Royal Decree-Law 14/2013 on Urgent Measures to Adapt Spanish Law to EU Financial Supervision and Solvency Regulations

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BOLETÍN OFICIAL DEL ESTADO Núm. 287 Sábado 30 de noviembre de 2013 Sec. I. Pág. 95352 I. GENERAL PROVISIONS HEAD OF STATE 12529 Royal Decree-Law 14/2013, of 29 November, on urgent measures to adapt Spanish law to European Union regulations in the field of supervision and solvency of financial entities. I During the last few years, the instability of the global financial system and, in particular, the Spanish one, has revealed certain deficiencies in financial regulation. There is international consensus that the legislation in force until 2008 failed to prevent the quality and quantity of capital of financial entities from being insufficient to absorb losses arising in a context of strong turbulence. It also did not mitigate the intensely procyclical behavior of entities, which excessively increased credit in expansion phases and substantially reduced it in recession, initially aggravating financial instability and, secondarily, worsening the effects and duration of the economic crisis.

In light of the above and given the enormous interconnection of international financial markets, the first reaction to reform financial regulation came from the main international forums. Thus, following the political impetus of world leaders meeting in Washington in November 2008 around the Group of Twenty, the Basel Committee on Banking Supervision agreed in December 2010 on the "Global Regulatory Framework for Strengthening Banks and Banking Systems" (known as Basel III Agreements), which, aiming to avoid future crises and improve international cooperation, significantly strengthened the quantitative and qualitative capital requirements for banks. The central axes of this agreement were transformed into harmonized European Union legislation in late June of this year 2013, through two legal instruments: Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms, and amending Regulation (EU) No 648/2012; and Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC. These European rules have, in turn, a purpose and dimension that go beyond the mere adoption of the Basel III Agreements, as they substantially advance the creation of a single banking rulebook in the matter of solvency. This harmonization exercise is essential for the establishment of the Banking Union, which will firmly rely on this common financial legislation, for the establishment of single mechanisms for the supervision and resolution of credit institutions in the euro area.

Regulation (EU) No 575/2013 of 26 June 2013 will enter into force on 1 January 2014, and Directive 2013/36/EU of 26 June 2013 must be incorporated into domestic law by that same date. The adaptation of the Spanish legal system to the new European rules requires an update and consolidation of the entire body of normative texts that, in a dispersed manner, contain the currently valid banking order and discipline rules. Consequently, the adaptation of our law to the new normative set must be articulated, in the interest of legal certainty and guaranteeing the greatest effectiveness of the rule, in a double normative project. On the one hand, a new text that consolidates and appropriately adjusts all national legislation on the solvency of credit institutions. And on the other, a rule that, with urgent character, adapts our legal system before 1 January 2014 to the normative changes whose incorporation is more pressing, in order to provide supervisors and financial entities with the necessary legal guarantees to operate in accordance with Regulation (EU) No 575/2013 of 26 June 2013, and to carry out the substantive adaptations of Directive 2013/36/EU of 26 June 2013. cve: BOE-A-2013-12529

BOLETÍN OFICIAL DEL ESTADO Núm. 287 Sábado 30 de noviembre de 2013 Sec. I. Pág. 95353 II This second objective, of urgent and extraordinary necessity, is the response of this royal decree-law, whose main measures pivot around three axes:

First, the rule directly incorporates as Spanish order and discipline regulation Regulation (EU) No 575/2013 of 26 June 2013, of imminent application, expanding and adapting the supervisory functions of the Bank of Spain and the National Securities Market Commission to the new powers established in European Union Law. In this way, the operational control of supervisors is guaranteed to ensure due compliance with the obligations derived for credit institutions and investment firms from the new European regulation.

Second, some novelties are incorporated regarding the limitation of variable remuneration. Fundamentally, to limit it to a maximum of one hundred percent with respect to fixed remuneration, unless authorized by the shareholders' meeting or equivalent body, in which case it may reach two hundred percent.

And, finally, a series of adjustments are made aimed at delimiting the scope of application of Regulation (EU) No 575/2013 of 26 June 2013 to avoid undesirable consequences in our regulation. To the extent that financial credit establishments are not subject to this rule, it is essential to maintain, on a provisional basis and until the specific regime applicable to them is approved, the legal regime in force prior to the entry into force of this royal decree-law.

The Securities Market Law is also modified with the aim of introducing into it the reforms derived from Directive 2013/36/EU, relating to investment firms, and which run parallel to those mentioned above regarding credit institutions.

On the other hand, Additional Provision second regulates for the first time in Spain the figure of the Legal Entity Identifier, provided for by Regulation (EU) No 648/2012 of the European Parliament and of the Council of 4 July 2012, on OTC derivatives, central counterparties and trade repositories. At the beginning of next year, counterparties to a derivatives contract should be identified, unequivocally and on an international scale, through the use of a code known as Entity Identifier. Through this royal decree-law, its issuance and management in Spain is attributed to the Mercantile Registry.

Additional Provision third seeks to enable municipalities that initially, and having been able to do so, did not request the measures of Title II of Royal Decree-Law 8/2013, of 28 June, to present the corresponding applications and adjustment plans within an additional period. In a good number of cases, this situation has been due to governance problems in the corresponding town halls. To remedy this situation, approval by the Local Government Board is enabled, or, if it does not exist because they are municipalities of less than 5,000 inhabitants and not obliged to have that body, by the Mayor. This would unlock a situation of interference of the political situation in the financial functioning of the affected municipalities. cve: BOE-A-2013-12529

BOLETÍN OFICIAL DEL ESTADO Núm. 287 Sábado 30 de noviembre de 2013 Sec. I. Pág. 95354 In short, the objective of this provision is to facilitate the greatest possible incorporation of municipalities into the extraordinary measures cited by eliminating obstacles that should not affect the achievement of stability and reequilibration of those entities. The urgency and necessity of this provision lies in the fact that the extraordinary measures to support municipalities with financial problems must be requested before the Ministry of Finance and Public Administrations within this same year. Measures considered necessary to resolve with the greatest possible speed the serious financial situation of the concerned town halls.

Additional Provision fourth collects the prudential treatment of preferred participations from the entry into force of Regulation (EU) 575/2013 of 26 June, without altering, however, the current fiscal regime for this type of instrument, collected in Law 13/1985, of 25 May, on investment coefficients, own resources and information obligations of financial intermediaries.

Likewise, a transitional provision is incorporated with the aim of attenuating the effects that the necessary repeal of the core capital requirement for Spanish credit institutions, established by Royal Decree-Law 2/2011, of 18 February, for the strengthening of the financial system, might produce. This provision seeks a double objective: on the one hand, to reconcile the capital requirement obligations provided for in the new Regulation (EU) No 575/2013 of 26 June 2013, with those on the same matter assumed by our country through the Memorandum of Understanding signed within the framework of the assistance program for the recapitalization of the financial sector, agreed within the Eurogroup; and on the other hand, to guarantee that the Bank of Spain is adequately and immediately empowered to prevent any imprudent reduction of own resources derived from the mere approval of the new solvency regulation.

Within the final provisions, Law 13/1994, of 1 June, on the Autonomy of the Bank of Spain, is modified, increasing the competencies of this institution, by enabling it to draft technical guides and answer binding consultations, equipping it with instruments for adequate interpretation and application of supervision regulation. Likewise, the aforementioned Law 9/2012, of 14 November, on the restructuring and resolution of credit institutions, is modified, in order to correct the current patrimonial situation of the Orderly Banking Resolution Fund (FROB) that has arisen from losses derived from its singular nature as a restructuring and resolution authority, thereby guaranteeing, ultimately, the fulfillment of the functions attributed to it by the rule. The special competencies attributed to the FROB as a resolution authority, and its direct impact on the satisfaction of public interest, demand an imminent action to solve its patrimonial situation, dispelling any doubt about its solvency. To this end, the possibility of increasing the Fund's own resources through the capitalization of credits, loans, or any other borrowing operation in which the General Administration of the State appears as a creditor is enabled. Likewise, the management of its cash operations is relaxed.

Law 9/2012, of 14 November, is also modified in an aspect of singular importance, by suppressing the provision that established a time limit on the application of Chapter VII of the Law, referring to the management of hybrid instruments of capital and subordinated debt. This elimination implies the definitive validity in our country of the mechanisms for absorbing losses derived from the restructuring or resolution of a credit institution, by its shareholders and subordinated creditors. In this way, Spain adopts, already permanently and in advance compared to most Member States of the European Union, the instruments necessary to distribute the losses of an entity in accordance with the principle of correct assumption of risk and minimization of the use of public resources. This is a measure completely aligned with what is already required by the most advanced international regulation and, in particular, the regulation of the European Union in the matter of competition and State aid. cve: BOE-A-2013-12529

BOLETÍN OFICIAL DEL ESTADO Núm. 287 Sábado 30 de noviembre de 2013 Sec. I. Pág. 95355 Additionally, doubts arising in practice regarding the extension of Sareb's creditor position in insolvency proceedings to those who acquire its credits by any title are clarified. Given Sareb's mandate for orderly liquidation, the sale of its credits is frequent, and the uncertainty in the application of its insolvency regulation is negatively impacting transactions, hence the need to proceed with its imminent review.

A third final provision has also been introduced in the Royal Decree-Law, through which Additional Provision thirty-sixth of Law 2/2012, of 29 June, on the General State Budgets for the year 2012, is modified. The indicated provision of the General State Budgets Law for the year 2012 instrumented the extension of the deadline for the repayment of the liquidations of the financing system of the Autonomous Communities and Cities with Statute of Autonomy corresponding to 2008 and 2009 that resulted in favor of the State, through which, to the Communities that requested it, the pending balances for repayment were extended to 120 equal monthly installments, provided that the conditions established in the provision were met.

Current circumstances advise the modification of the conditionalities established for said extension to 120 monthly installments, in case of non-compliance with the stability objective, subordinating the continuation of said extension to what is established by the Ministry of Finance and Public Administrations, through a Resolution of the General Secretariat for the Coordination of Autonomous and Local Entities, provided that the Autonomous Community so requests and it proves compliance with its information supply obligations. The extraordinary and urgent need for this measure lies in the fact that the modification subject to it has an impact on the budgets of the Autonomous Communities and given that the respective Budget Laws of those for 2014 are in the processing phase, it is necessary that the modification enters into force prior to the approval of these laws by the Autonomous Communities.

Finally, certain measures are introduced aimed at allowing certain deferred tax assets to continue counting as capital, in line with the regulation in force in other States of the European Union, so that Spanish credit institutions can operate in a homogeneous competitive environment. III In short, the main objective of this royal decree-law, as already referred to, is to carry out the most urgent adaptations of the Spanish legal system to the substantive novelties derived from Directive 2013/36/EU of 26 June, and Regulation (EU) No 575/2013 of 26 June, and to address other reforms of an urgent nature. To this end, those provisions whose immediate entry into force is necessary for the basic functioning of financial entities have been incorporated into this rule, thereby avoiding disruptions in prudential regulation that could generate serious difficulties in the Spanish financial system, at a time especially sensitive for it. The fulfillment of this objective is even more of a priority today given the new scenario designed in the European Union by the development of the Banking Union and, especially, in the face of the need not to generate the slightest legal uncertainty about a sector like banking that has recovered the path of stability and confidence in recent months.

By virtue of the urgency of adopting the measures, to allow their immediate effectiveness, making use of the authorization contained in Article 86 of the Constitution, at the proposal of the Ministers of Economy and Competitiveness and of Finance and Public Administrations, and after deliberation of the Council of Ministers in its meeting of 29 November 2013, I HEREBY ORDER: Article one. Modification of Law 13/1985, of 25 May, on investment coefficients, own resources and information obligations of financial intermediaries.

Law 13/1985, of 25 May, on investment coefficients, own resources and information obligations of financial intermediaries is modified in the terms provided in the following subsections:

One. Article six is drafted as follows: "Article six.

1. In accordance with Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms, and amending Regulation (EU) No 648/2012, with this law and with the provisions that develop it, consolidatable groups of credit institutions, as well as credit institutions integrated or not in a consolidatable group of credit institutions, must maintain at all times a sufficient volume of own resources in relation to the investments made and the risks assumed.
2. Consolidatable groups of credit institutions, as well as credit institutions not integrated into one of these consolidatable groups, will specifically have solid, effective and exhaustive strategies and procedures in order to evaluate and permanently maintain the amounts, types and distribution of internal capital that they consider adequate to cover the nature and level of the risks to which they are or may be exposed. These strategies and procedures will be periodically subject to internal examination in order to guarantee that they remain exhaustive and proportional to the nature, scale and complexity of the activities of the credit institution concerned.
3. Likewise, it may be imposed: a) The obligation to have a minimum quantity of liquid assets that allow meeting potential fund outflows derived from liabilities and commitments, even in the case of serious events that could affect liquidity, and to maintain an adequate structure of financing sources and maturities in their assets, liabilities and commitments in order to avoid potential liquidity imbalances or tensions that could damage or put at risk the financial situation of the entity. b) A minimum limit to the ratio between the entity's own resources and the total value of its exposures to risks derived from its activity. The obligations provided for in the preceding letters may be stricter depending on each credit institution's ability to obtain Level 1 capital."

Two. A new paragraph is added at the end of subsection 3 of Article eight, with the following wording: "The Bank of Spain may exempt from individual compliance with the requirements provided for in Parts two to eight of Regulation (EU) No 575/2013 of 26 June, credit institutions integrated into an institutional protection system when said system is constituted through a contractual agreement between several credit institutions and meets the requirements established in Article 10 of said regulation and what is provided for in points i, ii, v and vi above." cve: BOE-A-2013-12529

BOLETÍN OFICIAL DEL ESTADO Núm. 287 Sábado 30 de noviembre de 2013 Sec. I. Pág. 57 Three. Subsection 1 of Article ten bis is modified, which is drafted as follows: "1. It will correspond to the Bank of Spain, in its capacity as the authority responsible for the supervision of credit institutions and their consolidatable groups: a) To review the systems, whether agreements, strategies, procedures or mechanisms of any type, applied to comply with the solvency regulation contained in Regulation (EU) No 575/2013 of 26 June, in this law and in the provisions that develop it. This review will include the remuneration policies and practices referred to in Article 30 bis.1 bis of Law 26/1988, of 29 July, on the discipline and intervention of credit institutions. b) To evaluate the risks to which entities are or may be exposed. c) Without prejudice to what is provided in the preceding letter, to evaluate risks derived from possible events or changes in the economic situation that have been revealed in stress tests, taking into account the nature, dimension and complexity of the entity's activity. These stress tests must be carried out by the Bank of Spain at least once a year. d) From the review and evaluation mentioned in the preceding letters, to determine if the systems mentioned in letter a) and the own funds maintained guarantee a solid management and coverage of their risks. e) To require each credit institution to have governance rules that include remuneration policies and practices consistent with the promotion of solid and effective risk management to comply with the regulation on remuneration policies and practices established by regulation. f) To use the information collected in accordance with the disclosure criteria established in Article ten ter.1 to compare trends and practices in remuneration. The Bank of Spain will provide this information to the European Banking Authority. g) To collect information on the number of people, in each credit institution, with remunerations of at least 1 million euros, in intervals of that same amount, including their responsibilities in the position they hold, the business area involved and the main components of salary, incentives, long-term premiums and pension contribution. This information will be transmitted to the European Banking Authority. h) To draft, if it deems it appropriate, technical guides, addressed to supervised entities and groups, indicating the criteria, practices, methodologies or procedures it considers adequate for compliance with supervision regulation. These guides, which must be made public, may include the criteria that the Bank of Spain itself will follow in the exercise of its supervisory activities. These guides will refer to the following matters:

1. Evaluation of the risks to which entities are exposed and adequate compliance with order and discipline rules.
2. Remuneration practices and risk-taking incentives compatible with adequate risk management.
3. Financial and accounting information and external audit obligations.
4. Adequate management of risks derived from the holding of significant participations of credit institutions in other financial entities"