FINMA Circular 2013/7 Limitation of Intra-Group Positions - Banks

Laupenstrasse 27, 3003 Bern Tel. +41 (0)31 327 91 00, Fax +41 (0)31 327 91 01 www.finma.ch Circular 2013/7 Limitation of Intra-Group Positions – Banks Limitation of Intra-Group Positions at Banks Reference: FINMA Circular 13/7 "Limitation of Intra-Group Positions – Banks" Issued: 29 May 2013 Entry into force: 1 July 2013 Last amendment: 4 November 2020 [Amendments are marked with * and listed at the end of the document] Legal Basis: FINMA Act Art. 7 para. 1 lit. b Banking Act Art. 3g, 4 para. 2 Financial Institutions Act (FINIG) Art. 9, 43 Capital Adequacy Ordinance (ERV) Art. 70 para. 4 ERV Art. 2, 111a para. 2, 112 para. 2 lit. a, d, g Appendix: Form for detailed reporting

Addressees Banking Act Financial Institutions Act (FINIG) FINMA Act Financial Market Infrastructure Act (FinfraG) Collective Investment Schemes Act (KAG) Anti-Money Laundering Act (GwG) Others Banks Financial Groups and Conglomerates Other Intermediaries Insurers Insurance Groups and Conglomerates Intermediaries Asset Managers Trustees Managers of Collective Investment Assets Fund Management Companies Custodian Securities Houses Non-Custodian Securities Houses Trading Venues Central Counterparties Central Securities Depositories Transaction Registers Payment Systems Participants SICAV KmG for KKA SICAF Custodian Banks Representatives of Foreign KKA Other Intermediaries SRO SRO-Supervised Audit Firms Rating Agencies X

Table of Contents 2/7 I. Subject Matter II. Scope III. Intra-Group Positions A. Total Position B. Positions of Group Companies C. Netting IV. Limitation of Intra-Group Positions A. Contractual Counterparty B. Solvency of the Counterparty or the Counterparty's Country of Origin C. Quality of Consolidated Supervision D. Disproportion between Exposures and Own Funds a) Outsourcing of Risks to an Affiliated Company b) Positions Comparable to Actual Return of Own Funds c) Loans Granted to Customers with Guarantees Held by a Group Company Rz 1–2 3–5 6–9 6 7–8 9 10–17 11 12 13 14–17 14 15–16 17

3/7 I. Subject Matter If a bank or a custodian securities house is part of a financial group or financial conglomerate subject to adequate consolidated supervision, intra-group positions may be exempt from the cap according to Art. 97 of the Capital Adequacy Ordinance (ERV; SR 952.03), provided that the affected companies are fully included in the consolidation of own funds and risk distribution (full consolidation) and either a) are individually subject to adequate supervision or b) have as counterparties exclusively group companies that are individually subject to adequate supervision. 1 However, based on Art. 111a para. 2 and Art. 112 para. 2 lit. d ERV, FINMA is authorized to restrict the comprehensive exemption of intra-group positions according to para. 1. This circular specifies FINMA's practice regarding intra-group positions and illustrates measures to limit such positions, listing the key criteria on which FINMA relies when limiting them. 2 II. Scope This circular addresses banks according to Art. 1 of the Banking Act (BankG; SR 952.0), custodian securities houses according to Art. 41 of the Financial Institutions Act (FINIG; SR 954.1), and financial groups and financial conglomerates according to Art. 3c para. 1 and 2 BankG, which each form an integrated part of a foreign financial group over which FINMA does not exercise consolidated supervision. 3 The banks and custodian securities houses are referred to as "institutions". Swiss structures comprising multiple group companies and part of a group not led from Switzerland are referred to as "subordinate Swiss group". 4 The intra-group positions falling within the scope of this circular correspond to claims, obligations, and agreements according to Art. 111a para. 1 ERV against group companies domiciled abroad that entail a credit risk for the institution or the subordinate Swiss group. These include not only balance sheet and off-balance sheet positions, but also rights with equivalent effect (for example, the receipt of guarantees from affiliated entities to cover positions held with third parties or the custody of pledges to cover positions of the institution by affiliated entities). 5 III. Intra-Group Positions A. Total Position The total position is calculated in accordance with the provisions of Art. 113 ERV. Trust assets held on behalf of customers are excluded from the calculation of the total position, provided the risk has not been outsourced to the custodian. 6

4/7 B. Positions of Group Companies According to Art. 111 ERV, group companies constitute a group of affiliated counterparties from the perspective of each institution of the group or the subordinate Swiss group. The total position towards a group of affiliated counterparties results from the sum of the total positions of the individual counterparties. 7 According to Art. 102 ERV, the institution or the subordinate Swiss group must prepare an overview of the intra-group positions quarterly or semi-annually, at the same time as the list of existing concentration risks, and submit it to the audit firm and the body for leadership, supervision, and control. FINMA may request this document to assess the appropriateness of measures according to Section IV below. If additional clarification is needed, FINMA may, while maintaining proportionality, demand additional detailed reporting according to the appendix to this circular. 8 C. Netting A possibility of netting is only recognized as risk-reducing if a written netting agreement exists and its legal enforceability is confirmed by a legal opinion. The institution monitors relevant developments in supervisory law and supervisory practice in the affected jurisdictions. The institution has its appointed legal advisors periodically confirm that the conclusions contained in the legal opinions remain valid and updates the legal opinions if necessary. The audit firm examines the existence of the legal opinions, critically assesses them, and confirms in the supervisory report that the institution has sufficiently clarified the legal validity and enforceability of the netting declarations. The audit firm establishes a basic audit with the audit depth "Audit" annually upon the entry into force of this circular for new and existing netting agreements in its standard audit strategy, if the institution applies netting in the context of reporting intra-group positions according to Art. 102 ERV. 9 IV. Limitation of Intra-Group Positions When ordering measures to limit the intra-group positions of an institution or a subordinate Swiss group towards group companies that generally meet the conditions for an exemption from the cap according to Art. 111a para. 1 ERV, FINMA orients itself on quantitative and qualitative criteria. 10 A. Contractual Counterparty The complexity of group relationships should be reduced as much as possible to allow FINMA a comprehensive assessment of the risks arising from these relationships and to facilitate the payout of claims in the event of a payment default by the group to which the institution or the subordinate Swiss group belongs. Horizontal or diagonal intra-group financing, i.e., connections between companies that do not stand in the same line of participation, and cumulative financing from a large number of group companies should generally be avoided. 11

5/7 B. Solvency of the Counterparty or the Counterparty's Country of Origin If external indicators (such as a low rating of the institution's, the subordinate Swiss group's, or its country of origin's counterparty, negative market indicators regarding this counterparty or its country of origin) raise doubts about the solvency of the counterparty, FINMA may restrict or even prohibit the group relationships. 12 C. Quality of Consolidated Supervision If FINMA considers the consolidated supervision of the group to which the institution or the subordinate Swiss group belongs to be inadequate, it may restrict or even prohibit the intra-group exposures. This enables more flexible handling in the limitation according to Art. 111a para. 2 ERV, but also in the application of the general cap according to Art. 111a para. 1 ERV. 13 D. Disproportion between Exposures and Own Funds a) Outsourcing of Risks to an Affiliated Company If an institution grants loans or advances to its customers and outsources the risk to group companies subject to Art. 111a para. 1 ERV in a manner that the risk outsourcing is disproportionate to its own funds, FINMA may restrict or prohibit this type of intra-group position. A possible disproportion is generally assumed if the amount of risk to be outsourced to group companies, calculated according to Art. 113 ff. ERV, exceeds the amount of the institution's eligible CET11. Risk-reducing measures can be taken into account to the extent that they do not result in risk positions towards other group companies. 14 b) Positions Comparable to Actual Return of Own Funds Exposures incurred by an institution towards group companies that exceed their free eligible own funds2 and are not covered by guarantees without the right of prior action or netting agreements are subject to deeper review by FINMA. If FINMA concludes that such intra-group positions are comparable to an actual return of own funds, it may restrict or prohibit them, particularly if they include terms of more than one year. 15 Such loans may otherwise contravene Art. 680 of the Swiss Code of Obligations (OR) and are incompatible with Art. 20 para. 2 ERV, which stipulates that own funds must not be financed directly or indirectly by the bank's lending. 16 1 This refers to net CET1 after adjustments according to Art. 31-40 ERV. 2 Eligible own funds minus required own funds (Art. 41 ERV).

6/7 c) Loans Granted to Customers with Guarantees Held by a Group Company If an institution or a subordinate Swiss group grants loans or substantial advances to its customers that are directly guaranteed by a group company or indirectly covered by customer assets deposited with this group company, and which it does not comprehensively control through a direct majority participation or another dependency relationship, FINMA may require that part or all of the pledged assets be transferred to the institution or the subordinate Swiss group, so that the loan can be considered secured within the meaning of Art. 61 ERV. If the positions, however, are not pledged with the bank itself or secured at least equivalently, or covered by debt instruments not issued by the bank itself and not pledged or deposited with it, FINMA has the option to recognize the credit risk mitigation through guarantees and other collateral only partially or not at all. 17

List of Changes 7/7 The references to the Capital Adequacy Ordinance (ERV; SR 952.03) were adapted to the version that entered into force on 1 January 2019. In the context of the entry into force of the FIDLEG/FINIG legislation on 1 January 2020, the references and terms were adapted.