1 DE NEDERLANDSCHE BANK N.V Policy Rule on Scope of Consolidated and Solo Supervision of Investment Firms and Credit Institutions under the Financial Supervision Act Policy Rule of De Nederlandsche Bank N.V. of 23 July 2008, no. TB/2008/01270/mvdm, regarding the scope of (sub)consolidated supervision and solo supervision of investment firms and credit institutions pursuant to Part 3.6.2 of the Financial Supervision Act (Wet op het financieel toezicht) (Policy Rule on Scope of Consolidated and Solo Supervision of Investment Firms and Credit Institutions under the Financial Supervision Act)
2 CONTENTS 1 Introduction 2 Entry into force 3 Consolidated and subconsolidated supervision 3.1 Substance of consolidated supervision 3.2 Direction of consolidation 3.3 Subconsolidated supervision 3.4 Alternative methods for consolidated supervision of investment firms 3.5 Reporting forms to be submitted under (sub)consolidated supervision 4 Solo supervision 4.1 Substance of solo supervision 4.2 Differences from consolidated approach 4.3 Exemption from solo supervision for licensed subsidiaries 4.4 Exemption from solo supervision for licensed parent undertakings 4.5 Partial waiver from solo supervision for licensed parent undertakings ( solo consolidation ) 4.6 Elaboration of conditions regarding unhampered transfer of own funds and repayment of debts 4.7 Reporting forms to be submitted under solo supervision 5 Procedure for waivers/exemptions 6 Final provisions Annex I: Diagram illustrating the various forms of supervision Annex II: Relevant definitions (in alphabetical order)
3 Policy Rule on Scope of Consolidated and Solo Supervision of Investment Firms and Credit Institutions under the Financial Supervision Act 1 INTRODUCTION The present Policy Rule deals with the scope of (sub)consolidated and solo supervision of investment firms and credit institutions 1 within the framework of the implementation of the recast Banking Directive 2 and the recast Capital Adequacy Directive 3 in the Financial Supervision Act (Wet op het financieel toezicht). For the Dutch statutory framework underlying this Policy Rule, the reader is primarily referred to Chapter 3.6 of the Financial Supervision Act (Wet op het financieel toezicht) (Additional provisions regarding financial groups), and more in particular to Part 3.6.1 (Definitions and general, Sections 3:268 to 3:273) and Part 3.6.2 (Consolidated supervision of investment firms and credit institutions, Sections 3:275 to 3:280b) of the Financial Supervision Act (Wet op het financieel toezicht). Furthermore, for the statutory basis, the reader is also referred to Section 1:29a(1) of the Financial Supervision Act (Wet op het financieel toezicht), notably parts b and c of that subsection. 4 This Policy Rule was presented to the sector for consultation in April 2007 in the form of the Consultative document on the scope of prudential supervision of credit institutions and investment firms of March 2007 (Consultatiedocument reikwijdte prudentieel toezicht op kredietinstellingen en beleggingsondernemingen van maart 2007 (SC02A/NL)). The reactions received as part of that consultation have given rise to additions to alleviate the implementation of solo supervision for the sector, to include some interpretations of the Act and to remove some lack of clarity that had become evident in practice. These additions have all been incorporated into the present Policy Rule. 1 In this Policy Rule, for the sake of brevity, credit institutions and investment firms are referred to collectively as licensed undertakings. For the relevant definitions used in this Policy Rule and in Sections 1:1 and 3:268 of the Financial Supervision Act (Wet op het financieel toezicht), the reader is referred to Annex II to the present Policy Rule. 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 institutions (recast). 3 Directive 2006/49/EC of the European Parliament and of the Council of 14 June 2006 on the capital adequacy of investment firms and credit institutions (recast). The recast Capital Adequacy Directive (CAD) and the recast Banking Directive are sometimes referred to collectively as the Capital Requirements Directives(s) (CRD). 4 Section 1:29a(1) of the Financial Supervision Act (Wet op het financieel toezicht) insofar as relevant for the present purposes reads as follows: 1. De Nederlandsche Bank shall make public the following information: [ ] b. the way in which the Netherlands makes use of the options comprised in the Directives of the European Union that specifically focus on investment firms and credit institutions; c. the general starting points it adopts in utilising the scope in respect of policy which it has by virtue of the provisions under or pursuant to the Prudential Supervision of Financial Undertakings Part; [ ].
4 The sections below clarify the features of (sub)consolidated and solo supervision and describe the operation of the statutory provisions regarding exemptions (also known as general or statutory exemptions) and the provisions regarding waivers. In cases where reference is made to Sections of Acts, the Sections concerned are summarised rather than quoted in their entirety, in order to enhance readability. However, the full texts as included in the Acts are, of course, decisive. This Policy Rule consists for the most part of explanations to the provisions contained in the Financial Supervision Act (Wet op het financieel toezicht). Certain elements of the Policy Rule provide for a policy-based implementation by De Nederlandsche Bank, in cases where the Directives or the applicable statutory provisions leave scope for such implementation. 2 ENTRY INTO FORCE The new rules on the scope of (sub)consolidated and solo supervision form part of the Basel II Capital Accord and the recast Banking Directive and the recast Capital Adequacy Directive. Consequently, for an individual licensed undertaking, the entry into force of these regulations, including the options as described in the present Policy Rule, coincides with the date on which that individual licensed undertaking switched to the rules of the Basel II Capital Accord. The deadline for this switch was 1 January 2008, the date on which Basel I expired definitively. In fact, this means that the present Policy Rule applies retroactively to 1 January 2008. 3 CONSOLIDATED AND SUBCONSOLIDATED SUPERVISION 3.1 Substance of consolidated supervision Consolidated supervision as exercised by De Nederlandsche Bank focuses primarily on Dutch credit institutions or Dutch investment firms which form part of a group and encompasses all elements of pillar 1 (capital charges, including rules regarding large exposures), pillar 2 (supervisory review) and pillar 3 (disclosure and market discipline) of the Basel II Capital Accord and of the rules on controlled operation. Consolidated supervision means supervision on the basis of the consolidated financial position of the credit institution or investment firm subject to prudential supervision. Depending on the structure of the group, consolidation may be at the level of a licensed undertaking or of a financial holding company (for an illustration, see Annex I). Briefly, this means consolidation of holdings in credit institutions, investment firms, financial
5 institutions 5 and undertakings which provide ancillary services 6 pursuant to the Financial Supervision Act (Wet op het financieel toezicht) and the Decree on Prudential Rules for Financial Undertakings (Besluit prudentiële regels Wft). The quantitative statutory criteria regarding declarations of no-objection for qualifying holdings also apply on a consolidated basis, including the limitation of holdings in non-financial undertakings. This is worked out in more detail below. 3.2 Direction of consolidation From the perspective of the licensed undertaking, there are two consolidation directions: I Downward consolidation: the licensed undertaking consolidates (financial) subsidiaries (Section 3:276(1) of the Financial Supervision Act (Wet op het financieel toezicht)). Financial subsidiaries that is, credit institutions, investment firms and financial institutions must be consolidated in full (see Section 3:279(1) of the Financial Supervision Act (Wet op het financieel toezicht)). Excepted from this obligation of full consolidation are financial subsidiaries which are insurance undertakings; in that case, subject to certain conditions, the regime for financial conglomerates may apply (see Part 3.6.4 of the Financial Supervision Act (Wet op het financieel toezicht): Prudential control of financial conglomerates). The obligation of consolidation does apply to undertakings which provide ancillary services as well as to management companies of undertakings for collective investment in transferable securities (see Section 3:279(8) of the 5 According to the definition contained in Section 1:1 of the Financial Supervision Act (Wet op het financieel toezicht), a financial institution is a party, other than a credit institution, that has as its main business the performance of one or more of the activities referred to under 2-12 in Annex I to the recast Banking Directive, or the acquisition and holding of participating interests. The activities referred to under 2-12 in Annex I to the recast Banking Directive are the following: 2) lending; 3) financial leasing; 4) money transmission services (with the entry into force of the Payments Services Directive, to be replaced by payments services as described in article 4, under 3, of Directive 2007/64/EC ); 5) issuing and administering means of payment; 6) guarantees and commitments; 7) trading for own account or for account of customers in money market instruments, foreign exchange, financial futures and options, exchange and interest-rate instruments, or transferable securities; 8) participation in securities issues and the provision of services related to such issues; 9) advice to undertakings on briefly corporate finance; 10) money broking; 11) portfolio management and advice, and 12) safekeeping and administration of securities. These are material descriptions, so that they may also cover undertakings which qualify for the purposes of the Financial Supervision Act (Wet op het financieel toezicht) as, say, a financial service provider, a clearing institution or a money transactions office. 6 The Financial Supervision Act (Wet op het financieel toezicht) (Section 3:268(1), under h, defines an undertaking which provides ancillary services as an undertaking which carries out activities which have the character of support activities in relation to the main activities of an investment firm or credit institution. An undertaking which provides ancillary services may be an undertaking whose purpose is to hold and administer real estate or to manage dataprocessing services.
6 Financial Supervision Act (Wet op het financieel toezicht)). Proportional consolidation may be permitted in the event that the parent undertaking s capital liability is limited, especially in the case of joint ventures. In addition, Section 3:279 of the Financial Supervision Act (Wet op het financieel toezicht) provides for a number of special cases where De Nederlandsche Bank may require consolidation and where it may prescribe the manner in which such consolidation must be effected. In consultation with De Nederlandsche Bank, a subsidiary need not be consolidated if the information required for consolidating the subsidiary is not available, if the subsidiary is of negligible importance, or if consolidation would be misleading in the light of the supervisory objectives (Section 3:270 of the Financial Supervision Act (Wet op het financieel toezicht)). The meaning of negligible importance has been elaborated in more detail in Article 3 of the Decree on Prudential Supervision of Financial Groups (Besluit prudentieel toezicht financiële groepen Wft). In such cases, in the capital adequacy test, the carrying value of the holding must be deducted from the parent undertaking s actual own funds. In addition, minority interests of more than 10% in financial institutions or credit institutions must be deducted from actual own funds, as must minority holdings of less than 10% in financial institutions or credit institutions, to the extent that the sum total of the values of the holdings exceeds 10% of the actual own funds of the licensed undertaking (see Article 94(2) of the Decree on Prudential Rules for Financial Undertakings (Besluit prudentiële regels Wft)). II Upward consolidation: consolidation is effected at the level of the parent financial holding company of the licensed undertaking (Section 3:276(2) and (3) of the Financial Supervision Act (Wet op het financieel toezicht 7 )) Consolidated supervision at the level of the non-licensed parent financial holding company of an investment firm or a credit institution is sometimes referred to as holding company supervision. This form of supervision implies that all prudential supervisory rules, as indicated in section 3.1 of the present Policy Rule, apply to the consolidated financial position of the parent financial holding company. An exception is constituted by the rules regarding declarations of no-objection for acquiring or increasing qualifying holdings in briefly non-financial undertakings. In such cases, it is incumbent upon the bank having its registered office in the Netherlands which wishes to 7 Also see the repairs to Section 3:276(2) and (3) of the Financial Supervision Act (Wet op het financieel toezicht), as provided for in the Financial Supervision Act Repairs Bill (Reparatiewet Wft) (Second Chamber of Parliament II, 2007-2008, 31 468, no. 2, Section I, Part MMMMM): In Section 3:276(2) and (3), the phrase «a Dutch parent financial holding company» is replaced in each instance by «a parent financial holding company».
7 acquire or increase the qualifying holding concerned to obtain a declaration of no-objection (Section 3:96(1), under c, of the Financial Supervision Act (Wet op het financieel toezicht)). However, the question as to whether the quantitative criteria for non-financial qualifying holdings are satisfied (see Article 120 of the recast Banking Directive and Article 140 of the Decree on Prudential Rules for Financial Undertakings (Besluit prudentiële regels Wft)) is assessed on the basis of the consolidated financial position of the parent financial holding company (this follows from the reference in Section 3:276(2) of the Financial Supervision Act (Wet op het financieel toezicht) to Section 3:96(1), under c, of the same Act). 8 A financial holding company is a financial institution which, exclusively or mainly, has investment firms, credit institutions or financial institutions as its subsidiaries, including at least one investment firm or credit institution, and which is not a mixed-activity financial holding company (see the definition in Section 3:268(1), under d, of the Financial Supervision Act (Wet op het financieel toezicht)). The Act does not provide for a precise quantification of the concept mainly. In its interpretation of mainly, De Nederlandsche Bank relies on the principle that a financial institution qualifies as a financial holding company if it heads a group which, measured in terms of balance sheet total, consists to the extent of more than 80% of financial institutions (subsidiary plus parent undertaking), investment firms (subsidiaries) and credit instructions (subsidiaries). 9 For the sake of clarity, it is noted that financial holding companies include those which merely have a single credit institution or a single investment firm as a subsidiary as well as those which have several subsidiaries, only one of which is a (large) credit institution or investment firm. In brief, in case the parent financial holding company of a Dutch licensed undertaking has its registered office in the Netherlands, De Nederlandsche Bank bears responsibility for holding company supervision. If the parent financial holding company of a Dutch licensed undertaking has its registered office in another Member State of the European Economic Area (EEA), Section 3:275 of the Financial Supervision Act (Wet op het financieel toezicht) provides for a number of criteria 8 The total acquisition price of an individual non-financial qualifying holding may not amount to more than 15% of the consolidated actual own funds. For all non-financial qualifying holdings combined, the maximum is 60% of consolidated actual own funds (Article 140 of the Decree on Prudential Rules for Financial Undertakings (Besluit prudentiële regels Wft)). It should be noted that qualifying holdings of a bank having its registered office in the Netherlands in a management company of a undertaking for collective investment in transferable securities or in an undertaking which provides ancillary services are not counted towards the limits set in Article 140 of the Decree on Prudential Rules for Financial Undertakings (Besluit prudentiële regels Wft); this follows from Article 120 of the recast Banking Directive. 9 See the (first) Memorandum of Alterations to the Financial Supervision Bill (Second Chamber of Parliament II, 2004-2005, 29 708, no. 10, page 361).
8 determining which supervisory authority is responsible for consolidated supervision. Finally, the parent financial holding company of a Dutch licensed undertaking may have its registered office in a third country; in that case the equivalence 10 of the supervision in that country with European consolidated supervision is decisive. Hence, in order to establish which supervisory authority is responsible for consolidated supervision of international banking groups, the following classification may be used: Parent undertaking heading the group having its registered office within the EEA (Section 3:275 of the Financial Supervision Act (Wet op het financieel toezicht)) Parent financial holding company in the Netherlands having as its subsidiary a Dutch licensed undertaking as well as one or more licensed subsidiaries in another Member State De Nederlandsche Bank is competent to exercise holding company supervision. Parent financial holding company in another Member State having as its subsidiary a Dutch licensed undertaking and no other licensed subsidiaries in another Member State 11 De Nederlandsche Bank is competent to exercise holding company supervision. Parent financial holding company in Member State A having in addition to the Dutch licensed subsidiary a licensed subsidiary in Member State B the competent supervisory authority is De Nederlandsche Bank or the supervisory authority of Member State B, depending on which licensed subsidiary has the highest balance sheet total. Financial parent undertaking in both the Netherlands and another Member State having a licensed subsidiary in both the Netherlands and that other Member State, both licensed subsidiaries being subsidiaries of both parent financial holding companies De Nederlandsche Bank is competent to exercise holding company supervision, if the balance sheet total of the Dutch licensed subsidiary exceeds that of the licensed subsidiary in the other Member State. 10 In principle, the equivalence of the supervision exercised in third countries is assessed at the European level, but it may also be reviewed by individual supervisory authorities that have dealings with a certain financial holding company. Equivalence of consolidated supervision has at any rate been established for the Swiss and the US supervisory authorities. 11 In this respect, see the repairs to Section 3:275(2) of the Financial Supervision Act (Wet op het financieel toezicht), as provided for in the Financial Supervision Act Repairs Bill (Reparatiewet Wft) (Second Chamber of Parliament II, 2007-2008, 31 468, no. 2, Section I, Part LLLLL, opening sentence and under 1.): Section 3:275 is amended as follows: 1. In the second subsection, the phrase «a Dutch parent financial holding company or a Dutch EU parent financial holding company» is replaced by «a parent financial holding company or an EU parent financial holding company».
9 In consultation with the foreign supervisory authorities concerned, the criteria referred to under the third and fourth bullets may, if necessary, be departed from (see Article 126(3) of the recast Banking Directive 12 ). Licensed parent undertaking of the Dutch licensed undertaking is established in another Member State the competent supervisory authority of that other Member State exercises consolidated supervision over the licensed parent undertaking having its registered office in that Member State. In addition, De Nederlandsche Bank is the supervisory authority for the Dutch licensed subsidiary, on the basis of the latter s consolidated financial position. Parent undertaking heading the group having its registered office outside the EEA (Section 3:277 of the Financial Supervision Act (Wet op het financieel toezicht)) Parent financial holding company or licensed parent undertaking of a Dutch licensed undertaking is subject to consolidated supervision in a third country where the supervision is considered equivalent to European consolidated supervision consultation with the supervisory authority of the third country concerned about exchange of information is essential. Parent financial holding company or licensed parent undertaking of a Dutch licensed undertaking is established in a third country where the supervision is not considered equivalent to European consolidated supervision De Nederlandsche Bank may in consultation with other European supervisory authorities involved decide to apply other supervisory methods, such as holding company supervision in the third country, consolidated supervision of the European business and/or ring-fencing (isolating capital from outside risks). It should be noted that the rules regarding consolidated supervision apply to financial holding companies and not to other kinds of holding companies. Other types of holding companies for 12 Owing to a translation error in the Dutch-language version of Article 126(3) of the recast Banking Directive, this part of that Article has not been implemented in an entirely correct manner in Section 3:275(6) to (8) of the Financial Supervision Act (Wet op het financieel toezicht). This is being remedied by way of the Financial Supervision Act Repairs Bill (Reparatiewet Wft) (Second Chamber of Parliament II, 2007-2008, 31 468, no. 2, Section I, Part LLLLL, opening sentence and Parts 2. to 4.): 2. In subsection 6 the phrase «if the relative importance of carrying on the business of the financial undertaking concerned in a certain Member State so necessitates» is replaced by «if the nature and the size of the investment firm or credit institution concerned or the relative importance of its operations in various Member States so necessitate». A similar repair will be effected for Section 3:275(8) of the Financial Supervision Act (Wet op het financieel toezicht).
10 which the recast Banking Directive and the Financial Supervision Act (Wet op het financieel toezicht) provide specific supervisory regimes are insurance holding companies, mixed-activity financial holding companies (which head a financial conglomerate 13 ), mixed-activity insurance holding companies and mixed-activity holding companies. Mixed-activity holding companies are not subject to consolidated supervision, but must report their intra-group transactions (see Section 3:280 of the Financial Supervision Act (Wet op het financieel toezicht)). The obligation to make consolidated supervision possible at the level of the parent financial holding company has been imposed in a legal sense on the licensed undertaking (see Section 3:276(2) and (3) of the Financial Supervision Act (Wet op het financieel toezicht)). Hence, the latter must ensure that the holding company satisfies the requirements of consolidated supervision (such as submitting reports and permitting reviews) and may be called to account in that respect. Moreover, a financial holding company having its registered office in the Netherlands which is subject to consolidated supervision may be called to account directly where the full consolidation of its (financial) subsidiaries is concerned (see Section 3:279(1) of the Financial Supervision Act (Wet op het financieel toezicht)). 3.3 Subconsolidated supervision In the legislation, a distinction is made between consolidation and subconsolidation: Consolidation: at the top of the group at the level of the (Dutch) parent investment firm, the (Dutch) parent credit institution or the (Dutch) parent financial holding company. Subconsolidation (see Section 3:277a of the Financial Supervision Act (Wet op het financieel toezicht)): at the level of the Dutch licensed subsidiaries of a Dutch licensed parent undertaking or a (Dutch) parent financial holding company. Moreover, by contrast with consolidation, subconsolidation only comes into view in the event of financial subsidiaries having their registered office outside the EEA (for an illustration, see Annex 1). Consolidation at the level of the (Dutch) parent undertaking (licensed undertaking or financial holding company) is always required. Section 3:277a(1) of the Financial Supervision Act (Wet op 13 The exercise of supervision over financial conglomerates (see Part 3.6.4 of the Financial Supervision Act (Wet op het financieel toezicht)), that is, the supervision of banks and/or investment firms and insurers at a higher level within the group, does not affect the prescribed scope of the consolidated supervision of the banks and/or investment firms within the group pursuant to Part 3.6.2 of the Financial Supervision Act (Wet op het financieel toezicht)).
11 het financieel toezicht) states the conditions under which subconsolidation is required. Dutch licensed subsidiaries of a Dutch licensed parent undertaking or of a (Dutch) parent financial holding company are subject to subconsolidated supervision if: (a) (b) they themselves have financial subsidiaries (a management company of an undertaking for collective investment in transferable securities, an investment firm, a financial institution or a credit institution) having their registered office outside the EEA or if they have holdings in such financial undertakings having their registered office outside the EEA, or if their parent undertaking is a financial holding company and that holding company in turn has financial subsidiaries having their registered office outside the EEA or has holdings in such financial undertakings having their registered office outside the EEA. In that case, the scope of the subconsolidated supervision covers the parent financial holding company and its financial subsidiaries and holdings, including those having their registered office outside the EEA. 14 The financial subsidiaries or holdings outside the EEA include both direct and indirect interests (see Section 3:268(1), under b, and (2) of the Financial Supervision Act (Wet op het financieel toezicht)). It should be noted that (contrary to the rules under the Basel I Capital Accord) the new regime regarding subconsolidation no longer provides for the possibility of exemption from subconsolidation on the basis of a guarantee issued by the parent undertaking pursuant to Article 403 of Volume 2 of the Dutch Civil Code (Burgerlijk Wetboek) (hereinafter referred to as a 403 guarantee ). However, such guarantees still play a role in the policy governing exemptions and waivers from solo supervision (see Chapter 4). 3.4 Alternative methods for consolidated supervision of investment firms For investment firms forming part of a financial group, specific possibilities have been created permitting waivers to be granted at the consolidated level, depending on the composition of the group concerned (Section 3:280b of the Financial Supervision Act (Wet op het financieel toezicht)). 14 Also see questions 8 and 324 in the Q&A regarding Directive 2006/48/EC of the Capital Requirements Directive Transposition Group (http://ec.europa.eu/internal_market/bank/regcapital/transposition_en.htm, under Questions which have been answered ).
12 These waivers provide for an alternative method of supervision. The possibilities for obtaining waivers are described in Articles 4a, 4b and 4c of the Decree on Prudential Supervision of Financial Groups (Besluit prudentieel toezicht financiële groepen Wft). An waiver under Article 4b or 4c of the Decree on Prudential Supervision of Financial Groups (Besluit prudentieel toezicht financiële groepen Wft) is not possible in the case of a group including both investment firms and credit institutions. I Waiver under Article 4a of the Decree on Prudential Supervision of Financial Groups (Besluit prudentieel toezicht financiële groepen Wft) Provided the following statutory conditions are satisfied, De Nederlandsche Bank may permit the minimum required own funds of the parent financial holding company to be equated with: (a) the sum total of the values of the financial holdings, plus the subordinated loans and other liabilities to the financial holdings that would otherwise be included in the consolidation, or (b) the sum total of the minimum amount of the required own funds, calculated in accordance with the rules contained in the Decree on Prudential Rules for Financial Undertakings (Besluit prudentiële regels Wft), of the financial holdings that would otherwise be included in the consolidation. In addition, irrespective of whether method a or method b is chosen, each investment firm within the group must individually satisfy the requirements of pillar 1 and pillar 2. Moreover, each investment firm within the group must have a system in place for controlling the risks and the capital adequacy (sources of liabilities) of all components of the group. For such a waiver to be granted, the following conditions must be satisfied: (a) all investment firms within the group calculate actual own funds in the alternative manner provided for in Article 90(2) of the Decree on Prudential Rules for Financial Undertakings (Besluit prudentiële regels Wft), and
13 (b) (c) all investment firms within the group are so-termed 50k 15 or 730k 16 undertakings using an alternative method for calculating the capital charge against operational risk, and all investment firms within the group satisfy the conditions of Article 62 of the Decree on Prudential Rules for Financial Undertakings (Besluit prudentiële regels Wft), the contingent liabilities to financial holdings which would otherwise be included in the consolidation being deducted. II Waiver pursuant to Article 4b of the Decree on Prudential Supervision of Financial Groups (Besluit prudentieel toezicht financiële groepen Wft) De Nederlandsche Bank may grant permission to parent investment firms and parent financial holding companies to calculate required own funds as the sum total of the capital charges against credit and market risk (so exclusive of operational risk) or the fixed-cost requirement, whichever is higher, both calculated on the basis of the consolidated position of the parent investment firm or the parent financial holding company. For such permission to be granted, the following conditions must be satisfied: (a) all investment firms within the group are so-termed 50k undertakings 17 exempted from operational risk, and (b) each investment firm within the group holds actual own funds equal to the sum total of the capital charges against credit and market risk or the fixed-cost requirement, whichever is higher. Such a waiver ensures that the exemption for operational risk for individual investment firms also applies to the parent investment firm or parent financial holding company on the basis of its consolidated position. III Waiver pursuant to Article 4c of the Decree on Prudential Supervision of Financial Groups (Besluit prudentieel toezicht financiële groepen Wft) 15 As referred to in Article 48(1), under g and h, of the Decree on Prudential Rules for Financial Undertakings (Besluit prudentiële regels Wft), as this article has been amended, effective 1 November 2007, by the Decree on Regulated Markets (Besluit gereglementeerde markten Wft) (Bulletin of Acts, Orders and Decrees (Staatsblad) 2007, 407). 16 As referred to in Article 48(1), under i, j and k, of the Decree on Prudential Rules for Financial Undertakings (Besluit prudentiële regels Wft), as this article has been amended, effective 1 November 2007, by the Decree on Regulated Markets (Besluit gereglementeerde markten Wft) (Bulletin of Acts, Orders and Decrees (Staatsblad) 2007, 407). 17 See footnote 15.
14 De Nederlandsche Bank may grant permission to parent investment firms and parent financial holding companies to calculate required own funds as the sum total of the capital charges against credit and market risk plus the fixed-cost requirement, both calculated on the basis of the consolidated position of the parent investment firm or the parent financial holding company. For such permission to be granted, the following conditions must be satisfied: (a) (b) (c) all investment firms within the group are so-termed 50k or 730k undertakings 18 using an alternative method for calculating the capital charge against operational risk, and each 50 k investment firm within the group holds actual own funds equal to the sum total of the capital charges against credit and market risk or the fixed-cost requirement, whichever is higher, and each 730k investment firm within the group holds actual own funds equal to the sum total of the capital charges against credit and market risk plus the fixed-cost requirement. Such a waiver ensures that the alternative calculation of the capital charge against operational risk for individual 703k investment firms is also permitted to the parent investment firm or parent financial holding company on the basis of its consolidated position. 3.5 Reporting forms to be submitted under (sub)consolidated supervision In the case of consolidated and subconsolidated supervision, the following must be reported: Pillar I (including the large-exposures rule): Under this pillar, the COREP/FINREP reporting forms, form 8011 (Large exposures) and form 8040 (Declaration) as provided for in the Supervisory Regulation on Reporting Forms for Financial Undertakings (Regeling staten financiële ondernemingen Wft) must be submitted. 19 Most reporting forms must be submitted quarterly, within one month of the end of the quarter concerned. By way of transitional arrangement, De Nederlandsche Bank has decided to reduce the frequency of submission of the reporting forms for subconsolidated supervision temporarily to twice a 18 See footnotes 15 and 16. 19 For the sake of completeness, it might be noted that the Supervisory Regulation on Reporting Forms for Financial Undertakings (Regeling staten financiële ondernemingen Wft) also mentions a number of other reporting forms, such as form 8017 (Fixed-assets rule) and forms 8028 and 8029 (Liquidity). These reporting forms do not form part of the Basel II Capital Accord and, hence, are not covered by the scope of the present Policy Rule. For these other reporting forms, the present manner of reporting remains in full force and effect.
15 year. This is the minimum frequency as laid down in the recast Banking Directive (Article 74(2)). This temporary arrangement will be applicable throughout 2008. Pillar 2: The manner in which undertakings must implement pillar 2 has been laid down in a separate Policy Rule. 20 In that Policy Rule, De Nederlandsche Bank stresses the performance of the Supervisory Review and Evaluation Process` (hereinafter referred as the SREP) on a consolidated basis. In addition, the Supervisory Regulation on Reporting Forms for Financial Undertakings (Regeling staten financiële ondernemingen Wft) prescribes a number of reporting forms, with submission frequencies and submission deadlines. Pillar 3: The relevant rules apply at the level of the European parent undertaking instead of that of the national parent undertaking, because pillar 3 only concerns EU parent investment firms, EU parent credit institutions, EU parent financial holding companies as well as significant licensed subsidiaries (Section 3:280a of the Financial Supervision Act (Wet op het financieel toezicht)). Under pillar 3, the undertaking must disclose the data referred to in Annex XII, Parts 2 and 3, of the recast Banking Directive at least once a year. Before the end of the financial year to which the data relate, the undertaking must provide De Nederlandsche Bank with a description of the manner in which it intends to disclose the data and of the manner in which and the frequency with which it will verify the correctness of the data (Section 3:74a(3) of the Financial Supervision Act (Wet op het financieel toezicht)). A special arrangement is in force for significant Dutch licensed subsidiaries that is, significant from the national perspective of a parent investment firm, a parent credit institution or a parent financial holding company. These significant subsidiaries in the Netherlands need only disclose a subset of the full disclosure package (see Article 72 of the recast Banking Directive). 21 20 See the Policy Rule setting out the principles of the application of pillar 2 of the Basel II Capital Accord (Beleidsregel uitgangspunten toepassing tweede pijler Kapitaalakkoord Bazel 2) of De Nederlandsche Bank, dated 15 July 2008 (available on the website of De Nederlandsche Bank). 21 See also the repair to Section 3:280a(2) of the Financial Supervision Act (Wet op het financieel toezicht), as provided for in the Financial Supervision Act Repairs Bill (Reparatiewet Wft) (Second Chamber of Parliament II, 2007-2008, 31 468, no. 2, Section I, Part OOOOO): In Section 3:280a(2) the phrase «to the extent that it concerns the data referred to in Annex XII, Part 2, points 3 and 4, of the recast Banking Directive» is inserted after the phrase «meant in Section 3:74a, first subsection,».
16 In individual cases, in consultation with De Nederlandsche Bank, a different reporting regime may be agreed upon, where necessary relying on the possibilities for granting waivers as provided for in the Financial Supervision Act (Wet op het financieel toezicht) (see, among other provisions, Section 3:57(6) in conjunction with Section 3:72(2) or Section 3:72(8)). The aim should always be to ensure that the objectives which the relevant provisions seek to achieve are achieved in a different manner, for instance by subjecting a waiver to regulations or restrictions. 4 SOLO SUPERVISION 4.1 Substance of solo supervision In principle, each licensed undertaking subject to consolidated supervision is also subject to solo supervision. Solo supervision concerns pillar 1 (including the large-exposures rule). Solo supervision is based on the company balance sheet 22 (for an illustration, see Annex I). In that balance sheet, holdings in subsidiaries and receivables from and liabilities to these subsidiaries are included on a non-consolidated basis. 4.2 Differences from consolidated approach The solo approach potentially leads to major differences compared to the consolidated approach, especially where the capital adequacy test is concerned. One major element concerns the treatment of financial subsidiaries, including subsidiary credit institutions and subsidiary investment firms, and receivables from these subsidiaries. I Consolidated holdings Article 60 of the recast Banking Directive offers the Member States a possibility for non-deduction from actual own funds of holdings in and subordinated claims on credit institutions, financial institutions, insurance undertakings, insurance holding companies or reinsurance undertakings that are covered by the scope of the supervision on a consolidated basis or of the supplementary 22 In the event that, in its turn, a licensed undertaking has no financial subsidiaries, solo supervision coincides with consolidated supervision of that licensed undertaking, covering the elements listed in section 3.1 (Substance of consolidated supervision).
17 supervision of financial conglomerates. 23 In the Netherlands, this scope for national discretion has been implemented in Article 94(7) of the Decree on Prudential Rules for Financial Undertakings (Besluit prudentiële regels Wft). For undertakings that avail themselves of this possibility, these holdings are assigned a risk weight of 400%. 24 This has been laid down in the Supervisory Regulation on Solvency Requirements for Credit Risk (Regeling solvabiliteitseisen voor het kredietrisico) (in this context, see Articles 2:22, 2:53 and 3:26), as these provision now read after the implementation of the Clean-up Regulation for Supervisory Regulations (Veegregeling toezichthouderregelingen DNB) of 10 December 2007 (Government Gazette (Staatscourant) 2007, 245). 25 II Intra-group exposures In principle, exposures to group companies which are included in the company balance sheet but which are not included in the consolidated balance sheet are weighted in accordance with the Supervisory Regulation on Solvency Requirements for Credit Risk (Regeling solvabiliteitseisen voor het kredietrisico) (see Section 2.2 Risk weights). An exception is constituted by the scope for national discretion under the recast Banking Directive regarding intra-group exposures (see Article 80(7) of the recast Banking Directive). This scope for national discretion has not yet been used in the Dutch regulations, but it will be used in the future by means of the Financial Supervision Act Repairs Decree (Reparatiebesluit Wft). Pending this repair, the text of Article 87(7) of the recast Banking Directive is decisive. The following may serve as an illustration. Under Article 80(7) of the recast Banking Directive, a 0% risk weight may be assigned to intra-group exposures (provided they do not form part of own funds), if the following conditions are satisfied: (a) the counterparty is subject to prudential requirements, and 23 Hence, in the context of solo supervision, non-consolidated financial holdings, including minority holdings in financial undertakings, remain subject to the deduction arrangement. 24 This 400% risk weight represents the total of 370%, being the risk weight for other equity exposures under the simplified risk weight approach (Article 3:27 of the Supervisory Regulation on Solvency Requirements for Credit Risk (Regeling solvabiliteitseisen voor het kredietrisico), and 30%, being the percentage for provisions shortfall for expected loss (= 2.4% * 12.5). The addition of 30% is based on Article 3:37(1) of the Supervisory Regulation on Solvency Requirements for Credit Risk (Regeling solvabiliteitseisen voor het kredietrisico). The factor of 2.4% represents the expected loss amount for all other equity exposures, while the factor 12.5 represents the translation of the resulting capital charge to risk-weighted assets (= 1/8%). 25 The Clean-up Regulation for Supervisory Regulations (Veegregeling toezichthouderregelingen DNB) entered into force on 20 December 2007, retroactively to 1 January 2007 (see Article V).
18 (b) (c) (d) (e) the counterparty is included in the same consolidation on a full basis, and the counterparty is subject to the same risk management, and the counterparty is established in the same Member State, and there are no impediments to the transfer of own funds or the repayment of liabilities by the counterparty. In principle, the possibility to assign a 0% risk weight forms part of the standardised approach but, with the consent of De Nederlandsche Bank, it may also be used under the IRB approach pursuant to the carve-out provision in the recast Banking Directive (see Article 89(1), under e). III Guarantees Any guarantees issued in behalf of subsidiaries are also included in the solo capital adequacy test. This follows from the fact that mutual guarantees are not eliminated in a company balance sheet contrary to a consolidated balance sheet but take the form of off-balance sheet liabilities. 26 IV Large exposures Finally, it is important to note that the large-exposures rule (which is included in Chapter 7 of the Supervisory Regulation on Solvency Requirements for Credit Risk (Regeling solvabiliteitseisen voor het kredietrisico)) does not apply to exposures incurred by a financial undertaking to its parent undertaking, to other subsidiaries of that parent undertaking or to its own subsidiaries, insofar as those undertakings are covered by the supervision on a consolidated basis (Article 7:8(1) of the Supervisory Regulation on Solvency Requirements for Credit Risk (Regeling solvabiliteitseisen voor het kredietrisico)). This also applies to large exposures incurred to undertakings covered by consolidated supervision in another Member State or a third country (that is, a state outside the EEA), provided that equivalent consolidated supervisory standards are in force in that third country. 27 26 In the event of solo consolidation (see section 4.5), however, mutual guarantees are eliminated as a result of the consolidation. This elimination as a result of solo consolidation also applies to intra-group exposures. 27 See Article 113(2) of the recast Banking Directive.
19 4.3 Exemption from solo supervision for licensed subsidiaries In respect of solo supervision, there are various general exemptions as well as possibilities for obtaining individual waivers. These are discussed below: I A Dutch licensed subsidiary of a licensed Dutch parent undertaking is exempted from solo supervision (Section 3:278(1) of the Financial Supervision Act (Wet op het financieel toezicht)), if the following conditions are satisfied: (a) the subsidiary is covered by the scope of the consolidated supervision and, like the parent undertaking, is supervised by De Nederlandsche Bank, and (b) there are no factual or legal obstacles to the transfer of own funds or the repayment of debts by the parent undertaking to the subsidiary, and (c) the parent undertaking ensures prudent operation of the subsidiary and guarantees the subsidiary s liabilities (for instance, by means of a 403 guarantee), or the risks with regard to the subsidiary are negligible, and (d) the subsidiary has been integrated into the parent undertaking s risk management, and (e) the parent undertaking has more than fifty per cent of the voting rights in the subsidiary and is entitled to appoint or dismiss the majority of the subsidiary s management. In respect of cases where a 403 guarantee as referred to under condition (c) above constitutes the basis for exempting a Dutch licensed subsidiary from solo supervision, the following should be noted. De Nederlandsche Bank must, if it so wishes, be enabled to verify, on the basis of the relevant documentation, whether the scope of the 403 guarantee is sufficient to warrant exemption from solo supervision for the subsidiary concerned. In that context, it should be realised that a 403 guarantee provides for joint and several liability for the debts ensuing from the subsidiary s legal acts, and that, in principle, the scope of a 403 guarantee is limited to legal acts performed after its issue. Furthermore, De Nederlandsche Bank assumes that the parent undertaking which has issued the 403 guarantee ensures invariable compliance with the obligation to deposit the guarantee and the appurtenant documents with the Trade Register of the Chamber of Commerce (Handelsregister) (see Article 403(1), under g, of Volume 2 of the Dutch Civil Code (Burgerlijk Wetboek)) as well as with the other obligations ensuing from the 403 guarantee. When a 403 guarantee is revoked, the same applies to the obligations under Article 404 of Volume 2 of the Dutch Civil Code (Burgerlijk
20 Wetboek). De Nederlandsche Bank assumes that it will be informed in good time by the undertakings concerned of any intention to revoke or limit a 403 guarantee, due allowance being made for the procedure for lodging objections as provided for in Article 404 of Volume 2 of the Dutch Civil Code (Burgerlijk Wetboek). In principle, the foregoing also applies to any other forms of guarantee that constitute the basis for an exemption from solo supervision under Section 3:278(1) of the Financial Supervision Act (Wet op het financieel toezicht). II A Dutch licensed subsidiary of a financial holding company having its registered office in the Netherlands is exempted from solo supervision (Section 3:278(2) of the Financial Supervision Act (Wet op het financieel toezicht)), if, in addition to the five conditions listed above, the following condition is satisfied: (f) the financial holding company is subject to similar consolidated supervision as a licensed undertaking. This means that the Dutch financial holding company must at any rate be included in the consolidated supervision of the Dutch licensed subsidiary. 4.4 Exemption from solo supervision for licensed parent undertakings Section 3:278(3) of the Financial Supervision Act (Wet op het financieel toezicht) provides for the possibility of exempting a Dutch parent investment firm or Dutch parent credit institution from solo supervision if all subsidiaries of that parent undertaking satisfy the following conditions: (a) (b) (c) each subsidiary is included in the consolidation by the Dutch parent undertaking, and there are no obstacles to the transfer of own funds or the repayment of debts by the subsidiaries to the parent undertaking, and the parent undertaking has been integrated into the group s risk management. 4.5 Partial waiver from solo supervision for licensed parent undertakings ( solo consolidation ) The partial waiver in the form of solo consolidation (Section 3:278a of the Financial Supervision Act (Wet op het financieel toezicht)) permits, by way of exception, certain subsidiaries to be consolidated in the solo capital adequacy test of the licensed parent undertaking. Hence, as a result of this waiver, the balance sheet for the capital adequacy test is mainly solo, with a few