Circular 2/2014 of the CNMV on the exercise of regulatory options regarding solvency for investment firms and their consolidatable groups

BOLETÍN OFICIAL DEL ESTADO Núm. 157 Sábado 28 de junio de 2014 Sec. I. Pág. 49780 I. GENERAL PROVISIONS COMISIÓN NACIONAL DEL MERCADO DE VALORES 6768 Circular 2/2014, of June 23, of the National Securities Market Commission, on the exercise of various regulatory options regarding solvency for investment service firms and their consolidatable groups.

STATEMENT OF MOTIVES By means of a declaration and with the aim of strengthening the financial system, in April 2009 the G-20 requested the adoption of coherent measures at the international level that would reinforce transparency, accountability, and regulation, increasing the quantity and quality of capital in the financial system, as well as the adoption of a series of other measures aimed at limiting leverage and creating the appropriate framework to develop stricter liquidity requirements. In response to the mandate granted by the G-20, the Group of Governors of Central Banks and Heads of Supervision agreed on a series of regulatory strengthening measures for the financial sector, which, with the backing of G-20 leaders and once calibrated, were published in December 2010 by the Basel Committee on Banking Supervision and are known as the Basel III regulatory framework.

The High-Level Group on Financial Supervision in the European Union invited the Union to develop more harmonized financial regulation, and the European Council also emphasized the need to create a single European regulatory code applicable to all credit institutions and investment firms in the internal market.

Directives 2006/48/EC and 2006/49/EC of the European Parliament and of the Council, which regulated respectively the access to the activity of credit institutions and its exercise, and the capital adequacy of investment firms and credit institutions, were substantially modified on several occasions since their publication, through Directives 2009/27/EC of the Commission and 2009/111/EC and 2010/76/EU of the European Parliament and of the Council, which included common provisions applicable to both credit institutions and investment service firms. Thus, Circular 12/2008, of December 30, of the National Securities Market Commission was modified on two occasions, through Circulares 1/2011 and 5/2011, to adapt it to the aforementioned Directives.

For reasons of clarity and with the object of guaranteeing a coherent application of these provisions, at the European level these matters have been gathered into new legislative acts, giving rise, on the one hand, to Directive 2013/36/EU, of June 26, 2013, of the European Parliament and of the Council, on access to the activity of credit institutions and on the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC, and, on the other hand, to Regulation (EU) No 575/2013 of the European Parliament and of the Council, of June 26, 2013, on prudential requirements for credit institutions and investment firms, and amending Regulation (EU) No 648/2012.

The approval and publication in the "Official Journal of the European Union" of Regulation (EU) No 575/2013 and Directive 2013/36/EU has given rise to various regulatory initiatives. Thus, on November 30 last, Royal Decree-Law 14/2013, of November 29, on urgent measures for the adaptation of Spanish law to European Union regulation regarding the supervision and solvency of financial entities, was published, which modified, among others, Law 24/1988, of July 28, on the Securities Market, in the matters considered essential and most urgent for the application of this regulation from January 1, 2014.

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BOLETÍN OFICIAL DEL ESTADO Núm. 157 Sábado 28 de junio de 2014 Sec. I. Pág. 49781 In addition to the aforementioned Royal Decree-Law, both the draft law on the organization, supervision, and solvency of credit institutions, whose parliamentary processing is about to conclude, includes a final provision that extensively modifies the Securities Market Law, as well as the draft royal decree, which modifies Royal Decree 217/2008, of February 15, on the legal regime of investment service firms and other entities providing investment services, and partially modifies the Regulation of Law 35/2003, of November 4, on Collective Investment Institutions, approved by Royal Decree 1309/2005, of November 4, completing the incorporation into our law of Directive 2013/36/EU, of June 26, 2013.

Despite the extensive content of Regulation (EU) No 575/2013, a multitude of options to be determined by competent authorities are foreseen, in such varied matters as the scope of application, the definition of own funds, the own fund requirements for different risks, large exposures, liquidity coverage, and transitional provisions.

For the development of these options attributed to competent authorities, the fifth final provision of the aforementioned Royal Decree-Law 14/2013, of November 29, on competence delegation, provides that the National Securities Market Commission may make use of the options attributed to national competent authorities in Regulation (EU) No 575/2013, thus authorizing the CNMV for the development of the present Circular.

The object of this Circular is to regulate, in accordance with the conferred powers, the options that Regulation No 575/2013 attributes to national competent authorities, applicable to consolidatable groups of investment service firms and to Spanish investment service firms integrated or not in a consolidatable group, relating to those matters considered necessary for the application of the aforementioned Regulation (EU) No 575/2013 from January 1, 2014, without prejudice to the possibility that in the future other provisions not foreseen in this Circular may be considered useful for investment service firms or their groups.

In particular and once the scope of application is defined in the first rule, in the second rule, certain investment service firms and their consolidatable groups are exempted from complying with the liquidity requirements established by Regulation (EU) No 575/2013 in its sixth part, pending the report that the European Commission will prepare, no later than December 31, 2015, on the convenience of applying these requirements to the investment service firm sector. Investment service firms must continue to apply the liquidity coefficient established in Circular 7/2008, of November 26, of the National Securities Market Commission.

In the third and fourth rules, the treatment of certain holdings in financial entities and of qualifying holdings in non-financial entities, respectively, is regulated for the purposes of calculating own fund requirements. Through the fifth rule, in order to guarantee the solvency of entities, no exception is allowed for any investment service firm to be exempted from the requirement to maintain at all times own funds equal to or greater than the initial capital amount required at the time of its authorization. In the sixth rule, the treatment that entities must apply for the purposes of assessing whether their activity has changed significantly compared to the previous exercise is specified, until the entry into force of regulatory technical standards on this matter being prepared by the European Banking Authority.

On the other hand, through the seventh rule, credit institutions are regulated, by reference to Circular 2/2014, of January 31, of the Bank of Spain, on the exercise of various regulatory options contained in Regulation (EU) No 575/2013 of the European Parliament and of the Council, of June 26, 2013, on prudential requirements for credit institutions and investment firms, and amending Regulation (EU) No 648/2012, as well as other circulars that, on these matters, the Bank of Spain may publish in the future as development of Regulation (EU) No 575/2013, certain discretions associated with the calculation of own fund requirements for credit risk, more specifically, those relating to advanced methods for calculating these requirements, to credit risk mitigation techniques, and to securitizations. In the eighth rule, the method that entities must use for the determination of the value of certain exposures in relation to counterparty risk coverage is determined. Through the ninth rule, the treatment that entities must continue to apply to positions in stock indices until the entry into force of regulatory technical standards on this matter being prepared by the European Banking Authority is specified.

In the tenth rule, certain aspects regarding large exposures are regulated. Specifically, on the one hand, the treatment of positions held in collective investment undertakings or in other exposures with an equivalent level of diversification is regulated, on which their underlying positions must be evaluated, and on the other hand, the exemption of certain exposures that Regulation (EU) No 575/2013 leaves to the discretion of the competent authority is regulated. In the eleventh rule, it is specified that the submission of information to the National Securities Market Commission by entities will be carried out using the electronic means of the CIFRADOC/CNMV Service, in accordance with the formats, frequencies, communication dates, definitions, and computer solutions approved by the European Commission.

A single additional provision is included in the Circular in order to specify the place and deadline for publication of the "Solvency Report" by entities, with the content foreseen in the eighth part of Regulation (EU) No 575/2013.

The single transitional provision regulates the transitional regime for certain matters that Regulation (EU) No 575/2013 leaves to the discretion of competent authorities. Given the characteristics of the investment service firm sector, for which much of these matters are not particularly relevant, the National Securities Market Commission has opted to simplify, as much as possible and except for some exceptions, the transitional regime, applying from January 1, 2014 the ratios or percentages that, if applicable, would be applicable once said transitional regime has ended, provided that this does not significantly affect the current regime applicable to entities.

The Circular incorporates a single repealing provision with the object of repealing the content of Circular 12/2008, of December 30, of the National Securities Market Commission. The final and single provision refers to the entry into force of the present Circular.

Consequently, in exercise of the powers granted, the Council of the National Securities Market Commission, in its session of June 23, 2014, in accordance with the Council of State, prior report of the Bank of Spain and of the General Directorate of Insurance and Pension Funds, in accordance with what is established in articles 15 and 87.4 of Law 24/1988, of July 28, on the Securities Market, has approved the present Circular, which contains the following rules:

First Rule. Scope of application and definitions.

1. The provisions of this Circular shall apply to consolidatable groups of investment service firms as well as to individual investment service firms, integrated or not in a consolidatable group, subject to supervision by the National Securities Market Commission (hereinafter, the CNMV) in accordance with Regulation (EU) No 575/2013 of the European Parliament and of the Council, of June 26, 2013, on prudential requirements for credit institutions and investment firms, and amending Regulation (EU) No 648/2012 (hereinafter, Regulation (EU) No 575/2013), including the investment service firms mentioned in its article 95.2, with the following exceptions: – the fifth rule shall not apply to investment service firms provided for in article 4, paragraph 1, point 2, letter c), of Regulation (EU) No 575/2013, which provide the services of execution of orders on behalf of clients or the discretionary and individualized management of investment portfolios. – the sixth rule shall only apply to investment service firms provided for in its articles 95.1, 95.2, and 96.1. – the tenth rule shall only apply to investment service firms that are authorized to provide the services of underwriting of issues, placement of financial instruments with a firm commitment, or proprietary trading.
2. The terms and concepts used in this Circular shall be understood in accordance with the definitions collected in Regulation (EU) No 575/2013, as well as those of Directive 2013/36/EU of the European Parliament and of the Council, of June 26, 2013, on access to the activity of credit institutions and on the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC and their implementing norms into Spanish Law.

Second Rule. Level of application of liquidity requirements. In accordance with what is provided in paragraph 4 of article 6 and in paragraph 3 of article 11 of Regulation (EU) No 575/2013, investment service firms and groups thereof in which only investment service firms are included for which the CNMV has determined that they are not obliged to maintain a capital buffer against systemic risks, in accordance with what is provided in the implementing norms into Spanish law of Directive 2013/36/EU, shall be exempted from complying with the obligations provided in the sixth part (liquidity) of Regulation (EU) No 575/2013. For these purposes, and in accordance with what is provided in paragraph 5 of article 412 of Regulation (EU) No 575/2013, these entities will continue to apply the liquidity coefficient established in Circular 7/2008, of November 26, of the National Securities Market Commission, on accounting rules, annual accounts, and reserved information statements of Investment Service Firms, Management Companies of Collective Investment Institutions, and Management Companies of Venture Capital Entities.

Third Rule. Deduction requirements in the case of consolidation, prudential supervision, or institutional protection schemes. The CNMV may allow, upon prior request, that investment service firms and their consolidatable groups do not deduct the holding of own fund instruments of an entity in the financial sector in which the parent entity, the parent financial holding company, the parent mixed financial holding company, or the entity have a significant investment, in accordance with what is provided in paragraph 1 of article 49 of Regulation (EU) No 575/2013, in which case it will subject it to weighting for the purposes of calculating own fund requirements as indicated in paragraph 4 of article 49 of Regulation (EU) No 575/2013.

Fourth Rule. Risk weighting of qualifying holdings in non-financial entities. In the case of qualifying holdings in non-financial entities, in accordance with what is provided in letter b) of paragraph 3 of article 89 of Regulation (EU) No 575/2013, and in accordance with what is established in the same regarding the treatment of qualifying holdings in non-financial entities, entities must apply the treatment provided for in letter a), that is, apply the weighting of 1,250%.

Fifth Rule. Initial capital requirements. In relation to paragraph 6 of article 93 of Regulation (EU) No 575/2013, and for the purposes of guaranteeing the solvency of entities, the exceptions provided for in paragraphs 2, 3, 4, and 5 of the aforementioned article 93 will not be taken into account, so that the own funds of an entity cannot fall below the amount of initial capital required at the time of its authorization.

Sixth Rule. Variation in the calculation base of own fund requirements based on fixed overheads. Pending the approval by the European Commission of the regulatory technical standards referred to in article 97 of Regulation (EU) No 575/2013 and in accordance with what is established in paragraph 2 of said article, it shall be understood that a significant change in the activity of an investment service firm has occurred when its fixed overheads have undergone a variation greater than 25% compared to the fixed overheads of the preceding exercise. In the case of an increase in its activity, the investment service firm must adjust its calculation base of own fund requirements based on fixed overheads, and it may also do so in the case of a decrease in said activity.

Seventh Rule. Own fund requirements for credit risk: Internal Ratings-Based (IRB) method, credit risk mitigation, and securitization. In relation to the discretions granted to competent authorities in chapters 3, 4, and 5 of title II of part three of Regulation (EU) No 575/2013 regarding own fund requirements for credit risk, and more specifically, to the "Internal Ratings-Based (IRB) Method", "Credit Risk Mitigation", and "Securitization", respectively, the provisions of Circular 2/2014, of January 31, of the Bank of Spain, to credit institutions, on the exercise of various regulatory options contained in Regulation (EU) No 575/2013 of the European Parliament and of the Council, of June 26, 2013, on prudential requirements for credit institutions and investment firms, and amending Regulation (EU) No 648/2012, as well as other circulars that, on these matters, the Bank of Spain may publish in the future as development of Regulation (EU) No 575/2013, will be followed. References to credit institutions or their groups shall be understood as made to investment service firms or their groups, and references to the Bank of Spain shall be understood as made to the CNMV.

Eighth Rule. Netting sets. In accordance with paragraph 6 of article 282 of Regulation (EU) No 575/2013, for the determination of the value of exposures in relation to counterparty risk coverage, investment service firms will use the position valuation method at market prices established in article 274 of Regulation (EU) No 575/2013. In these cases, netting will not be recognized and the exposure value will be determined as if there existed a netting set comprising only one transaction.

Ninth Rule. Stock indices. In accordance with what is provided in paragraph 2 of article 344 of Regulation (EU) No 575/2013, and until the standards contemplated in paragraph 1 of the same article enter into force, investment service firms and their groups may continue to apply the treatment contemplated in paragraphs 3 and 4 of said article of Regulation (EU) No 575/2013.

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BOLETÍN OFICIAL DEL ESTADO Núm. 157 Sábado 28 de junio de 2014 Sec. I. Pág. 49785 Tenth Rule. Large exposures.

1. For the purposes of determining if positions in Collective Investment Undertakings, provided for in letter o) of article 112 of Regulation (EU) No 575/2013, or other similar exposures whose level of diversification can be considered equivalent to the aforementioned ones, constitute large exposures, entities will individually evaluate each underlying position in said Institutions, taking into account the economic content of the exposure, regardless of the Funds in which they invest and the Managers that manage them.
2. The exposures contemplated in paragraph 2 of article 400 of Regulation (EU) No 575/2013 may be considered totally exempt for the purposes of complying with large exposure limits when they meet the conditions provided for in paragraph 3 of said article.

Eleventh Rule. Submission of information to the CNMV. Entities will submit to the CNMV the solvency information collected in Regulation (EU) No 575/2013, with the formats, frequencies, communication dates, definitions, and computer solutions approved by the European Commission, using the electronic means of the CIFRADOC/CNMV Service.

Single Additional Provision. For the purposes of the disclosure obligations provided in the eighth part of Regulation (EU) No 575/2013, entities will publish this information on their website, duly integrated into a single document called "Solvency Report", with a frequency of at least annual and as soon as feasible, no later than the date on which the annual accounts of the exercise to which the information refers are approved.

Single Transitional Provision. Transitional regime.

1. Provisions with validity from January 1, 2014 or, if applicable, from January 1, 2015. A. Own fund requirements. In accordance with what is provided in paragraph 2 of article 465 of Regulation (EU) No 575/2013, from January 1, 2014, entities must, at all times, comply with the own fund requirements established in paragraph 1 of the same article, at the levels detailed below: a) an ordinary level 1 capital ratio of 4.5%, and b) a level 1 capital ratio of 6%. B. Unrealized gains and losses valued at fair value.
2. In accordance with what is provided in paragraph 3 of article 467 of Regulation (EU) No 575/2013, from January 1, 2014, entities will include in the calculation of their ordinary level 1 capital elements 100% of unrealized losses, related to assets or liabilities, valued at fair value and recorded in the balance sheet, excluding those contemplated in article 33 of Regulation (EU) No 575/2013, as well as all other unrealized losses recorded in the income statement.
3. In accordance with what is provided in article 468 of Regulation (EU) No 575/2013, from January 1, 2015, investment service firms and their groups may inc