STAATSCOURANT Government Gazette of the Netherlands No October 2010

Transcription

1 STAATSCOURANT Government Gazette of the Netherlands No October 2010 Official publication of the Kingdom of the Netherlands since 1814 Regulation of De Nederlandsche Bank N.V. of 26 October 2010 establishing the conditions under which hybrid instruments are equated to assets as referred to in Articles 90 to 94 inclusive of the Decree on Prudential Rules pursuant to the Financial Supervision Act (Besluit prudentiële regels Wft) (Regulation on hybrid instruments of banks and other financial undertakings (excluding insurers) pursuant to the Financial Supervision Act (2010 Regeling hybride instrumenten banken en andere financiële ondernemingen (exclusief verzekeraars) Wft 2010) De Nederlandsche Bank N.V., Having consulted the relevant representative organisations; Having regard to Section 1:28, subsection 2 of the Dutch Financial Supervision Act (Wet op het financieel toezicht / Wft); Having regard to Article 89, paragraph 2(a) and Articles 90 to 94 inclusive of the Decree on Prudential Rules pursuant to the Financial Supervision Act (Besluit prudentiële regels Wft); Having regard to Directive 2009/111/EC of the European Parliament and of the Council of 16 September 2009 amending Directives 2006/48/EC, 2006/49/EC and 2007/64/EC as regards banks affiliated to central institutions, certain own funds items, large exposures, supervisory arrangements, and crisis management (OJEU L 302); Hereby decides: CHAPTER 1. Definitions and scope Article 1.1 In this Regulation, the following terms shall have the following meanings: a. Decree: Decree on Prudential Rules pursuant to the Financial Supervision Act (Besluit prudentiële regels Wft); b. DNB: De Nederlandsche Bank N.V.; c. financial undertaking: a financial undertaking as referred to in Article 90 of the Decree; d. hybrid instrument: a financial instrument whose characteristics are such that it can be equated to an asset as referred to in Article 89, paragraph 2(a) of the Decree, in conjunction with Articles 90 to 94 inclusive of the Decree; e. direct issue: the issue of a hybrid instrument by a financial undertaking which regards or will regard that hybrid instrument as one of the assets as referred to in Articles 90 to 94 inclusive of the Decree; and

2 f. indirect issue: the issue of a hybrid instrument by an entity other than a financial undertaking which regards or will regard that hybrid instrument as one of the assets as referred to in Articles 90 to 94 inclusive of the Decree, provided that the financial undertaking and the issuing entity form part of the same group within the meaning of Section 24b of Book 2 of the Netherlands Civil Code. Article 1:2 1. This Regulation shall apply to banks, managers of collective investment schemes, investment firms, clearing institutions or electronic money institutions, within the meaning of Article 90 of the Decree. 2. This Regulation shall not apply to insurers within the meaning of Article 95, paragraph 1 of the Decree. CHAPTER 2. Equating of hybrid instruments with original own funds capital Article 2:1 For the calculation of the original own funds capital as referred to in Article 91, paragraph 1 of the Decree, hybrid instruments that have been issued directly or indirectly by a financial undertaking may be equated with assets as referred to in Article 91, paragraph 2 of the Decree, provided the procedural provisions of Chapter 4 are met. CHAPTER 3. Equating of hybrid instruments with upper? or lower supplementary capital Article 3:1 Hybrid instruments that comply with the provisions as set out in Chapter 2 and cannot be regarded as assets within the meaning of Article 91, paragraph 2 of the Decree solely because of exceeding the applicable limits, shall? be regarded as assets as referred to in Article 92, paragraph 2 of the Decree. Article 3:2 When calculating the upper? supplementary capital (upper tier 2 capital), hybrid instruments with a call option or interest rate step-up may only be equated to assets as referred to in Article 92, paragraph 2 of the Decree if: a. in the case of a call option: the call option complies with the provisions of Article 3:3; b. in the case of an interest rate step-up: the step-up complies with the provisions of Article 3:4. Article 3:3 1. A call option can not be exercised at the discretion of the financial undertaking before five years after the date of issue, subject to the prior consent of DNB. 2. DNB will only grant permission as referred to in the first paragraph if, after the exercise of the call option, the hybrid instrument is replaced with a hybrid instrument of equal or

3 higher quality, where the latter hybrid instrument is present or immediately [made] available. 3. Contrary to the provisions of the foregoing paragraph, DNB may grant permission without requiring the replacement by a hybrid instrument that is present or immediately [made] available if DNB is satisfied that the amount of the remaining capital from which the hybrid instrument will be withdrawn after exercise of the call option remains at a prudent distance above the minimum amount of the qualifying capital as referred to in Articles 60, 63 and 64 of the Decree. Article 3:4 1. A right to an interest rate step-up may be exercised only once over the life of the hybrid instrument. 2. An interest rate step-up shall not occur before ten years after the date of issue. 3. An interest step-up may amount to no more than 100 basis points above the initial interest rate, or a maximum of 50% of the initial credit spread, in both cases corrected for the effect of a change in the relevant interest rate bases. Article 3:5 When calculating the lower supplementary capital (lower tier 2 capital), hybrid instruments with a call option or interest rate step-up shall only be equated to assets as referred to in Article 92, paragraph 3 of the Decree if: a. in the case of a call option: the call option can only be exercised at the initiative of the financial undertaking subject to the prior consent of DNB; b. in the case of an interest rate step-up: the step-up complies with the provisions of Article 3:4, provided that: 1. the number of calendar years that has elapsed as referred to in Article 3:4, paragraph 2 is at least five; 2. the values of the step-up as referred to in Article 3:4, paragraph 3 are halved if the step-up occurs after five years, and linear interpolation shall be applied if the step-up occurs in the period that commences after five years and ends before ten years; and c. the reduction as referred to in Article 92, paragraph 3(c)(4) of the Decree is applied at the latest from the moment at which the exercise of the call option is almost certain and the anticipated date of exercise is taken as the redemption date. CHAPTER 4. Procedural provisions Article 4:1 1. Hybrid instruments shall only be eligible for application of this Regulation if the issue of those instruments has been submitted to DNB for assessment either before or after issue, accompanied by the necessary documentation demonstrating that the provisions of this Regulation have been met. 2. Hybrid instruments shall only be eligible from the moment that DNB has indicated in writing that the provisions of this Regulation have been met.

4 3. In carrying out the testing referred to in paragraph 1 of this Article, DNB shall take as a basis the prevailing international standards. CHAPTER 5. Transitional provisions Article 5:1 1. Instruments that have been designated by DNB in writing as innovative tier 1 capital or as lower supplementary capital on the grounds of parts , , , to inclusive and Annex 4003-b1 of the DNB Manual on the Credit Institutions (Supervision) Act (Wtk) shall lawfully qualify as hybrid instruments as referred to in this Regulation. 2. Instruments that have been designated by DNB in writing as innovative financial instruments on the grounds of the Regulation on innovative financial instruments and intangible assets (Regeling innovatieve financiële instrumenten en immateriële activa) (Government Gazette 2007, 1, lapsed with effect from 31 December 2007, Government Gazette 2007, 247) shall lawfully qualify as hybrid instruments as referred to in this Regulation. 3. Instruments that have been designated by DNB in writing as hybrid instruments on the grounds of the Regulation on equating hybrid instruments to own funds (Regeling gelijkstelling hybride instrumenten met eigenvermogensbestanddelen) (Government Gazette 2007, 247) shall lawfully qualify as hybrid instruments as referred to in this Regulation. CHAPTER 6. Final provisions Article 6:1 The Regulation equating hybrid instruments to own funds (Regeling gelijkstelling hybride instrumenten met eigenvermogensbestanddelen) (Government Gazette 2007, 247) shall lapse with effect from 31 December Article 6:2 1. This Regulation shall enter into force on 31 October 2010, with the proviso that this Regulation shall first apply with effect from 31 December In the event that the Government Gazette (Staatscourant) in which this Regulation is published appears after 29 October 2010, this Regulation shall enter into force on the day after the date of publication of the Government Gazette in which it is published, with retroactive force to 31 October 2010, with the proviso that this Regulation shall first apply with effect from 31 December Article 6:3 This Regulation shall be cited as the Regulation on hybrid instruments of banks and other financial undertakings (excluding insurers) pursuant to the Financial Supervision Act

5 (Regeling hybride instrumenten banken en andere financiële ondernemingen (exclusief verzekeraars) Wft 2010). This Regulation together with the explanatory notes shall be published in the Netherlands Government Gazette (Staatscourant). Amsterdam, 26 October 2010 De Nederlandsche Bank N.V., H.J. Brouwer, director.

6 EXPLANATORY NOTES General Introduction This Regulation on hybrid instruments of banks and other financial undertakings (excluding insurers) pursuant to the Financial Supervision Act (Regeling hybride instrumenten banken en andere financiële ondernemingen (exclusief verzekeraars) Wft 2010), published by De Nederlandsche Bank (DNB), sets out the conditions under which hybrid instruments may be equated with own funds as referred to in Articles 90 to 94 inclusive of the Decree on Prudential Rules pursuant to the Financial Supervision Act (Besluit prudentiële regels Wft). This supervisory regulation implements the provisions set out in Article 89, paragraph 2(a) of the Decree on Prudential Rules pursuant to the Financial Supervision Act, which in turn is derived from Section 3:57, subsection 2 of the Financial Supervision Act (Wet op het financieel toezicht / Wft). The objective of this DNB Regulation is to implement elements of the CRD II Directives more specifically: Directive 2009/111/EEC which relate to hybrid instruments and core capital. 2 The rules for supplementary capital remain unchanged under these CRD II Directives. 3 Articles 90 to 94 inclusive of the Decree on Prudential Rules pursuant to the Financial Supervision Act contain detailed rules for calculating the available eligible? capital (solvency). The conditions set out in this DNB supervisory regulation for equating hybrid capital instruments to assets which constitute the eligible capital relate to the qualitative requirements, quantitative limits and procedural stipulations to be set for such hybrid instruments. The scope of this supervisory regulation extends to banks, managers of collective investment schemes, investment firms, clearing institutions and electronic money institutions. For insurers, the rules on hybrid instruments are contained in a separate DNB supervisory regulation, namely the Regulation on hybrid instruments for insurers pursuant to the 2 For a more detailed description of the CRD II Directives, see also the general section of the Notes to the DNB Regulation amending solvency requirements in connection with the implementation of the CRD II Directives (Wijzigingsregeling solvabiliteitseisen Wft 2010 in verband met de implementatie van de CRD II richtlijnen) of 26 October CRD II incorporates the following European Directives: - Commission Directive 2009/27/EC of 7 April 2009 amending certain Annexes to Directive 2006/49/EC of the European Parliament and of the Council as regards technical provisions concerning risk management (OJEU L 94); - Commission Directive 2009/83/EC of 27 July 2009 amending certain Annexes to Directive 2006/48/EC of the European Parliament and of the Council as regards technical provisions concerning risk management (OJEU L 196); and - Directive 2009/111/EC of the European Parliament and of the Council of 16 September 2009 amending Directives 2006/48/EC, 2006/49/EC and 2007/64/EC as regards banks affiliated to central institutions, certain own funds items, large exposures, supervisory arrangements, and crisis management (OJEU L 302). 3 See also the Notes to individual articles in Chapter 3.

7 Financial Supervision Act (Regeling hybride instrumenten verzekeraars Wft 2010) by DNB, also of 26 October If and in so far as the qualitative requirements, quantitative limits and procedural stipulations have not been incorporated in the Regulation, reference is made to the CEBS Guidelines (Implementation Guidelines for Hybrid Capital Instruments of 10 December 2009; referred to hereinafter as CEBS Hybrids Guidelines 4 ) and the Open Book Supervision section of the DNB website. For the interpretation and application of this Regulation, DNB will also take into account relevant future developments in international bodies, including (but not limited to) those in the Basel Committee (as regards the implementation of the Basel III Capital Accord in respect of the proposed new CRD IV Directive) and those at CEBS (now EBA) level (ditto). DNB s interpretations will be published on the Open Book Supervision section of its website. This new Regulation comes into effect on 31 October 2010, but will first apply from 31 December As stated, the legal basis for this Regulation on hybrid instruments of banks and other financial undertakings (excluding insurers) pursuant to the Financial Supervision Act (Regeling hybride instrumenten banken en andere financiële ondernemingen (exclusief verzekeraars) Wft 2010) may be found primarily in Article 89, paragraph 2(a) of the Decree on Prudential Rules pursuant to the Financial Supervision Act (Besluit prudentiële regels Wft), which in turn is derived from Section 3:57, subsection 2 of the Financial Supervision Act (Wet op het financieel toezicht / Wft). As explained elsewhere in the DNB supervisory regulations that serve to implement the CRD II Directives, 5 a supplementary and given its nature temporary legal basis for this DNB Regulation may also be found in Section 1:28, subsection 2 of the Wft, namely in so far and for as long as the implementing legislation relating to the CRD II Directives is not yet complete. More specifically, this supplementary legal basis may be or may become relevant with respect to the transitional arrangement provided for in Article 5:1 of this Regulation for hybrid instruments recognised in the past ( grandfathering ) For an interpretation of the legislative and regulatory process for implementing CRD II Directives 2009/27/EC, 2009/83/EC and 2009/111/EC, see the general section of the Notes to the Regulation amending solvency requirements in connection with the implementation of the CRD II Directives (Wijzigingsregeling solvabiliteitseisen Wft 2010 in verband met de implementatie van de CRD II richtlijnen) of 26 October 2010.

8 Explanatory notes to individual Articles Chapter 1 Article 1:1(c) Hybrid instruments may be issued by banks, managers of collective investment schemes, investment firms, clearing institutions and electronic money institutions. This is a continuation of the policy which applied under the DNB Manual on the Credit Institutions (Supervision) Act (Wtk), which applied until 2007 (Policy rule on innovative tier 1 instruments - Beleidsregel inzake innovatieve tier 1 instrumenten), the Regulation on innovative financial instruments and intangible assets - Regeling innovatieve financiële instrumenten en immateriële activa (Government Gazette 2007, 1; subsequently lapsed) and the Regulation on equating hybrid instruments with own funds - Regeling gelijkstelling hybride instrumenten met eigenvermogensbestanddelen (Government Gazette 2007, 247; this Regulation will lapse when the present Regulation enters into force with effect from 31 December 2010). Article 1:1(d) There is no watertight definition of hybrid instruments; hence the open nature of the definition given here. The most important qualifying criterion is the equivalence of these instruments with real capital. In principle, any instrument that complies with the relevant rules as set out in the Decree on Prudential Rules pursuant to the Financial Supervision Act (Besluit prudentiële regels Wft) qualifies, with due consideration of the DNB Open Book Supervision referred to earlier in relation to the interpretation of the present Regulation. Article 1:1(e) and (f) and Article 2:1, paragraph 1 Hybrid instruments may be issued either directly or indirectly. This distinction is important for the way in which the proceeds of the issue become available to a financial undertaking that includes the issued hybrid instruments for the calculation of its capital. In practice, special entities (special purpose vehicle / SPV) are used for indirect issues entities over which the financial undertaking exercises de facto control so that the entities are linked within a group as referred to in Section 24b of Book 2 of the Netherlands Civil Code. For further rules relating to hybrids issued by an SPV, reference is made to the CEBS Hybrids Guidelines. Article 2:1 Article 2:1 of this Regulation contains the main rule for equating hybrid instruments with own funds. Financial undertakings within the meaning of this Regulation may include hybrid instruments in their own funds for the calculation of their (net) original own funds. Chapter 3 Articles 3:1 to 3:5 inclusive Regarding equating hybrid instruments to supplementary capital, it should be noted that the relevant rules do not change as a result of implementation of the CRD II Directives. The provisions on equating supplementary capital as included in the DNB Regulation on equating hybrid instruments with own funds (Regeling gelijkstelling hybride instrumenten met eigenvermogensbestanddelen) (Government Gazette 2007, 247), which applied until

9 31 December 2010, have accordingly been incorporated in full in this new Regulation and will therefore continue to apply in full and unchanged after 31 December As a result, some of the alignment between concepts and definitions of core capital on the one hand and supplementary capital on the other will disappear. With a view to expected future regulations (e.g. the proposed CRD IV Directive, implementing the Basel III Capital Accord), DNB has decided to assess and, where necessary, resolve any gaps resulting from this disjunction on a case-by-case basis, inter alia in the form of Q&As. Article 3:1 The limits have now been incorporated in the CEBS Hybrids Guidelines. Article 3:4, paragraph 3 The term initial credit spread is a reference to point 53 of the CEBS Hybrids Guidelines, which reads as follows: 53. Step-ups are permitted, in conjunction with a call option, only if they are considered moderate, i.e. if they result in an increase over the initial rate that is no greater than, either: basis points less the swap spread between the initial index basis and the stepped-up index basis; or - 50% of the initial credit spread less the swap spread between the initial index basis and the stepped-up index basis Article 3:5 If the interest rate step-up exceeds the maximum values, application of the linear interpolation rule must commence no later than five years before the step-up. For all call options whether or not in combination with an interest rate step-up if it transpires during the term of the debt instrument that the call option will almost certainly be exercised, the linear interpolation rule should be applied from the moment that this becomes apparent, with the anticipated exercise date of the call option being taken as the redemption [maturity?] date. Chapter 4 Articles 4:1 The Articles included in chapter 4 relate to procedural provisions as incorporated in Article 4:1 of the Regulation on equating hybrid instruments to own funds (Regeling gelijkstelling hybride instrumenten met eigenvermogensbestanddelen) (Government Gazette 2007, 247). The new third paragraph of Article 4:1 explicitly states that DNB shall take as a basis the prevailing international standards in testing hybrid instruments. Article 5:1 Article 5:1, paragraphs 1 and 2, stipulates that instruments designated by DNB as hybrid instruments on the grounds of the old DNB Manual on the Credit Institutions (Supervision) Act (Wtk) or the (temporary) Regulation on innovative financial instruments and intangible assets (Regeling innovatieve financiële instrumenten en immateriële active) (Government Gazette 2007, 1; lapsed) or the Regulation on equating hybrid instruments to own funds (Regeling gelijkstelling hybride instrumenten met eigenvermogensbestanddelen) (Government Gazette 2007, 247) will continue to qualify as hybrid instruments for the application of the present new DNB Regulation ( grandfathering ). This provision avoids the

10 need to go through a new acceptance procedure during the transition between the successive regulations for hybrid instruments that have already been accepted on the basis of the old Regulation. However, in view of further developments in international standards relating to hybrid instruments, it is conceivable that this grandfathering will be phased out in the future, after a reasonable transitional period. Article 6:2 The date on which this Regulation comes into effect has been set at 31 October 2010, but the actual date on which it enters into force i.e. the date from which this Regulation will first apply has been set at 31 December This means that the acceptance of hybrid capital instruments will not change for financial undertakings in the period before 31 December The report on the fourth quarter of 2010 therefore assumes acceptance of hybrid instruments that were issued before this new Regulation came into force, provided the conditions for acceptance which applied at that time were met. De Nederlandsche Bank N.V., H.J. Brouwer, director.