuals or moral hazard and is

aligned with the risk appetite, values and long-term interests of the institution. Remuneration must

also be aligned with the role of the financial sector as the mechanism through which financial

resources are efficiently allocated in the economy. In particular these principles should ensure that

the design of variable remuneration policies ensures that incentives are aligned with the long-term

interests of the institution and that payment methods strengthen the institution's capital base.

Performance-based components of remuneration should also help enhance fairness within the

remuneration structures of an institution. The principles recognise that credit institutions and

investment firms may apply the provisions in different ways according to their size, internal

organisation and the nature, the scope and the complexity of their activities. In particular, it may not

be proportionate for investment firms referred to in Articles 20(2) and 20(3) of Directive

2006/49/EC to comply with all of the principles.

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In order to ensure that the design of remuneration policies is integrated in the risk management of

the financial institution, the management body, in its supervisory function, of each credit institution

or investment firm should adopt and periodically review the general principles to be applied. In this

context, the management body in its supervisory function could, where applicable and depending on

national company law, be understood as the supervisory board.

(4a) Credit institutions and investment firms that are significant in terms of their size, internal

organisation and the nature, the scope and the complexity of their activities should be required to

establish a remuneration committee as an integral part of their governance structure and

organisation.

(4b) By December 2012, the Commission should review the principles on remuneration policy with

particular regard to the efficiency, implementation, and enforcement of the principles, taking into

account international developments including any further proposals from the Financial Stability

Board and the implementation of the principles in other jurisdictions including the link between the

design of variable remunerations and excessive risk-taking behaviour.

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(5) Remuneration policy should aim at aligning the personal objectives of staff members with the

long-term interests of the credit institution or investment firm concerned. The assessment of the

performance-based components of remuneration should be based on longer-term performance and

take into account the outstanding risks associated with the performance. The assessment of

performance should be set in a multi-year framework, of at least three to five years, in order to

ensure that the assessment process is based on longer term performance and that the actual payment

of performance-based components of remuneration is spread over the business cycle of the firm.

To further align incentives, a substantial part of variable compensation of all staff members covered

by those requirements should consist of shares, share linked instruments, other equivalent non-cash

instruments of the credit institution and, where appropriate, other long dated financial instruments

that adequately reflect the credit quality of this credit institution. Instruments could include a capital

instrument which in the circumstance of severe financial problems of the institutions is converted

into equity or otherwise written down. In cases where the credit institution concerned does not issue

long dated financial instruments, it shall be permitted to issue this substantial part of variable

compensation in shares and share-linked instruments and other equivalent non-cash instruments.

The Member States or their competent authorities may place restrictions on the types and designs of

these instruments or ban certain instruments as appropriate.

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(5a) To minimise incentives for excessive risk-taking, variable remuneration should be a balanced

proportion of total remuneration. It is essential that an employee's fixed salary represents a

sufficiently high proportion of their total remuneration to allow the operation of a fully flexible

variable remuneration policy, including the possibility to pay no variable remuneration.

In order to assure coherent remuneration practices throughout the sector, it is appropriate to specify

certain clear requirements. Guaranteed variable remunerations are not consistent with sound risk

management or the pay-for-performance principle and should, as a general rule, be prohibited

(5b) A substantial portion of the variable remuneration component, such as 40 to 60 %, should be

deferred over an appropriate period of time. These portions should increase significantly along with

the level of seniority and/or responsibility. Moreover, a substantial portion of the variable

remuneration component should consist of shares, share-linked instruments of the credit institution

or investment firm, subject to the legal structure of the institution concerned or, in case of a non-

listed credit institution, in other equivalent non-cash instruments, and where appropriate, other

long dated financial instruments that adequately reflect the credit quality of this institution. In this

context, the principle of proportionality is of great importance since it may not always be

appropriate to apply these requirements in the context of small credit institutions and investment

firms. Taking into account the restrictions that limit the amount of variable remuneration payable in

cash and payable upfront, the amount of variable remuneration which can be paid in cash or cash

equivalent not subject to deferral should be limited in order to further align personal objectives of

staff with the long term interest of the credit institution.

(5c) Credit institutions and investment firms should ensure that the total variable remuneration

does not limit their ability to strengthen their capital base. The extent to which capital needs to be

built up should be a function of an institution’s or a firm’s current capital position. In this context,

national competent authorities should have the power to limit variable remuneration, inter alia, as a

percentage of total net revenues when it is inconsistent with the maintenance of a sound capital

base.

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(5d) Credit institutions and investment firms should require their staff members to undertake not to

use personal hedging strategies or insurance to undermine the risk alignment effects embedded in

their remuneration arrangements.

(5e) Regarding entities that are benefiting from exceptional government intervention, priorities

should be to build up their capital base and provide for recovery of taxpayer assistance. Any

variable remuneration payments should reflect these priorities.

(6) The principles regarding sound remuneration policies set out in Commission Recommendation

of 30 April 2009 on remuneration policies in the financial services sector1 are consistent with and

complement the principles of this Directive.

(7) The provisions on remuneration should be without prejudice to the full exercise of fundamental

rights guaranteed by the Treaties, in particular to the provisions of Article 153(5) of the Treaty on

the Functioning of the European Union, general principles of national contract and labour law,

applicable legislation regarding shareholders’ rights and involvement and the general

responsibilities of the administrative and supervisory bodies of the institution concerned, as well as

the rights(…), where applicable, of social partners to conclude and enforce collective agreements, in

accordance with national laws and traditions.

(8) In order to ensure fast and effective enforcement, competent authorities should also have the

power to impose either financial or non-financial measures or penalties for breach of a requirement

under Directive 2006/48/EC, including the requirement to have remuneration policies that are

consistent with sound and effective risk management. Those measures and penalties should be

effective, proportionate and dissuasive.

In order to ensure consistency and a level playing field, the Commission should review Member

States’ implementation and exercise of those sanctioning powers on an aggregate basis with regard

to the consistency between the measures and penalties across the Union.

C(2009) 3159

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(9) In order to ensure effective supervisory oversight of the risks posed by inappropriate

remuneration structures, the remuneration polices and practices adopted by credit institutions and

investment firms should be included in the scope of supervisory review under

Directive 2006/48/EC. In the course of that review, supervisors should assess whether those policies

and practices are likely to encourage excessive risk-taking by the staff in question. In addition, the

Committee of European Banking Supervisors should ensure the existence of guidelines for the

assessment of the suitability of the persons who effectively direct the business of a credit institution.

(9a) The Commission Green Paper of 2 June 2010 on corporate governance in financial institutions

identifies a series of failures in corporate governance in credit institutions and investment firms that

should be addressed. Amongst the solutions identified, the Commission refers to the need to

strengthen significantly requirements relating to persons who effectively direct the business of the

credit institution who should be of sufficiently good repute and have appropriate experience and

also be assessed as to their suitability to perform their professional activities. The Green Paper also

underlines the need to improve shareholders' involvement in approving remuneration policies. The

Council and the European Parliament note the Commission's intention, as a follow-up, to make

legislative proposals, where appropriate, on these issues.

(9aa) In order further to enhance transparency as regards the remuneration practices of credit

institutions and investment firms, the competent authorities of Member States should collect

information on remuneration to benchmark remuneration trends in accordance with the categories

of quantitative information that those institutions are required to disclose under this Directive. The

competent authorities should provide the Committee of European Banking Supervisors (CEBS)

with such information to enable it to conduct similar assessments at Union level

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(10) In order to promote supervisory convergences in the assessment of remuneration policies and

practices, the Committee of European Banking Supervisors should elaborate guidelines on sound

remuneration policies in the banking sector and to facilitate information collection and the

consistent implementation of the remuneration principles in the banking sector. The Committee of

European Securities Regulators should assist in the elaboration of such guidelines to the extent that

they also apply to remuneration policies for persons involved in the provision of investment

services and the carrying out of investment activities by credit institutions and by investment firms

within the meaning of Directive 2004/39/EC of the European Parliament and of the Council of 21

April 2004 on markets in financial instruments. The Committee of European Banking Supervisors

should conduct open public consultations regarding the technical standards and analyse the

potentially related costs and benefits.The Commission may propose legislation entrusting the

European supervisory Authority dealing with banking matters and, to the extent it is appropriate, to

the European supervisory Authority dealing with markets and securities matters, as established

pursuant to the de Larosière process on financial supervision, with the elaboration of draft technical

regulatory and implementing standards to facilitate information collection and the consistent

implementation of the remuneration principles in the banking sector to be adopted by the

Commission."

(11) Since poorly designed remuneration policies and incentive schemes are capable of increasing

to an unacceptable extent the risks to which credit institutions and investment firms are exposed,

prompt remedial action and, if necessary, appropriate corrective measures should be taken.

Consequently, it is appropriate to ensure that competent authorities have the power to impose

qualitative or quantitative measures on the relevant entities that are designed to address problems

that have been identified in relation to remuneration policies in the Pillar 2 supervisory review.

Qualitative measures available to competent authorities include requiring credit institutions or

investment firms to reduce the risk inherent in their activities, products or systems, including

introducing changes to their structures of remuneration or freezing the variable parts of

remuneration to the extent that they are inconsistent with effective risk management. Quantitative

measures include a requirement to hold additional own funds.

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(12) Good governance structures, transparency and disclosure are essential for sound remuneration

policies. In order to ensure adequate transparency to the market of their remuneration structures and

the associated risk, credit institutions and investments firms should disclose detailed information on

their remuneration policies practices and, for reasons of confidentiality, aggregated amounts for

those members of staff whose professional activities have a material impact on the risk profile of

the institution. That information should be made available to all stakeholders (shareholders,

employees and the general public). However, this obligation should be without prejudice to

Directive 95/46/EC of the European Parliament and of the Council of 24 October 1995 on the

protection of individuals with the regard to the processing of personal data and the free movement

of such data. (12a) In order to guarantee their full effectiveness and in order to avoid any

discriminatory effect in its application, the provisions on remuneration laid down in point 1 of

Annex I to this Directive should be applied to remuneration due on the basis of contracts concluded

before the effective date of implementation in each Member State and awarded or paid after that

date. Moreover, in order to safeguard the objectives pursued by this Directive, especially the

effective risk management, in respect of periods still characterised by a high degree of financial

instability, and in order to avoid any risk of circumvention of the provisions on remuneration laid

down in point 1 of Annex I to this Directive during the period prior to their implementation, it is

necessary to apply such provisions to remuneration awarded, but not yet paid, before the date of

effective implementation in each Member State, for services provided in 2010.

(13) The review of risks to which the credit institution might be exposed should result in effective

supervisory measures. It is therefore necessary that further convergence be reached with a view to

supporting joint decisions by supervisors and ensuring equal conditions of competition within the

Union.

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(15) Banks investing in re-securitisations are required under Directive 2006/48/EC to exercise due

diligence also with regard to the underlying securitisations and the non-securitisation exposures

ultimately underlying the former. Credit institutions should assess whether exposures in the context

of asset backed commercial paper programs constitute re-securitisation exposures, including those

in the context of programs which acquire senior tranches of separate pools of whole loans where

none of these loans is a securitisation or re-securitisation exposure, and where the first-loss

protection for each investment is provided by the seller of the loans. In the latter situation, a pool-

specific liquidity facility should generally not be a re-securitisation exposure because it represents a

tranche of a single asset pool (that is, the applicable pool of whole loans) which contains no

securitisation exposures. By contrast, a program-wide credit enhancement covering only some of

the losses above the seller-provided protection across the various pools generally would constitute a

tranching of the risk of a pool of multiple assets containing at least one securitisation exposure, and

therefore would be a re-securitisation exposure. Nevertheless, if such a program funds itself entirely

with a single class of commercial paper, and if either the program-wide credit enhancement is not a

re-securitisation or the commercial paper is fully supported by the sponsoring credit institution,

leaving the commercial paper investor effectively exposed to the default risk of the sponsor instead

of the underlying pools or assets, then this commercial paper generally should not be considered a

re-securitisation exposure.

(17) The provisions on prudent valuation in Directive 2006/49/EC should apply to all instruments

measured at fair value, whether in the trading book or non-trading book of institutions. It should be

clarified that, where the application of prudent valuation would lead to a lower carrying value than

actually recognised in the accounting, the absolute value of the difference should be deducted from

own funds.

(18) Institutions should have a choice whether to apply a capital requirement to or deduct from

own funds those securitisation positions that receive a 1 250 % risk weight under this Directive,

irrespective of whether the positions are in the trading or the non-trading book.

(19) Capital requirements for settlement risks should also apply to the non-trading book.

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(20) Originator or sponsor institutions should not be able to circumvent the prohibition of implicit

support by using their trading books in order to provide such support.

(21) Without prejudice to the disclosures explicitly required by this Directive, the aim of the

disclosure requirements should be to provide market participants with accurate and comprehensive

information regarding the risk profile of individual institutions. Therefore institutions should be

required to disclose additional information not explicitly listed in this Directive if necessary to meet

this objective.

(22) In order to ensure a coherent implementation throughout the Union of Directive 2006/48/EC,

the Commission and the Committee of European Banking Supervisors set up a working group

(Capital Requirements Directive Transposition Group - CRDTG) in 2006, entrusted with the task of

discussing and resolving issues related to the implementation of that Directive. According to the

CRDTG, certain technical provisions of Directives 2006/48/EC and 2006/49/EC need to be further

specified. It is therefore appropriate to adjust those provisions.

(23) Where an external credit assessment for a securitisation position incorporates the effect of

credit protection provided by the investing institution itself, the institution should not be able to

benefit from the lower risk weight resulting from that protection. This should not lead to the

deduction from capital of the securitisation if there are other ways to determine a risk weight in line

with the actual risk of the position, not taking into account such credit protection.

(24) In the field of securitisation, disclosure requirements of institutions should be considerably

strengthened. They should in particular also take into account the risks of securitisation positions in

the trading book. Furthermore, in order to ensure adequate transparency regarding the nature of an

institution’s securitisation activities, disclosures should reflect the extent to which the institution

sponsors SSPEs and the involvement of certain affiliated entities, since closely related parties may

pose on-going risks to the institution concerned.

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(25) Specific risk charges for securitisation positions should be aligned with the capital

requirements in the banking book since the latter provide for a more differentiated and risk-sensitive

treatment of securitisation positions.

(26) Given recent weak performance, the standards for internal models to calculate market risk

capital requirements should be strengthened. In particular, their capture of risks should be

completed regarding credit risks in the trading book. Furthermore, capital charges should include a

component adequate to stress conditions to strengthen capital requirements in view of deteriorating

market conditions and in order to reduce the potential for pro-cyclicality. Financial institutions

should also carry out reverse stress tests to examine what scenarios could challenge the viability of

the bank unless they can prove that such a test is dispensable. Given the recent particular difficulties

of treating securitisation positions using approaches based on internal models, institutions' ability to

model securitisation risks in the trading book should be limited and a standardised capital charge for

securitisation positions in the trading book should be required by default.

(26a) This Directive lays down limited exceptions for certain correlation trading activities, where

banks may be allowed by their supervisor to calculate a comprehensive risk capital charge subject

to strict minimum requirements. In such cases the bank will be required to subject them to a capital

charge equal to the higher of the capital charge according to this internally developed approach and

8% of the capital charge for specific risk according to the standardised measurement method. It will

not be required to subject these exposures to the “Incremental Risk Capital Charge” (IRC). It must,

however, incorporate them in both the value-at-risk and stressed value-at-risk measures.

(26b) Article 152 of Directive 2006/48/EC requires certain credit institutions to provide own funds

that are at least equal to certain specified minimum amounts for the three twelve month periods

between 31 December 2006 and 31 December 2009. In the light of the current situation in the

banking sector and the extension of the transitional arrangements for minimum capital adopted by

the Basel Committee on Banking Supervision, it is appropriate to renew this requirement for a

limited period of time until 31 December 2011.

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(26c) In order not to discourage credit institutions from moving to the Internal Rating Based

Approach (IRB) or Advanced Measurement Approaches (AMA) for calculating the capital

requirements during the transitional period due to unreasonable and disproportionate

implementation costs, credit institutions that move to IRB or AMA after the end of 2009 and which

have therefore previously calculated their capital requirements in accordance with the less

sophisticated approaches may, subject to supervisory approval, be allowed to use the less

sophisticated approaches as the basis for the calculation of the transitional floor. Competent

authorities should monitor their markets closely and ensure a level playing field within all their

markets and market segments and avoid distortions in the internal market.

(26d) In accordance with point 34 of the Inter-institutional Agreement on Better law-making,

Member States are encouraged to draw up, for themselves and in the interest of the Union their own

tables illustrating, as far as possible, the correlation between this Directive and the transposition

measures, and to make them public

(26e) The measures in this Directive are steps in the reform process in response to the financial

crisis. In line with the conclusions of the G-20, the Financial Stability Board and the Basel

Committee on Banking Supervision further reforms may be necessary, including the need to build

counter-cyclical buffers, "dynamic provisioning", the rationale underlying the calculation of capital

requirements in Directive 2006/48/EC and supplementary measures to risk-based requirements for

credit institutions to help constrain the build-up of leverage in the banking system. In order to

ensure appropriate democratic oversight of the process, the European Parliament and the Council

must be involved in a timely and effective manner.

(26g) The Commission should review the application of these Directives to ensure that its

provisions are applied in an equitable way which does not result in discrimination between credit

institutions on the basis of their legal structure or ownership model

(26h)The Commission should be empowered to adopt delegated acts in accordance with Article 290

of the Treaty on the Functioning of the European Union (TFEU) in relation to the matters set out in

Article 150(1) and 150(2) letters (a), (b), (c) and (f).

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(26i) In this instance, the European Parliament or the Council have a period of three months from

the date of notification to object to a delegated act. At the initiative of the European Parliament or

the Council, this period can be prolonged by three months in significant areas of concern. The

European Parliament and the Council may inform the other institutions of their intention not to raise

objections. This early approval of delegated acts is particularly indicated when deadlines need to be

met, for example to meet timetables set in the basic act for the Commission to adopt delegated acts.

(26j) In Declaration 39, on Article 290 of the TFEU, annexed to the Final Act of the

Intergovernmental Conference which adopted the Treaty of Lisbon, signed on 13 December 2007,

the Conference took note of the Commission's intention to continue to consult experts appointed by

the Member States in the preparation of draft delegated acts in the financial services area, in

accordance with its established practice.

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HAVE ADOPTED THIS DIRECTIVE:

Article 1

Directive 2006/48/EC is amended as follows:

(1) In Article 4, the following points are inserted:

"(40a) 're-securitisation' means a securitisation where the risk associated with an underlying

pool of exposures is tranched and at least one of the underlying exposures is a securitisation

position;

(40b) 're-securitisation position' means an exposure to a re-securitisation;"

“(49): "discretionary pension benefits" means enhanced pension benefits granted on a

discretionary basis by a credit institution to an employee as part of that employee's variable

remuneration package. These awards do not include accrued benefits granted to an employee

under the terms of their company pension schemes”

(1a) In Article 11, the following paragraph is added at the end of paragraph 1::

“The Committee of European Banking Supervisors should ensure the existence of guidelines

for the assessment of the suitability of the persons who effectively direct the business of a

credit institution.”

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(2) Article 22 is amended as follows:

(a)

Paragraph 1 is replaced by the following:

"1.

Home Member State competent authorities shall require that every credit institution

have robust governance arrangements, which include a clear organisational structure with

well-defined, transparent and consistent lines of responsibility, effective processes to identify,

manage, monitor and report the risks it is or might be exposed to, adequate internal control

mechanisms, including sound administration and accounting procedures, and remuneration

policies and practices that are consistent with and promote sound and effective risk

management."

(aa) A new Paragraph 2a is added:

"2b. Home Member State competent authorities shall use the information collected in

accordance with the criteria for disclosure established in point 15(ea) of part 2 of Annex XII

to benchmark remunerations trends. The competent authority shall provide the Committee of

European Banking Supervisors with this information."

(b) The following paragraph 3 is added:

"3.

The Committee of European Banking Supervisors shall ensure the existence of

guidelines on sound remuneration policies which comply with the principles set out in points

23 and 23a of Annex V. The guidelines shall also take into account the principles on sound

remuneration policies set out in the Commission Recommendation of 30 April 2009 on

remuneration policies in the financial services sector. The Committee of European Securities

Regulators shall cooperate closely with the Committee of European Banking Supervisors in

ensuring the existence of guidelines on remuneration policies for categories of staff involved

in the provision of investment services and activities within the meaning of point 2 of Article

4(1) of Directive 2004/39/EC of the European Parliament and of the Council on markets in

financial instruments.”

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The Committee of European Banking Supervisors shall use the information received from

competent authorities to benchmark remuneration practices at the Union level on the basis of

information provided by competent authorities under paragraph 2b of this Article

(ba) The following paragraph 3a is added:

"3a. Home Member State competent authorities shall collect information on the number of

individuals per credit institution in pay brackets of EUR 1 million and upwards including the

business area involved and the main elements of salary, bonus, long-term award and pension

contribution. This information shall be forwarded to the Committee of European Banking

Supervisors and it shall disclose this information on an aggregate Home Member State basis

in a common reporting format. The Committee of European Banking Supervisors may

elaborate guidelines to facilitate the implementation of, and ensure consistency of information

collected.

(3) In Article 54, the following paragraph is added:

Member States shall ensure that, for the purposes of the first paragraph, their respective

competent authorities have the power to impose financial and non-financial penalties or

measures. Those penalties or measures must be effective, proportionate and dissuasive.

(4) Article 57 is amended as follows:

(a)

In the first paragraph, point (r) is replaced by the following:

"(r) the exposure amount of securitisation positions which receive a risk weight of 1 250 %

under this Directive and the exposure amount of securitisation positions in the trading book

that would receive a 1 250% risk weight if they were in the same credit institutions non-

trading book.

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(5) In Article 64, the following paragraph is added:

"5. Credit institutions shall apply the requirements of Part B of Annex VII to Directive

2006/49/EC to all their assets measured at fair value when calculating the amount of own

funds and shall deduct from the total of the items (a) to (ca) minus (i) to (k) in Article 57 the

amount of any additional value adjustments necessary . The Committee of European Banking

Supervisors shall establish guidelines regarding the details of the application of this

provision.”

(6) Article 66(2) is replaced by the following:

"2. The total of the items in points (l) to (r) of Article 57 shall be deducted half from the total

of the items in points (a) to (ca) minus (i) to (k) of that Article, and half from the total of the

items in points (d) to (h) of that Article, after application of the limits laid down in paragraph

1 of this Article. To the extent that half of the total of the items in points (l) to (r) exceeds the

total of the items in points (d) to (h) of Article 57, the excess shall be deducted from the total

of the items in points (a) to (ca) minus (i) to (k) of that Article.

Items in point (r) of Article 57 shall not be deducted if they have been included for the

purposes of Article 75 in the calculation of risk-weighted exposure amounts as specified in

this Directive or in the calculation of capital requirements as specified in Annex I or V to

Directive 2006/49/EC."

(7) In Article 75, points (b) and (c) are replaced by the following:

“(b) in respect of their trading-book business, for position risk and counter-party risk and, in

so far as the limits laid down in Articles 111 to 117 are authorised to be exceeded for large

exposures exceeding such limits, the capital requirements determined in accordance with

Article 18 and Chapter V, Section 4 of Directive 2006/49/EC;

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"(c) in respect of all their business activities, for foreign exchange risk, for settlement risk and

for commodities risk, the capital requirements determined according to Article 18 of Directive

2006/49/EC;"

(8) Article 101(1) is replaced by the following:

1. A sponsor credit institution, or an originator credit institution which in respect of a

securitisation has made use of Article 95 in the calculation of risk-weighted exposure amounts

or has sold instruments from its trading book to an SSPE to the effect that it is no longer

required to hold own funds for the risks of these instruments, shall not, with a view to

reducing potential or actual losses to investors, provide support to the securitisation beyond its

contractual obligations.

(9a) In Article 136, the following points (f) and (fa) are inserted:

“(f) requiring credit institutions to limit variable remuneration as a percentage of total net

revenues when it is inconsistent with the maintenance of a sound capital base”.

(fa) requiring credit institutions to use net profits to strengthen the capital base.

(9b) In Article 136(2), the following paragraph is added:

For the purposes of determining the appropriate level of own funds on the basis of the review

and evaluation carried out in accordance with Article 124, the competent authorities shall

assess whether any imposition of a specific own funds requirement in excess of the minimum

level is required to capture risks to which a credit institution is or might be exposed, taking

into account the following:

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(a)

the quantitative and qualitative aspects of the credit institutions' assessment process

referred to in Article 123;

(b) the credit institutions' arrangements, processes and mechanisms referred to in Article 22;

(10) Article 145(3) is replaced by the following:

"3. Credit institutions shall adopt a formal policy to comply with the disclosure requirements

laid down in paragraphs 1 and 2, and have policies for assessing the appropriateness of their

disclosures, including their verification and frequency. Credit institutions shall also have

policies for assessing whether their disclosures convey their risk profile comprehensively to

market participants. Where those disclosures do not convey the risk profile comprehensively

to market participants, credit institutions shall publicly disclose the information necessary in

addition to that required according to paragraph 1. However, they shall only be required to

disclose information which is material and not proprietary or confidential according to the

technical criteria set out in Annex XII, Part 1."

(10a) The title of Title VI is replaced by the following:

“Delegated and implementing acts”

(10b) In Article 150(1), the introductory part is replaced by the following:

"1. Without prejudice, as regards own funds, to the proposal that the Commission is to submit

pursuant to Article 62, the technical adjustments [...] in the following areas shall be adopted

by means of delegated acts in accordance with Articles 151a, 151b and 151c.The measures

referred to in points (d) and (e) shall be adopted in accordance with the regulatory procedure

referred to in Article 151(2a) :"

(10c) In the first subparagraph of Article 150(2), the introductory part is replaced by the following:

"The Commission may adopt the following [...] measures:"

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(10d) In Article 150(2), the first sentence of the second subparagraph is replaced by the following:

"The measures referred to in points (a), (b), (c) and (f) shall be adopted by means of delegated

acts in accordance with Articles 151a, 151b and 151c."

(10e) Articles 151(2) and 151(3) are deleted.

(10f) The following article is inserted after Article 151:

"Article 151a

Exercise of the delegation

1. The power to adopt delegated acts referred to in Article 150(1) and letters (a), (b), (c) and

(f) of Article 150(2) shall be conferred on the Commission for a period of four years

following the entry into force of this Directive. The Commission shall make a report in

respect of the delegated powers at the latest 6 months before the end of the four-year period.

The delegation of powers shall be automatically extended for periods of an identical duration,

unless the European Parliament or the Council revokes it in accordance with Article 151b.

2. As soon as it adopts a delegated act, the Commission shall notify it simultaneously to the

European Parliament and to the Council.

3. The powers to adopt delegated acts are conferred on the Commission subject to the

conditions laid down in Articles 151b and 151c."

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(10g) The following article is inserted after Article 151:

"Article 151b

Revocation of the delegation

1. The delegation of power referred to in Article 150(1) and letters (a), (b), (c) and (f) of

Article 150(2) may be revoked at any time by the European Parliament or by the Council.

2. The institution which has commenced an internal procedure for deciding whether to revoke

the delegation of power shall endeavour to inform the other institution and the Commission

within a reasonable time before the final decision is taken, indicating the delegated powers

which could be subject to revocation.

3. The decision of revocation shall put an end to the delegation of the powers specified in that

decision. It shall take effect immediately or at a later date specified therein. It shall not affect

the validity of the delegated acts already in force. It shall be published in the Official Journal

of the European Union."

(10h) The following article is inserted after Article 151b:

"Article 151c

Objections to delegated acts

1. The European Parliament or the Council may object to a delegated act within a period of

three months from the date of notification. At the initiative of the European Parliament or the

Council this period shall be extended by three months.

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2. If on the expiry of that period, neither the European Parliament nor the Council has

objected to the delegated act, it shall be published in the Official Journal of the European

union and shall enter into force at the date stated therein. The delegated act may be published

in the Official Journal of the European Union and enter into force before the expiry of that

period if the European Parliament and the Council have both informed the Commission of

their intention not to raise objections.

3. If the European Parliament or the Council objects to a delegated act, it shall not enter into

force. In accordance with Article 296 of the TFEU the institution which objects shall state the

reasons for objecting to the delegated act.”

(10i) In Article 152, the following paragraphs 5(a)-(e) are inserted:

“5a. Credit institutions calculating risk-weighted exposure amounts in accordance with

Articles 84 to 89 shall until 31 December 2011 provide own funds which are at all times more

than or equal to the amount indicated in paragraph 5c or paragraph 5d if applicable.

(10j) In Article 152, the following paragraph is inserted:

5b.

Credit institutions using the Advanced Measurement Approaches as specified in Article

105 for the calculation of their capital requirements for operational risk shall until 31

December 2011 provide own funds which are at all times more than or equal to the amount

indicated in paragraph 5c or paragraph 5d if applicable.

(10k) In Article 152, the following paragraph is inserted:

5c.

The amount referred to in 5a and 5b shall be 80% of the total minimum amount of own

funds that the credit institutions would be required to hold under Article 4 of Directive

93/6/EEC and Directive 2000/12/EC, as applicable prior to 1 January 2007.

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(10l) In Article 152, the following paragraph is inserted:

5d.

Subject to approval by the competent authorities, for credit institutions referred to in

paragraph 5e, the amount referred to in 5a and 5b may be 80% of the total minimum amount

of own funds that those credit institutions would be required to hold under Articles 78 to 83,

Article 103 or 104 and Directive 2006/49/EC as applicable prior to 1 January 2011.

(10m) In Article 152, the following paragraph is inserted:

5e.

A credit institution may apply paragraph 5d only if it started to use the Internal Ratings

Based Approach or the Advanced Measurement Approaches for the calculation of its capital

requirements on or after 1 January 2010.”

(10mm) In Article 154, paragraph 5 is replaced by the following:

Until 31

December 2012, the exposure weighted average LGD for all retail exposures

"5.

secured by residential properties and not benefiting from guarantees from central governments

shall not be lower than 10%.”

(10n) In Article 156, the following paragraph is inserted after paragraph 3:

"By April 2013, the Commission shall review and report on the provisions on remuneration,

including those set out in Annexes V and XII, with particular regard to their efficiency,

implementation, enforcement, taking into account international developments. That review

shall identify any lacunae arising from the application of the principle of proportionality to

these provisions. The Commission shall submit this report to the European Parliament and the

Council together with any appropriate proposals."

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(10o) In Article 156, the following paragraph is inserted after paragraph 3a:

"In order to ensure consistency and a level playing field, the Commission shall review the

implementation of Article 54 with regard to the consistency between the measures and

penalties across the Union and, if appropriate, put forward proposals."

(10p) In Article 156, the following paragraph is inserted after paragraph 3b:

"The Commission's periodic review of the application of this Directive should ensure that the

way it is applied does not result in manifest discrimination between credit institutions on the

basis of their legal structure or ownership model."

(10pa) In Article 156, the following paragraph is inserted after paragraph 3c:

"In order to ensure consistency in the prudential approach to capital, the Commission shall

review the relevance of the reference to instruments within the meaning of Article 66,

paragraph 1a, letter (a) in Annex V to this directive as soon as it takes an initiative to review

the definition of capital instruments as provided for in Articles 56 to 67."

(10q) The following Article is inserted:

“Article 156a

By 31 December 2011 the Commission shall review and report on the desirability of changes

to align Annex IX of this Directive taking into consideration internationally agreements

regarding bank capital requirements for securitisation positions.. That report shall be

submitted to the European Parliament and the Council together with any appropriate

legislative proposals”.

(11) The Annexes are amended as set out in Annex I to this Directive:

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Article 2

Directive 2006/49/EC is amended as follows:

(1)

In the first subparagraph of Article 3(1), the following point (t) is added:

"(t) 'securitisation position' and 're-securitisation position' mean securitisation position and re-

securitisation position as defined in Directive 2006/48/EC."

(2)

In Article 17(1), the introductory phrase is replaced by the following:

"Where an institution calculates risk-weighted exposure amounts for the purposes of Annex II

to this Directive in accordance with Articles 84 to 89 of Directive 2006/48/EC, then for the

purposes of the calculation provided for in point 36 of Part 1 of Annex VII to Directive

2006/48/EC, the following shall apply:"

(3)

In Article 18(1), point (a) is replaced by the following:

"(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 points 1 to 4 of Annex II for their non trading book business."

(3a) The title of Section 2 of Chapter VIII is replaced by the following:

"Delegated acts and powers of execution"

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(3b) Article 41(2) is replaced by the following:

"2. The measures referred to in paragraph 1 [...] shall be adopted by means of delegated acts

in accordance with Articles 42a, 42b and 42c."

(3c) Article 42(2) is deleted

(3d) The following article is inserted after Article 42:

"Article 42a

Exercise of the delegation

1. The power to adopt delegated acts referred to in Article 41 shall be conferred on the

Commission for a period of four years following the entry into force of this Directive. The

Commission shall make a report in respect of the delegated powers at the latest 6 months

before the end of the four-year period. The delegation of powers shall be automatically

extended for periods of an identical duration, unless the European Parliament or the Council

revokes it in accordance with Article 42b.

2. As soon as it adopts a delegated act, the Commission shall notify it simultaneously to the

European Parliament and to the Council.

3. The powers to adopt delegated acts are conferred on the Commission subject to the

conditions laid down in Articles 42b and 42c."

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(3e) The following article is inserted after Article 42a:

"Article 42b

Revocation of the delegation

1. The delegation of power referred to in Article 41 may be revoked at any time by the

European Parliament or by the Council.

2. The institution which has commenced an internal procedure for deciding whether to revoke

the delegation of power shall endeavour to inform the other institution and the Commission

within a reasonable time before the final decision is taken, indicating the delegated powers

which could be subject to revocation.

3. The decision of revocation shall put an end to the delegation of the powers specified in that

decision. It shall take effect immediately or at a later date specified therein. It shall not affect

the validity of the delegated acts already in force. It shall be published in the Official Journal

of the European Union."

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(3f) The following Article is inserted after Article 42b:

"Article 42c

Objections to delegated acts

1. The European Parliament or the Council may object to a delegated act within a period of

three months from the date of notification. At the initiative of the European Parliament or the

Council this period shall be extended by three months.

2. If on the expiry of that period, neither the European Parliament nor the Council has

objected to the delegated act, it shall be published in the Official Journal of the European

Union and shall enter into force at the date stated therein. The delegated act may be published

in the Official Journal of the European Union and enter into force before the expiry of that

period if the European Parliament and the Council have both informed the Commission of

their intention not to raise objections.

3. If the European Parliament or the Council objects to a delegated act, it shall not enter into

force. In accordance with Article 296 of the TFEU the institution which objects shall state the

reasons for objecting to the delegated act.”

(3g) Article 47 is replaced by the following:

"Until 30 December 2011 or any earlier date specified by the competent authorities on a case-

by-case basis, institutions that have received specific risk model recognition prior to 1 January

2007 in accordance with point 1 of Annex V may, for that existing recognition, treat points 4

and 8 of Annex VIII to Directive 93/6/EEC as those points stood prior to 1 January 2007."

(4)

The Annexes are amended as set out in Annex II to this Directive

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Article 3

Transposition

1. Member States shall bring into force the laws, regulations and administrative provisions

necessary to comply with :

(a) paragraphs (2), (3), (10a) and (10mm) of Article 1, and points 1, 2(ba), 2(bb), 2(bc), 2(bd) 3(a)

and 4(c) of Annex 1 by 1 January 2011 at the latest; and

(b) all provisions of this Directive other than those specified in sub-paragraph (a) by 31 December

2011 at the latest.

The laws, regulation, and administrative provisions necessary to comply with point 1 of Annex I

shall require credit institutions to apply the principles therein to (i) remuneration due on the basis of

contracts concluded before the effective date of implementation in each Member State and awarded

or paid after that date, and to (ii) remuneration awarded, but not yet paid, before the date of

effective implementation in each Member State, for services provided in 2010.

1a. Having regard to the international nature of the Basel framework and to the dangers of timing

differences in major jurisdictions, the Commission shall report to the European Parliament and the

Council by 31 December 2010 on progress made towards international implementation of the

changes to the capital adequacy framework, together with any appropriate proposals.

1b. The laws, regulations and administrative provisions necessary to comply with this Directive

shall contain a reference to this Directive, or be accompanied by such a reference on the occasion of

their official publication. Member States shall determine how such a reference is to be made.

2. Member States shall communicate to the Commission the text of the main provisions of national

law which they adopt in the field covered by this Directive.

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Article 4

Entry into force

This Directive shall enter into force on the day following that of its publication in the Official

Journal of the European Union.

Article 5

Addressees

This Directive is addressed to the Member States.

Done at Brussels,

For the European Parliament

For the Council

The President

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ANNEX I

Annexes V, VI, IX and XII to Directive 2006/48/EC are amended as follows:

(1)

In Annex V, the following Section 11 is added:

"11. REMUNERATION POLICIES

23. When establishing and applying the total remuneration policies, inclusive of salaries and

discretionary pension benefits, for categories of staff, including senior management, risk

takers, control functions and any employee receiving total remuneration that takes them into

the same remuneration bracket as senior management and risk takers, whose professional

activities have a material impact on their risk profile, credit institutions shall comply with the

following principles in a way and to the extent that is appropriate to their size, internal

organisation and the nature, the scope and the complexity of their activities:

(a)

the remuneration policy is consistent with and promotes sound and effective risk

management and does not encourage risk-taking that exceeds the level of tolerated risk of the

credit institution;

(b) the remuneration policy is in line with the business strategy, objectives, values and long-

term interests of the credit institution, and incorporates measures to avoid conflicts of interest;

periodically reviews the general principles of the remuneration policy and is responsible for

its implementation

(d) the implementation of the remuneration policy is, at least annually, subject to central and

independent internal review for compliance with policies and procedures for remuneration

adopted by the management body in its supervisory function;

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(da) staff members engaged in control functions are independent from the business units they

oversee, have appropriate authority, and are compensated in accordance with the achievement

of the objectives linked to their functions, independent of the performance of the business

areas they control;

(db) the remuneration of the senior officers in the risk management and compliance functions

is directly overseen by the remuneration committee;

(e) Where remuneration is performance related, the total amount of remuneration is based on

a combination of the assessment of the performance of the individual and of the business unit

concerned and of the overall results of the credit institution and when assessing individual

performance, financial as well as non-financial criteria are taken into account.

(ea) the assessment of the performance is set in a multi-year framework in order to ensure

that the assessment process is based on longer term performance and that the actual payment

of performance-based components of remuneration is spread over a period which takes

account of the underlying business cycle of the credit institution and its business risks;

(eb) the total variable remuneration does not limit the ability of the credit institution to

strengthen its capital base;

(ec) (…)guaranteed variable remuneration is exceptional and occurs only in the context of

hiring new staff and is limited to the first year;

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(ed) in the case of credit institutions that benefit from exceptional government intervention:

- Variable remuneration is strictly limited as a percentage of net revenues when it is

inconsistent with the maintenance of a sound capital base and timely exit from

government support,

- The relevant competent authorities shall require credit institutions to restructure

compensation in a manner aligned with sound risk management and long-term growth,

including inter alia and when appropriate establishing limits to the remuneration of

Directors.

- No variable remuneration should be paid to the directors of that institution unless this

is justified.

(f) fixed and variable components of total remuneration are appropriately balanced; the fixed

component represents a sufficiently high proportion of the total remuneration to allow the

operation of a fully flexible policy on variable remuneration components, including the

possibility to pay no variable remuneration component. Institutions should set the appropriate

ratios between the fixed and the variable component of the total remuneration. The

Committee of European Banking Supervisors shall ensure the existence of guidelines to set

specific criteria to determine the appropriate ratios between the fixed and the variable

component of the total remuneration.

(g)

payments related to the early termination of a contract reflect performance achieved

over time and are designed in a way that does not reward failure;

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(h) the measurement of performance used to calculate variable remuneration components or

pools of variable remuneration components includes an adjustment for all types of current and

future risks and takes into account the cost of the capital and the liquidity required;

The allocation of the variable remuneration components within the credit institution shall also

take into account all types of current and potential risks.

(ha) a substantial portion , which is at least 50 % of any variable remuneration shall consist

of an appropriate balance of:

(i)

shares or equivalent ownership interests, subject to the legal structure of the credit

institution concerned, or share-linked instruments or equivalent non-cash

instruments in case of a non-listed credit institution, and

(ii)

where appropriate, other instruments within the meaning of article 66 paragraph 1a

letter a), where applicable that adequately reflect the credit quality of the credit

institution on an ongoing concern.

These instruments are subject to an appropriate retention policy designed to align incentives

with the longer-term interests of the credit institution.

Member States or their competent authorities may place restrictions on the types and designs

of these instruments or ban certain instruments as appropriate.

This point shall be applied to both the portion of the variable remuneration component

deferred in line with point (i) and the portion of the variable remuneration component not

deferred.

haa) The Committee of European Banking Supervisors shall ensure the existence of

guidelines to specify instruments that can be eligible as instruments within the meaning of

paragraph ha(ii) that adequately reflect the credit quality of credit institution within the

meaning of paragraph ha).

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(i) a substantial portion, which is at least 40 % of the variable remuneration component is

deferred over a period which is not less than three to five years and is correctly aligned with

the nature of the business, its risks and the activities of the member of staff in question .

Remuneration payable under deferral arrangements vests no faster than on a pro-rata basis. In

the case of a variable remuneration component of a particularly high amount, at least 60 % of

the amount is deferred.

The length of the deferral period is established in accordance with the business cycle, the

nature of the business, its risks and the activities of the member of staff in question.

(ia) the variable remuneration, including the deferred portion, is paid or vests only if it is

sustainable according to the financial situation of the credit institution as a whole, and

justified according to the performance of the credit institution, the business unit and the

individual concerned;

Without prejudice to the general principles of national contract and labour law, the total

variable remuneration is generally considerably contracted where subdued or negative

financial performance of the firm occurs, taking into account both current compensation and

reductions in payouts of amounts previously earned, including through malus or clawback

arrangements.

(ib) "the pension policy is in line with the business strategy, objectives, values and long-term

interests of the credit institution. If the employee leaves the credit institution before

retirement, discretionary pension benefits should be held by the credit institution for a period

of five years in the form of instruments as defined in point (ha). In case of an employee

reaching retirement, discretionary pension benefits should be paid to the employee in the form

of instruments defined in point (ha) subject to a five year retention period."

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(ic) staff members are required to undertake not to use personal hedging strategies or

remuneration- and liability-related insurance to undermine the risk alignment effects

embedded in their remuneration arrangements;

(id) variable remuneration is not paid through vehicles or methods that facilitate the avoidance

of the requirements of this Directive

(ie) These principles are applied by credit institutions at group, parent company and

subsidiary levels, including those established in offshore financial centres.

(1a) In Section 11 of Annex V, the following point is inserted

"22a. Credit institutions that are significant in terms of their size, internal organisation and the

nature, the scope and the complexity of their activities shall establish a remuneration

committee. The remuneration committee shall be constituted in such a way as to enable it to

exercise competent and independent judgment on remuneration policies and practices and the

incentives created for managing risk, capital and liquidity

The remuneration committee shall be responsible for the preparation of decisions regarding

remuneration, including those which have implications for the risk and risk management of

the credit institution concerned and which are to be taken by the management body in its

supervisory function. The Chair and the members of the remuneration Committee shall be

members of the management body who do not perform any executive functions in the credit

institution concerned. When preparing such decisions, the remuneration committee shall take

into account the long-term interests of shareholders, investors and other stakeholders in the

credit institution."

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(2)

Annex VI, Part 1 is amended as follows:

(a) Point 8 is replaced by the following:

"8. Without prejudice to points 9, 10 and 11, exposures to regional governments and local

authorities shall be risk weighted as exposures to institutions , subject to point 11a. This

treatment is independent of the exercise of discretion as specified in Article 80(3). The

preferential treatment for short-term exposures specified in points 31, 32 and 37 shall not be

applied."

(b) The following point 11a is inserted:

"11a. Without prejudice to points 9, 10 and 11, exposures to regional governments and local

authorities of the Member States denominated and funded in the domestic currency of that

regional government and local authority shall be assigned a risk weight of 20%."

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(ba) Point 68(d) is replaced by the following:

"(d) loans secured by residential real estate or shares in Finnish residential housing companies

as referred to in point 46 up to the lesser of the principal amount of the liens that are

combined with any prior liens and 80 % of the value of the pledged properties or by senior

units issued by French Fonds Communs de Créances or by equivalent securitisation entities

governed by the laws of a Member State securitising residential real estate exposures. In the

event of such senior units being used as collateral, the special public supervision to protect

bond holders as provided for in Article 52(4) of Directive 2009/65/EC shall ensure that the

assets underlying such units shall, at any time while they are included in the cover pool be at

least 90 % composed of residential mortgages that are combined with any prior liens up to the

lesser of the principal amounts due under the units, the principal amounts of the liens, and

80 % of the value of the pledged properties, that the units qualify for the credit quality step 1

as set out in this Annex and that such units do not exceed 10 % of the nominal amount of the

outstanding issue. Exposures caused by transmission and management of payments of the

obligors of, or liquidation proceeds in respect of, loans secured by pledged properties of the

senior units or debt securities shall not be comprised in calculating the 90 % limit;"

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(bb) Point 68(e) is replaced by the following:

"(e) loans secured by commercial real estate or shares in Finnish housing companies as

referred to in point 52 up to the lesser of the principal amount of the liens that are combined

with any prior liens and 60 % of the value of the pledged properties or by senior units

issued by French Fonds Communs de Créances or by equivalent securitisation entities

governed by the laws of a Member State securitising commercial real estate exposures. In

the event of such senior units being used as collateral, the special public supervision to

protect bond holders as provided for in Article 52(4) of Directive 2009/65/EC shall ensure

that the assets underlying such units shall, at any time while they are included in the cover

pool be at least 90 % composed of commercial mortgages that are combined with any prior

liens up to the lesser of the principal amounts due under the units, the principal amounts of

the liens, and 60 % of the value of the pledged properties, that the units qualify for the

credit quality step 1 as set out in this Annex and that such units do not exceed 10 % of the

nominal amount of the outstanding issue. The competent authorities may recognise loans

secured by commercial real estate as eligible where the Loan to Value ratio of 60 % is

exceeded up to a maximum level of 70 % if the value of the total assets pledged as

collateral for the covered bonds exceed the nominal amount outstanding on the covered

bond by at least 10 %, and the bondholders' claim meets the legal certainty requirements set

out in Annex VIII. The bondholders' claim must take priority over all other claims on the

collateral. Exposures caused by transmission and management of payments of the obligors

of, or liquidation proceeds in respect of, loans secured by pledged properties of the senior

units or debt securities shall not be comprised in calculating the 90 % limit;"

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(bc) In point 68, the third paragraph is replaced by the following:

"Until 31 December 2013, the 10% limit for senior units issued by French Fonds

Communs de Créances or by equivalent securitisation entities as specified in points (d) and

(e) does not apply, provided that: (i) the securitised residential or commercial real estate

exposures were originated by a member of the same consolidated group of which the issuer

of the covered bonds is also a member or by an entity affiliated to the same central body to

which the issuer of the covered bonds is also affiliated (that common group membership or

affiliation to be determined at the time the senior units are made collateral for covered

bonds; and (ii) a member of the same consolidated group of which the issuer of the covered

bonds is also a member or an entity affiliated to the same central body to which the issuer

of the covered bonds is also affiliated retains the whole first loss tranche supporting those

senior units.

Before the end of this period, and by 31 December 2012 at the latest, the Commission shall

review the appropriateness of this delegation and, if relevant, the appropriateness of

extending similar treatment to any other form of covered bond. In the light of that review,

the Commission may, if appropriate, adopt delegated acts in accordance with the power

referred to in Article 151a to extend this period or make this delegation permanent or

extend it to other forms of covered bonds."

(bd) In Annex VII, Part 2, section 1, point 8, subpoint (d) is replaced by the following:

"(d) Covered bonds as defined in Annex VI, Part 1, points 68 to 70 may be assigned an LGD

value of 11,25%;"

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(3)

Annex IX is amended as follows:

(a) In Part 3, point 1, the following point (c) is added:

"(c) The credit assessment shall not be based or partly based on unfunded support provided by

the credit institution itself. In such case, the credit institution shall consider the relevant

position as if it was not rated and shall apply the relevant treatment of unrated positions as set

out in Annex IX, Part 4"

(b) Part 4 is amended as follows:

(i)

In point 5, the following sentence is added:

Where a credit institution has two or more overlapping positions in a securitisation, it will be

required to the extent that they overlap to include in its calculation of risk- weighted

exposures amounts only the position or portion of a position producing the higher risk-

weighted exposure amount. The credit institution may also recognise such overlap between

specific risk capital charges for positions in the trading book and capital charges for positions

in the banking book, provided that the credit institution is able to calculate and compare the

capital charges for the relevant positions. For the purpose of this point 'overlapping' means

that the positions, wholly or partially, represent an exposure to the same risk such that the

extent of the overlap there is a single exposure.

Where point 1(c) of Part 3 applies to positions in asset backed commercial papers, the credit

institution may, subject to the approval of the competent authorities, use the risk-weight

assigned to a liquidity facility in order to calculate the risk-weighted exposure amount for the

commercial paper if the liquidity facility ranks pari passu with the commercial paper so that

they form overlapping positions and 100 % of the commercial paper issued by the ABCP is

covered by liquidity facilities.”

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(ii)

Point 6 is replaced by the following:

"6. Subject to point 8, the risk-weighted exposure amount of a rated securitisation or re-

securitisation position shall be calculated by applying to the exposure value the risk weight

associated with the credit quality step with which the credit assessment has been determined

to be associated by the competent authorities in accordance with Article 98 as laid down in

Table 1."

(iii) Table 1 is replaced by the following:

Table 1

Credit Quality

Step

4 (only for

credit

assessments

other than

short-term

credit

assessments)

350%

1250%

100%

225%

650%

all other credit

quality steps

Securitisation

positions

1250%

20%

50%

100%

Re-securitisation

40%

positions

(iv) Table 2 is deleted.

(v)

Point 46 is replaced by the following:

"46. Under the Ratings Based Method, the risk-weighted exposure amount of a rated

securitisation or re-securitisation position shall be calculated by applying to the exposure

value the risk weight associated with the credit quality step with which the credit assessment

has been determined to be associated by the competent authorities in accordance with Article

98, as set out in the Table 4, multiplied by 1,06."

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(vi) Table 4 is replaced by the following:

Table 4

Credit Quality Step

Credit

assessments

other than

short term

all other and unrated

Short term

credit

assessments

Securitisation Positions

Re-securitisation

Positions

10%

12%

20%

35%

60%

100%

250%

425%

650%

1250%

12%

15%

18%

20%

35%

50%

75%

20%

25%

35%

20%

25%

35%

40%

60%

100%

150%

200%

300%

500%

750%

30%

40%

50%

65%

100%

150%

225%

350%

500%

650%

850%

(vibis)

Table 5 is deleted.

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(vii) Point 47 is replaced by the following:

"47. The weightings in column C of table 4 shall be applied where the securitisation

position is not a re-securitisation position and where the effective number of exposures

securitised is less than six. For the remainder of the securitisation positions that are not

re-securitisation positions, the weightings in column B shall be applied unless the

position is in the most senior tranche of a securitisation, in which case the weightings in

column A shall be applied. For re-securitisation positions the weightings in column E

shall be applied unless the re-securitisation position is in the most senior tranche of the

re-securitisation and none of the underlying exposures were themselves re-securitisation

exposures, in which case column D shall be applied. When determining whether a

tranche is the most senior, it is not required to take into consideration amounts due

under interest rate or currency derivative contracts, fees due, or other similar payments."

(viii) Point 48 is deleted:

(ix) Point 49 is replaced by the following:

"49. In calculating the effective number of exposures securitised multiple exposures to

one obligor must be treated as one exposure. The effective number of exposures is

calculated as:

(

∑

EAD

)

∑

EAD

where EAD

represents the sum of the exposure values of all exposures to the ith

obligor. If the portfolio share associated with the largest exposure, C1, is available, the

credit institution may compute N as 1/C1."

(x)

Point 50 is deleted.

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(xi) Point 52 is replaced by the following:

"52. Subject to points 58 and 59, under the Supervisory Formula Method, the risk

weight for a securitisation position shall be the risk weight to be applied in accordance

with point 53. However, the risk weight shall be no less than 20% for re-securitisation

positions and no less than 7% for all other securitisation positions."

(xii) In point 53, the sixth paragraph is replaced by the following:

"N is the effective number of exposures calculated in accordance with point 49. In the case

of re-securitisations, the credit institution must look at the number of securitisation

exposures in the pool and not the number of underlying exposures in the original pools from

which the underlying securitisation exposures stem."

(3a) The title of Annex XII is replaced by the following:

"TECHNICAL CRITERIA ON TRANSPARENCY AND DISCLOSURE"

(4)

Annex XII, Part 2 is amended as follows:

(a) Points 9 and 10 are replaced by the following:

"9.

The credit institutions calculating their capital requirements in accordance with points

(b) and (c) of Article 75 shall disclose those requirements separately for each risk referred to

in those provisions. In addition, the capital requirement for specific interest rate risk of

securitisation positions shall be disclosed separately.

10.

The following information shall be disclosed by each credit institution which calculates

its capital requirements in accordance with Annex V to Directive 2006/49/EC:

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(a) for each sub-portfolio covered:

(i)

the characteristics of the models used;

(ii)

for the capital charges according to Annex V point 5a and point 5l of Directive

2006/49/EC separately, the methodologies used and the risks measured through the use

of an internal model including a description of the approach used by the credit

institution to determine liquidity horizons, the methodologies used to achieve a capital

assessment that is consistent with the required soundness standard and the approaches

used in the validation of the model;

(iii) a description of stress testing applied to the sub-portfolio;

(iv) a description of the approaches used for back-testing and validating the accuracy

and consistency of the internal models and modelling processes;

(b)

the scope of acceptance by the competent authority;

(c)

a description of the extent and methodologies for compliance with the requirements set

out in Annex VII, Part B to Directive 2006/49/EC;

(d)

the highest, the lowest and the mean of the following:

(i)

end;

(ii)

end;

the daily value-at-risk measures over the reporting period and as per the period

the stressed value-at-risk measures over the reporting period and as per the period

(iii) the capital charges according to Annex V point 5a and point 5l of Directive

2006/49/EC separately over the reporting period and as per the period-end;

(e)

the amount of capital according to Annex V point 5a and point 5l of Directive

2006/49/EC separately , together with the weighted average liquidity horizon for each sub-

portfolio covered;

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(f)

a comparison of the daily end-of-day value-at-risk measures to the one-day changes of

the portfolio's value by the end of the subsequent business day together with an analysis of

any important overshooting during the reporting period."

(b) Point 14 is replaced by the following:

"14. Credit institutions calculating risk weighted exposure amounts in accordance with

Articles 94 to 101 or capital requirements according to point 16a of Annex I to Directive

2006/49/EC shall disclose the following information, where relevant separately for their

trading and non-trading book:

(a)

a description of the credit institution's objectives in relation to securitisation activity;

(b)

the nature of other risks including liquidity risk inherent in securitised assets;

(c)

the type of risks in terms of seniority of underlying securitisation positions and in terms

of assets underlying these latter securitisation positions assumed and retained with re-

securitisation activity;

(d)

the different roles played by the credit institution in the securitisation process;

(e)

an indication of the extent of the credit institution's involvement in each of them;

(f)

a description of the processes in place to monitor changes in the credit and market risk

of securitisation exposures including, how the behaviour of the underlying assets impacts

securitisation exposures and a description of how those processes differ for re-securitisation

exposures;

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(g)

a description of the credit institution's policy governing the use of hedging and

unfunded protection to mitigate the risks of retained securitisation and re-securitisation

exposures, including identification of material hedge counterparties by relevant type of risk

exposure;

(h)

the approaches to calculating risk weighted exposure amounts that the credit institution

follows for its securitisation activities including the types of securitisation exposures to which

each approach applies;

(i)

the types of SSPEs that the credit institution, as sponsor, uses to securitise third-party

exposures including whether and in what form and to what extent the credit institution has

exposures to these SSPEs, separately for on- and off-balance sheet exposures, as well as a list

of the entities that the credit institution manages or advises and that invest in either the

securitisation positions that the credit institution has securitised or in SSPEs that the credit

institution sponsors.

(j)

a summary of the credit institution's accounting policies for securitisation activities,

including:

(i)

(ii)

whether the transactions are treated as sales or financings;

the recognition of gains on sales;

(iii) the methods and key assumptions and inputs and the changes from the previous

period for valuing securitisation positions;

(iv) the treatment of synthetic securitisations if this is not covered by other accounting

policies;

(v)

how assets awaiting securitisation are valued and whether they are recorded in the

credit institutions non-trading book or the trading book;

(vi) policies for recognising liabilities on the balance sheet for arrangements that could

require the credit institution to provide financial support for securitised assets;

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(k)

the names of the ECAIs used for securitisations and the types of exposure for which

each agency is used;

(l)

where applicable, a description of the Internal Assessment Approach as set out in Annex

IX, Part 4 including the structure of the internal assessment process and relation between

internal assessment and external ratings, the use of internal assessment other than for IAA

capital purposes, the control mechanisms for the internal assessment process including

discussion of independence, accountability, and internal assessment process review; the

exposure types to which the internal assessment process is applied and the stress factors used

for determining credit enhancement levels, by exposure type;

(m) an explanation of significant changes to any of the quantitative disclosures in points (n)

to (q) since the last reporting period;

(n)

separately for the trading and the non-trading book, the following information broken

down by exposure type:

(i)

the total amount of outstanding exposures securitised by the credit institution,

separately for traditional and synthetic securitisations and securitisations for which the

credit institution acts only as sponsor;

(ii) the aggregate amount of on-balance sheet securitisation positions retained or

purchased and off-balance sheet securitisation exposures;

(iii) the aggregate amount of assets awaiting securitisation;

(iv) for securitised facilities subject to the early amortisation treatment, the aggregate

drawn exposures attributed to the originator’s and investors’ interests respectively, the

aggregate capital requirements incurred by the credit institution against (the

originator’s interest and the aggregate capital requirements incurred by the credit

institution against the investor’s shares of drawn balances and undrawn lines;

(v)

the amount of securitisation positions that are deducted from own funds or risk-

weighted at 1 250%;

(vi) a summary of the securitisation activity of the current period, including the

amount of exposures securitised and recognised gain or loss on sale;

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(o)

separately for the trading and the non-trading book, the following information:

(i)

the aggregate amount of securitisation positions retained or purchased and the

associated capital requirements, broken down between securitisation and re-

securitisation exposures and further broken down into a meaningful number of risk-

weight or capital requirement bands, for each capital requirements approach used;

(ii)

the aggregate amount of re-securitisation exposures retained or purchased broken

down according to the exposure before and after hedging/insurance and the exposure to

financial guarantors, broken down according to guarantor credit worthiness categories

or guarantor name;

(p)

for the non-trading book and regarding exposures securitised by the credit institution,

the amount of impaired/past due assets securitised and the losses recognised by the credit

institution during the current period, both broken down by exposure type;

(q)

for the trading book, the total outstanding exposures securitised by the credit institution

and subject to a capital requirement for market risk, broken down into traditional/synthetic

and by exposure type."

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"15. The following information, including regular updates no less frequently than annually,

shall be disclosed to the public regarding the remuneration policy and practices of the credit

institution for those categories of staff whose professional activities have a material impact on

its risk profile. Credit institutions shall comply with the requirements set out in this point in a

way that is appropriate to their size, internal organisation and the nature, scope and

complexity of their activities and be without prejudice to Directive 95/46/EC of the European

Parliament and of the Council of 24 October 1995 on the protection of individuals with the

regard to the processing of personal data and the free movement of such data:

(a)

information concerning the decision-making process used for determining the

remuneration policy, including if applicable, information about the composition and the

mandate of a remuneration committee, the external consultant whose services have been used

for the determination of the remuneration policy and the role of the relevant stakeholders;

(b)

information on link between pay and performance;

(c)

the most important design characteristics of the remuneration system, including,

information on the criteria used for performance measurement and risk adjustment, deferral

policy and vesting criteria;

(d)

information on the performance criteria on which the entitlement to shares, options or

variable components of remuneration is based;

(e)

the main parameters and rationale for any variable component scheme and any other

non-cash benefits;

(ea) aggregate quantitative information on remuneration, broken down by business area.

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(eaa) aggregate quantitative information on remuneration, broken down by senior

management and members of staff whose actions have a material impact on the risk profile of

the credit institution, indicating the following:

(i) amounts of remuneration for the financial year, split into fixed and variable

remuneration, and number of beneficiaries;

(ii) amounts and form of variable remuneration, split into cash, shares and share-linked

instruments and other;

(iii) amounts of outstanding deferred remuneration, split into vested and unvested

portions

(iv) the amounts of deferred remuneration awarded during the financial year, paid out

and reduced through performance adjustments;

(v) new sign-on and severance payments made during the financial year, and number of

beneficiaries of such payments; and

(vi) the amounts of severance payments awarded during the financial year, number of

beneficiaries, and highest such award to a single person.

In the case of directors of credit institutions that are significant in terms of their size, internal

organisation and the nature, scope and the complexity of their activities, the quantitative

information referred to in this point shall also be made available to the public at the level of

directors within the meaning of Article 11."

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(1)

Annex I is amended as follows:

The following sentence is inserted after the first sentence of point 8:

The previous sentence not withstanding, the institution may elect to replace the notional value by

the notional value less any market value changes of the credit derivative since trade inception.

(a) The third paragraph in point 8 (v) is replaced by the following:

“Where a n-th-to-default credit derivative is externally rated, the protection seller shall calculate the

specific risk capital charge using the rating of the derivative and apply the respective securitisation

risk weights as applicable.”

(aa) Point 14 is amended as follows:

(i)

The first paragraph is replaced by the following:

14. The institution shall assign its net positions in the trading book in instruments that are not

securitisation positions as calculated in accordance with point 1 to the appropriate categories

in Table 1 on the basis of their issuer/obligor, external or internal credit assessment, and

residual maturity, and then multiply them by the weightings shown in that table. It shall sum

its weighted positions resulting from the application of this point (regardless of whether they

are long or short) in order to calculate its capital requirement against specific risk. It shall

calculate its capital requirement against specific risk for positions that are securitisation

positions in accordance with point 16a.

For the purposes of this point and points 14a and 16a, the institution may cap the product of

the weight and the net position at the maximum possible default-risk related loss. For a short

position this limit could be calculated as a change in value due to the underlying names

immediately becoming default risk-free.

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"14a. By way of derogation from point 14, an institution may determine the specific risk

capital charge for the correlation trading portfolio as follows: the institution computes (i) the

total specific risk capital charges that would apply just to the net long positions of the

correlation trading portfolio and (ii) the total specific risk capital charges that would apply

just to the net short positions of the correlation trading portfolio. The larger of these total

amounts shall be the specific risk capital charge for the correlation trading portfolio.

14b. For the purpose of this Directive, the correlation trading portfolio shall consist of

securitisation positions and nth-to-default credit derivatives that meet the following criteria:

(a) The positions are neither re-securitisation positions, nor options on a securitisation

tranche, nor any other derivatives of securitisation exposures that do not provide a pro-

rata share in the proceeds of a securitisation tranche; and

(b) All reference instruments are single-name instruments, including single- name credit

derivatives, for which a liquid two-way market exists. This shall also include commonly

traded indices based on these reference entities. A two-way market is deemed to exist

where there are independent bona fide offers to buy and sell so that a price reasonably

related to the last sales price or current bona fide competitive bid and offer quotations

can be determined within one day and settled at such price within a relatively short time

conforming to trade custom.

(ab) The following point is inserted:

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14b. Positions which reference to either of the following cannot be part of the correlation

trading portfolio:

(a) an underlying that could be assigned to the exposure classes in Article 79, paragraph

1, letter i) and h) of Directive 2006/48/EC in a credit institution’s non-trading book; or

(b) a claim on a special purpose entity.

An institution may include in the correlation trading portfolio positions which are

neither securitisation positions nor n-th-to-default credit derivatives but which hedge

other positions of this portfolio, provided that a liquid two-way market as described in

point 14a (b) exists for the instrument or its underlyings.”

(b)

The following point 16a is inserted:

"16a. For instruments in the trading book that are securitisation positions, the institution shall

weight with the following its net positions as calculated in accordance with point 1:

(a)

for securitisation positions that would be subject to the Standardised Approach for credit

risk in the same institution's non-trading book, 8% of the risk weight under the Standardised

Approach as set out in Part 4 of Annex IX to Directive 2006/48/EC;

(b)

for securitisation positions that would be subject to the Internal Ratings Based Approach

in the same institution's non-trading book, 8% of the risk weight under the Internal Ratings

Based Approach as set out in Part 4 of Annex IX to Directive 2006/48/EC.

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(ba) for the purpose of point (a) and (b), the Supervisory Formula Method may only be used

with supervisory approval by institutions other than an originator institution that may apply it

for the same securitisation position in its non-trading book. Where relevant, estimates of PD

and LGD as inputs to the Supervisory Formula Method shall be determined in accordance

with Articles 84 to 89 of Directive 2006/48/EC or alternatively and subject to separate

supervisory approval, based on estimates that are derived from an approach as set out in point

5a of Annex V and that are in line with the quantitative standards for the Internal Ratings

Based Approach, The Committee of European Banking Supervisors shall establish guidelines

in order to ensure a convergent use of estimates of PD and LGD as inputs when those

estimates are based on the approach set out in point 5a of Annex V.

(c)

paragraphs (a) and (b) notwithstanding, for securitisation positions that would be

subject to a 1 250 % risk weight according to Article 122(a) of Directive 2006/48/EC if they

were in the same institutions’ non-trading book, 8% of the risk weight according to that

Article.

The institution shall sum its weighted positions resulting from the application of this point

(regardless of whether they are long or short) in order to calculate its capital requirement

against specific risk. By way of derogation, for a transitional period ending on 31st December

2013, it shall sum separately (i) its weighted net long positions (ii) its weighted net short

positions. The larger of these sums shall be the specific risk capital requirement. During that

transitional period, the institution shall nevertheless report to the competent authority of the

home Member State the sum of both its weighted net long and net short positions, broken

down by types of underlying assets."

(c)

Point 34 is replaced by the following:

"34. The institution shall sum all its net long positions and all its net short positions in

accordance with point 1. It shall multiply its overall gross position by 8% in order to calculate

its capital requirement against specific risk."

(d)

Point 35 is deleted.

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(2)

In Annex II, point 7, the second paragraph is replaced by the following:

"However, in the case of a credit default swap, an institution the exposure of which arising

from the swap represents a long position in the underlying shall be permitted to use a figure of

0% for potential future credit exposure, unless the credit default swap is subject to closeout

upon insolvency of the entity the exposure of which arising from the swap represents a short

position in the underlying, even though the underlying has not defaulted, in which case the

figure for potential future credit exposure of the institution shall be limited to the amount of

premia which are not yet paid by the entity to the institution."

(3)

Annex V is amended as follows:

(a)

Point 1 is replaced by the following:

"1. The competent authorities shall, subject to the conditions laid down in this Annex, allow

institutions to calculate their capital requirements for position risk, foreign-exchange risk

and/or commodities risk using their own internal risk-management models instead of or in

combination with the methods described in Annexes I, III and IV. Explicit recognition by the

competent authorities of the use of models for supervisory capital purposes shall be required

in each case."

(b)

In point 4, the second paragraph is replaced by the following:

"Competent authorities shall examine the institution's capability to perform back-testing on

both actual and hypothetical changes in the portfolio's value. Back-testing on hypothetical

changes in the portfolio's value is based on a comparison between the portfolio's end-of-day

value and, assuming unchanged positions, its value at the end of the subsequent day.

Competent authorities shall require institutions to take appropriate measures to improve their

back-testing programme if deemed deficient. At a minimum, competent authorities shall

require institutions to perform back-testing on hypothetical (using changes in portfolio value

that would occur were end-of-day positions to remain unchanged) outcomes."

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(c)

Point 5 is replaced by the following:

"5.

For the purpose of calculating capital requirements for specific risk associated with

traded debt and equity positions, the competent authorities shall recognise the use of an

institution's internal model if, in addition to compliance with the conditions in the remainder

of this Annex, the internal model meets the following conditions:

(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. This means that institutions shall demonstrate

that the internal model is sensitive to material idiosyncratic differences between similar

but not identical positions;

(f)

it captures event risk.

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.

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An institution may choose to exclude from the calculation of its specific risk capital

requirement using an internal model those positions in securitisations or nth to default

credit derivatives for which it meets a capital requirement for position risks according to

Annex I with the exception of those positions that are subject to the approach set out in

point 5l.

As techniques and best practices evolve, institutions shall avail themselves of these new

techniques and practices."

An institution shall not be required to capture default and migration risks for traded debt

instruments in its internal model where it is capturing these risks through the

requirements set out in points 5a to 5k.

(d)

The following points 5a to 5l are inserted:

"5a. Institutions subject to point 5 for traded debt instruments shall have an approach in

place to capture, in the calculation of their capital requirements, the default and migration

risks of its trading book positions that are incremental to the risks captured by the value-at-

risk measure as specified in point 5. An institution shall demonstrate that its approach meets

soundness standards comparable to the approach set out in Articles 84 to 89 of Directive

2006/48/EC, under the assumption of a constant level of risk, and adjusted where appropriate

to reflect the impact of liquidity, concentrations, hedging and optionality.

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Scope

5b. The approach to capture the incremental default and migration risks shall cover all positions

subject to a capital charge for specific interest rate risk but shall not cover securitisation positions

and n-th-to-default credit derivatives. Subject to supervisory approval, the institution may choose to

consistently include all listed equity positions and derivatives positions based on listed equities for

which such inclusion is consistent with how the bank internally measures and manages risk. The

approach shall reflect the impact of correlations between default and migration events. The impact

of diversification between, on the one hand, default and migration events and, on the other hand,

other market risk factors, shall not be reflected.

Parameters

5c.

The approach to capture the incremental risks must measure losses due to default and internal

or external ratings migration at the 99,9 % confidence interval over a capital horizon of one year.

Correlation assumptions shall be supported by analysis of objective data in a conceptually sound

framework. The approach to capture the incremental risks shall appropriately reflect issuer

concentrations. Concentrations that can arise within and across product classes under stressed

conditions shall also be reflected.

The approach shall be based on the assumption of a constant level of risk over the one-year capital

horizon, implying that given individual trading book positions or sets of positions that have

experienced default or migration over their liquidity horizon are re-balanced at the end of their

liquidity horizon to attain the initial level of risk. Alternatively, an institution may chose to

consistently use a one-year constant position assumption.

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5d.

The liquidity horizons shall be set according to the time required to sell the position or to

hedge all material relevant price risks in a stressed market, having particular regard to the size of the

position. Liquidity horizons shall reflect actual practice and experience during periods of both

systematic and idiosyncratic stresses. The liquidity horizon shall be measured under conservative

assumptions and shall be sufficiently long that the act of selling or hedging, in itself, would not

materially affect the price at which the selling or hedging would be executed.

The determination of the appropriate liquidity horizon for a position or set of positions is subject to

a floor of three months.

The determination of the appropriate liquidity horizon for a position or set of positions shall take

into account an institution’s internal policies relating to valuation adjustments and the management

of stale positions. When an institution determines liquidity horizons for sets of positions rather than

for individual positions, the criteria for defining sets of positions shall be defined in a way that

meaningfully reflects differences in liquidity. The liquidity horizons shall be greater for positions

that are concentrated, reflecting the longer period needed to liquidate such positions. The liquidity

horizon for a securitisation warehouse shall reflect the time to build, sell and securitise the assets, or

to hedge the material risk factors, under stressed market conditions.

5e.

Hedges may be incorporated into an institution’s approach to capture the incremental default

and migration risks. Positions may be netted when long and short positions refer to the same

financial instrument. Hedging or diversification effects associated with long and short positions

involving different instruments or different securities of the same obligor, as well as long and short

positions in different issuers, may only be recognised by explicitly modelling gross long and short

positions in the different instruments. Institutions shall reflect the impact of material risks that could

occur during the interval between the hedge’s maturity and the liquidity horizon as well as the

potential for significant basis risks in hedging strategies by product, seniority in the capital

structure, internal or external rating, maturity, vintage and other differences in the instruments. An

institution shall reflect a hedge only to the extent that it can be maintained even as the obligor

approaches a credit or other event.

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For trading book positions that are hedged via dynamic hedging strategies, a rebalancing of the

hedge within the liquidity horizon of the hedged position may be recognised provided that the

institution (i) chooses to model rebalancing of the hedge consistently over the relevant set of trading

book positions, (ii) demonstrates that the inclusion of rebalancing results in a better risk

measurement, and (iii) demonstrates that the markets for the instruments serving as hedges are

liquid enough to allow for this rebalancing even during periods of stress. Any residual risks

resulting from dynamic hedging strategies must be reflected in the capital charge.

5f.

The approach to capture the incremental default and migration risks must reflect the nonlinear

impact of options, structured credit derivatives and other positions with material nonlinear

behaviour with respect to price changes. The institution shall also have due regard to the amount of

model risk inherent in the valuation and estimation of price risks associated with such products.

5g.

The approach to capture the incremental default and migration risks shall be based on data

that are(…), objective and up-to-date(…).

Validation

5h.

As part of the independent review of their risk measurement system and the validation of their

internal models as required in this annex, institutions shall, with a view to the approach to capture

incremental default and migration risks, in particular:

(i)

validate that its modelling approach for correlations and price changes is appropriate for its

portfolio, including the choice and weights of its systematic risk factors;

(ii)

perform a variety of stress tests, including sensitivity analysis and scenario analysis, to assess

the qualitative and quantitative reasonableness of the approach, particularly with regard to the

treatment of concentrations. Such tests shall not be limited to the range of events experienced

historically;

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(iii) apply appropriate quantitative validation including relevant internal modelling benchmarks.

The approach to capture the incremental risks must be consistent with the institution’s internal risk

management methodologies for identifying, measuring, and managing trading risks.

Documentation

5i.

An institution shall document its approach to capturing incremental default and migration

risks so that its correlation and other modelling assumptions are transparent to competent

authorities.

Internal approaches based on different parameters

5j.

If the institution uses an approach to capturing incremental default and migration risks that

does not comply with all requirements of this point but that is consistent with the institution’s

internal methodologies for identifying, measuring, and managing risks it shall be able to

demonstrate that its approach results in a capital requirement that is at least as high as if it was

based on an approach in full compliance with the requirements of this point. Competent authorities

shall review compliance with the previous sentence at least yearly. The Committee of European

Banking Supervisors shall monitor the range of practices in this area and draw up guidelines in

order to secure a level playing field.

Frequency of calculation

5k.

(…)An institution shall perform the calculations required under its chosen approach to capture

the incremental risk at least weekly.

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5l. Competent authorities shall recognise the use of an internal approach for calculating an

additional capital charge instead of a capital charge for the correlation trading portfolio in

accordance with Annex I, point 14a provided that all conditions in this point are fulfilled.

Such an internal approach shall adequately capture all price risks at the 99,9 % confidence interval

over a capital horizon of one year under the assumption of a constant level of risk, and adjusted

where appropriate to reflect the impact of liquidity, concentrations, hedging and optionality. The

institution may incorporate any positions in this approach that are jointly managed with positions of

the correlation trading portfolio and may then exclude those positions from the approach required

under point 5a of this Annex.

The amount of this capital charge for all price risks may not be less than 8 % of the capital charge

that would be calculated according to Annex I point 14a for all positions incorporated in the charge

for all price risks.

In particular, the following risks shall be adequately captured:

(a)

the cumulative risk arising from multiple defaults, including the ordering of defaults, in

tranched products;

(b)

credit spread risk, including the gamma and cross-gamma effects;

(c)

volatility of implied correlations, including the cross effect between spreads and correlations;

(d)

basis risk, including both

(i) the basis between the spread of an index and those of its constituent single names; and

(ii) the basis between the implied correlation of an index and that of bespoke portfolios;

(e)

recovery rate volatility, as it relates to the propensity for recovery rates to affect tranche

prices; and

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(f)

to the extent the comprehensive risk measure incorporates benefits from dynamic hedging, the

risk of hedge slippage and the potential costs of rebalancing such hedges.

For the purpose of this point, an institution shall have sufficient market data to ensure that it fully

captures the salient risks of these exposures in its internal approach in accordance with the

standards set out in this point, demonstrates through back testing or other appropriate means that its

risk measures can appropriately explain the historical price variation of these products and ensures

that it can separate the positions for which it holds approval in order to incorporate them in the

capital charge according to this point from those positions for which it does not hold such approval.

With regard to portfolios subject to this point, the institution shall regularly apply a set of specific,

predetermined stress scenarios. These stress scenarios shall examine the effects of stress to default

rates, recovery rates, credit spreads, and correlations on the P&L of the correlation trading desk.

The institution shall apply these stress scenarios at least weekly and report at least quarterly to the

competent authorities the results, including comparisons with the institution’s capital charge

according to this point. Any instances where the stress tests indicate a material shortfall of this

capital charge must be reported to the competent authorities in a timely manner. Based on these

stress testing results, the competent authorities shall consider a supplemental capital charge against

the correlation trading portfolio as set out in Article 136(2) of Directive 2006/48/EC.

An institution shall calculate the capital charge to capture all price risks at least weekly.”

(d)

Point 6 is replaced by the following:

“6.

Institutions using internal models which are not recognized in accordance with point 5

shall be subject to a separate capital charge for specific risk as calculated according to Annex

I.”

(e)

Point 7 is replaced by the following:

"7.

For the purposes of points 10b(a) and 10b(b), the results of the institution's own

calculation shall be scaled up by the multiplication factors (m

) and (m

) . These factors shall

be at least 3."

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(f)

In Point 8, the first paragraph is replaced by the following:

"For the purposes of point 10b(a) and 10b(b), the multiplication factors (m

) and (m

) shall be

increased by a plus-factor of between 0 and 1 in accordance with Table 1, depending on the

number of overshootings for the most recent 250 business days as evidenced by the

institution's back-testing of the value-at-risk measure as set out in point 10. Competent

authorities shall require the institutions to calculate overshootings consistently on the basis of

back-testing on hypothetical and actual changes in the portfolio's value. An overshooting is a

one-day change in the portfolio's value that exceeds the related one-day value-at-risk measure

generated by the institution's model. For the purpose of determining the plus-factor the

number of overshootings shall be assessed at least quarterly and shall be equal to the higher of

the number of overshootings under hypothetical and actual changes in the value of the

portfolio."

(g)

Point 9 is deleted.

(h)

Point 10 is amended as follows:

(i)

Point (c) is replaced by the following:

calculated according to shorter holding periods scaled up to 10 days by, for example, the

square root of time. An institution using this approach shall periodically justify the

reasonableness of its approach to the satisfaction of the competent authoritie;

(ii)

Point (e) is replaced by the following:

"(e) monthly data set updates."

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(i)

The following points 10a and 10b are inserted:

"10a. In addition, each institution shall calculate a ‘stressed value-at-risk’ based on the 10-day, 99th

percentile, one-tailed confidence interval value-at-risk measure of the current portfolio, with value-

at-risk model inputs calibrated to historical data from a continuous 12-month period of significant

financial stress relevant to the institution’s portfolio. The choice of such historical data shall be

subject to approval by competent authorities and to yearly review by the institution. The

Committee of European Banking Supervisors shall monitor the range of practices in this area and

draw up guidelines in order to ensure convergence. Institutions shall calculate the stressed value-at-

risk at least weekly.

10b. Each institution shall meet, on a daily basis, a capital requirement expressed as the sum of

points (a) and (b) below. In addition, an institution that uses its internal model to calculate the

capital requirement for specific position risk shall meet a capital requirement expressed as the sum

of points (c) and (d) below:

(a)

The higher of (1) its previous day’s value-at-risk number measured according to point

10 (VaRt-1); and (2) an average of the daily value-at-risk measures according to point 10 on

each of the preceding sixty business days (VaRavg), multiplied by the multiplication factor

);

(b) The higher of (1) its latest available stressed-value-at-risk number according to point

10a (sVaRt-1); and (2) an average of the stressed value-at-risk numbers calculated in the

manner and frequency specified in point 10a during the preceding sixty business days

(sVaRavg), multiplied by the multiplication factor (m

);

c) A capital charge calculated according to Annex I for the position risks of securitisation

positions and nth to default credit derivatives in the trading book with the exception of those

incorporated in the capital charge according to point 5l;

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(d)

The higher of the institution's most recent and the institution's 12 weeks average

measure of incremental default and migration risk according to point 5a and , where

applicable, the higher of the institution’s most recent and the institution’s 12 weeks average

measure of all price risks according to point 5l."

(10ba) Credit institutions shall also carry out reverse stress tests.

(j)

In Point 12, the first paragraph is replaced by the following:

"The risk-measurement model shall capture a sufficient number of risk factors, depending on

the level of activity of the institution in the respective markets. Where a risk factor is

incorporated in the institution's pricing model but not in the risk-measurement model, the

institution must be able to justify this omission to the satisfaction of the competent authority.

In addition, the risk-measurement model shall capture nonlinearities for options and other

products as well as correlation risk and basis risk. Where proxies for risk factors are used they

shall show a good track record for the actual position held. In addition, the following shall

apply for individual risk types:"

(4)

Annex VII, Part B is amended as follows:

(a)

In point 2, point (a) is replaced by the following:

"(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, guidelines for the use of

unobservable inputs reflecting the institution’s assumptions of what market participants would

use in pricing the position, frequency of independent valuation, timing of closing prices,

procedures for adjusting valuations, month end and ad-hoc verification procedures;"

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(b)

Point 3 is replaced by the following:

"3. Institutions shall mark their positions to market whenever possible. Marking to market is

the at least daily valuation of positions at readily available close out prices that are sourced

independently. Examples include exchange prices, screen prices, or quotes from several

independent reputable brokers."

(c)

Point 5 is replaced by the following:

"5. Where marking to market is not possible, institutions must conservatively mark to model

their positions/portfolios before applying trading book capital treatment. Marking to model is

defined as any valuation which has to be benchmarked, extrapolated or otherwise calculated

from a market input."

(d)

In point 6, point (a) is replaced by the following:

"(a) senior management shall be aware of the elements of the trading book or of other fair-

valued positions 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;"

(e)

Points 8 and 9 are replaced by the following:

"Valuation adjustments

8. Institutions shall establish and maintain procedures for considering valuation adjustments.

General standards

9. The competent authorities shall require the following valuation adjustments to be formally

considered: unearned credit spreads, close-out costs, operational risks, early termination,

investing and funding costs, future administrative costs and, where relevant, model risk."

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(f) Points 11 to 15 are replaced by the following:

"11. Institutions shall establish and maintain procedures for calculating an adjustment to the

current valuation of less liquid positions. Such adjustments shall where necessary be in

addition to any changes to the value of the position required for financial reporting purposes

and shall be designed to reflect the illiquidity of the position. Under those procedures,

institutions shall consider several factors when determining whether a valuation adjustment is

necessary for less liquid positions. Those factors include the amount of time it would take to

hedge out the position/risks within the position, the volatility and average of bid/offer spreads,

the availability of market quotes (number and identity of market makers) and the volatility

and average of trading volumes including trading volumes during periods of market stress,

market concentrations, the aging of positions, the extent to which valuation relies on marking-

to-model, and the impact of other model risks.

12. When using third party valuations or marking to model, institutions shall consider whether

to apply a valuation adjustment. In addition, institutions shall consider the need for

establishing adjustments for less liquid positions and on an ongoing basis review their

continued suitability.

15a. With regard to complex products including, but not limited to, securitisation exposures

and n-th-to-default credit derivatives, credit institutions shall explicitly assess the need for

valuation adjustments to reflect the following two forms of model risk: the model risk

associated with using a possibly incorrect valuation methodology and the risk associated with

using unobservable (and possibly incorrect) calibration parameters in the valuation model.”

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