Law 6/2011 of 11 April amending the Law on Financial Intermediaries, the Securities Market Law, and the Royal Decree on Credit Entities

OFFICIAL STATE GAZETTE No. 87 Tuesday, 12 April 2011 Sec. I. Page 37474 I. GENERAL PROVISIONS THE HEAD OF STATE 6548 Law 6/2011, of 11 April, amending Law 13/1985, of 25 May, on investment coefficients, own funds and information obligations of financial intermediaries, Law 24/1988, of 28 July, on the Securities Market, and Royal Legislative Decree 1298/1986, of 28 June, on the adaptation of current law in the matter of credit entities to that of the European Communities. JUAN CARLOS I KING OF SPAIN To all those who see and understand this, Know: That the General Courts have approved and I come to sanction the following law. PRELIMINARY STATEMENT The financial crisis has revealed numerous deficiencies in prudential regulation worldwide. For this reason, a process of reform of prudential regulations has been launched in the European Union in line with what was discussed at the G-20 and in consonance with the modification of the Basel II agreement currently underway. In this sense, Directive 2009/111/EC of the European Parliament and of the Council of 16 September 2009 amending Directives 2006/48/EC, 2006/49/EC and 2007/64/EC as regards banks affiliated to a central body, certain elements of own funds, large exposures, the supervisory regime and crisis management, constitutes the first phase of this process. With the approval of Directive 2009/111/EC, a series of fundamental reforms are addressed, including: the establishment of conditions for the admissibility of hybrid capital instruments as own funds, the improvement of cooperation between supervisors to strengthen the European Union framework on crisis management, and the determination of a series of requirements to allow exposure to securitization positions. The purpose of this Law is to initiate the transposition of said Directive, and for this purpose, on the one hand, Law 13/1985, of 25 May, on investment coefficients, own funds and information obligations of financial intermediaries, and, on the other hand, Law 24/1988, of 28 July, on the Securities Market, are amended. Likewise, given the changes introduced by the aforementioned Directive in the exchange of information between supervisory authorities and the European Central Bank, it has been necessary to modify Royal Legislative Decree 1298/1986, of 28 June, on the adaptation of current law in the matter of Credit Entities to that of the European Communities. At the origin of the financial crisis is the investment in complex securitization structures, the risk of which was often difficult for investors to assess. Securitization is important for the proper functioning of the financial system as it allows obtaining significant amounts of financing through the mechanism of risk distribution among numerous investors. However, there is an information asymmetry problem between the originator or sponsor, who is better informed about the characteristics of the structure intended to be securitized, and the investor, who is much less informed. This would generate a detriment if the incentives of both were aligned, but in fact, this is not the case, since, while the originator intends to transfer the risk to the investor, the latter intends to obtain the maximum possible profitability with the minimum risk. With the modifications introduced by this Law to Law 13/1985, of 25 May, and to Law 24/1988, of 28 July, in article one.one and two.one, respectively, the aim is to align both incentives by introducing the obligation for entities to comply with certain requirements that will be developed by regulation to allow exposure to securitization positions and to initiate a securitization. The financial crisis has also revealed the need to improve the European framework for crisis prevention and management. Given the high level of integration of financial markets in the European Union, and the possibility, therefore, of financial crises in one Member State spreading to the rest of the Union, it is indispensable to strengthen cooperation between supervisors. Therefore, reflecting what is established by the Directive, this Law introduces several measures in this direction, such as the obligation of the Bank of Spain and the National Securities Market Commission to take into account the repercussions of their decisions on the financial stability of other Member States, the regulation of supervisory colleges and joint decisions within the framework of the supervision of cross-border groups, or the possibility of declaring branches as significant. Finally, hybrid capital instruments play an important role in the current management of the capital of credit institutions. These instruments allow credit institutions to achieve a diversified capital structure and reach a wide range of financial investors. The Basel Committee on Banking Supervision reached an agreement, both on the admissibility criteria and on the limits for the inclusion of certain types of hybrid capital instruments in the basic own funds of credit institutions. Consequently, it is important to establish criteria so that these capital instruments can be admitted as basic own funds of credit institutions. In this sense, this Law modifies the regime for the computability of preferred shares as own funds established in the second additional provision of Law 13/1985, of 25 May. Thus, this instrument is adapted to international requirements that ensure that this type of instrument is an effective instrument to meet the solvency requirements of entities. However, the law itself includes a transitional regime for those issued prior to entry into force. Finally, article three addresses the reform of the exchange of information of the Bank of Spain with the European Central Bank through the modification of Royal Legislative Decree 1298/1986, of 28 June. This Law is enacted in accordance with the provisions of paragraphs 6, 11 and 13 of section 1 of article 149 of the Constitution, which attribute to the State exclusive competence over commercial legislation, over the bases of the organization of credit, banking and insurance, and over the bases and coordination of the general planning of economic activity, respectively. Article one. Modification of Law 13/1985, of 25 May, on investment coefficients, own funds and information obligations of financial intermediaries. The following modifications are introduced in Law 13/1985, of 25 May, on investment coefficients, own funds and information obligations of financial intermediaries: One. Section 1 of article six is modified, which shall read as follows: "1. 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 funds in relation to the investments made and the risks assumed. In particular, they will have at all times funds equal to or greater than the sum of the following minimum own funds requirements: a) With respect to all their activities except those of the trading portfolio, the own funds requirements determined in accordance with the regulatory calculation method for credit risk and dilution risk; b) With respect to their trading portfolio activities, the own funds requirements determined in accordance with the regulatory calculation method for position risk and counterparty risk, and, to the extent authorized, for large exposures exceeding the limits established by regulation; c) With respect to all their activities, the own funds requirements determined in accordance with the regulatory calculation method for exchange rate risk, settlement risk and risk on commodities; d) With respect to all their activities, the own funds requirements determined in accordance with the regulatory calculation method for operational risk." Two. The following letter d) is added to section 3 of article six: "d) The conditions under which a credit institution may be exposed to the risk of a securitization position, or maintain such exposures, as well as the conditions that originator or sponsor credit institutions must apply to the exposures to be securitized. For these purposes, a credit institution that is not an originator, sponsor or original creditor shall be considered exposed to the credit risk of a securitization position in its trading book or outside it only if the originator, sponsor or original creditor has explicitly revealed to the credit institution that intends to retain a significant net economic interest on a permanent basis, which in any case shall not be less than 5 percent." Three. Section 1 of article ten bis shall read as follows: "1. It shall be the responsibility of the Bank of Spain, in its capacity as the authority responsible for the supervision of credit institutions and their consolidatable groups: a) Review the systems, whether agreements, strategies, procedures or mechanisms of any kind, applied to comply with the solvency regulations contained in this Law and in the provisions developing it. Such review will include the remuneration policies and practices referred to in section 1 bis of article 30 bis of Law 26/1988, of 29 July, on discipline and intervention of credit institutions. b) Evaluate the risks to which they are or may be exposed. c) From the review and evaluation mentioned in the preceding letters, determine if the systems mentioned in letter a) and the own funds maintained guarantee a solid management and coverage of their risks. d) 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 regulations on remuneration policies and practices established by regulation. e) Draft and publish guidelines, addressed to supervised entities and groups, indicating the criteria, practices or procedures, which it considers appropriate to favor an adequate assessment of the risks to which they are or may be exposed as well as the better compliance with the rules of organization and discipline of the supervised subjects. Such guidelines may include the criteria that the Bank of Spain itself will follow in the exercise of its supervisory activities. f) Draft and publish guidelines, addressed to supervised entities and groups, indicating the criteria, practices or procedures, which it considers appropriate to ensure that remuneration practices result in risk-taking incentives compatible with adequate risk management. Such guidelines may include the criteria that the Bank of Spain itself will follow in the exercise of its supervisory activities. g) Use the information collected in accordance with the disclosure criteria established in section 1 of article ten ter to compare trends and practices in remuneration. The Bank of Spain will provide this information to the European Banking Authority. h) Collect information on the number of persons, in each credit institution, with remunerations of at least 1 million euros, including the business area involved and the main components of salary, incentives, long-term bonuses and pension contribution. This information will be transmitted to the European Banking Authority. To this end, the Bank of Spain may adopt and transmit as such to entities and groups, the guidelines that, on these matters, are approved by international bodies or committees active in banking regulation and supervision. The analyses and evaluations mentioned in letters a) and b) above shall be updated with at least annual periodicity." Four. Section 2 of article ten bis shall read as follows: "2. It shall be the responsibility of the Bank of Spain, in its capacity as the authority responsible for the exercise of supervision of consolidatable groups of credit institutions and in relation to European Union supervisory authorities: a) Coordinate the collection of information and disseminate among the other authorities responsible for the supervision of entities in the group the information it considers important in both normal and urgent situations. b) Planning and coordination of supervisory activities in normal situations, in relation, among others, to the activities contemplated in section 1 of this article, in articles 6.4, 10 ter, and 11 of this Law, and in provisions relating to technical criteria concerning the organization and treatment of risks, in collaboration with the competent authorities involved. c) Planning and coordination of supervisory activities, in collaboration with the competent authorities involved and, where appropriate, with central banks, in urgent situations or in anticipation of such situations, and in particular, in those cases where there is an adverse evolution of credit institutions or financial markets, making use, whenever possible, of specific communication channels existing to facilitate crisis management. The planning and coordination of supervisory activities referred to in this letter c) shall include the exceptional measures contemplated in article 6.1.d) of Royal Legislative Decree 1298/1986, of 28 June, on the adaptation of current law in the matter of credit entities to that of the European Communities, the preparation of joint assessments, the implementation of emergency plans and communication to the public. d) Cooperate closely with other competent authorities with supervisory responsibility over foreign credit institutions, parent companies, subsidiaries or participations of the same group under the terms provided in article 6 of Royal Legislative Decree 1298/1986, of 28 June. In particular, the Bank of Spain will cooperate with the aforementioned competent authorities in granting authorization for the use of internal credit ratings or internal methods for measuring operational risk to be applied in Spanish groups of credit institutions and in determining the conditions, under which, if any, such authorization must be subject. The authorization requests mentioned in the previous paragraph, presented by a European Union parent credit institution and its subsidiaries or, jointly, by the subsidiaries of a European Union parent financial holding company, shall be addressed to the Bank of Spain, in its capacity as the authority responsible for the exercise of supervision of consolidatable groups of credit institutions. In these cases, within a period not exceeding six months, the Bank of Spain will promote the adoption of a joint decision on the request with the other competent authorities of other Member States responsible for the supervision of the various entities integrated in the group. The reasoned resolution that collects this joint decision will be notified to the applicant by the Bank of Spain. The period referred to in the previous paragraph shall begin on the date of receipt of the complete request by the Bank of Spain. The Bank of Spain will forward said request without delay to the other competent authorities. In the absence of a joint decision between the Bank of Spain and the other competent authorities within six months, the Bank of Spain will resolve on the request. The reasoned resolution will take into account the opinions and reservations of the other competent authorities expressed during the six-month period. The reasoned resolution will be notified to the applicant and to the other competent authorities by the Bank of Spain. In the case of the equivalent procedure that applies, in accordance with what is provided in Directive 2006/48/EC of the European Parliament and of the Council, of 14 June 2006, on the taking up and pursuit of the business of credit institutions, the aforementioned authorizations when they concern groups of foreign credit institutions in which a Spanish credit institution is integrated, the Bank of Spain, in addition to cooperating in the joint decision to be adopted, may accept, where appropriate, the decisions adopted by the competent authorities of other European Union Member States when they are responsible for the exercise of supervision of those groups. The affected Spanish entity will calculate its own funds requirements in accordance with said decision. By regulation, the terms of the cooperation procedure referred to in this letter may be specified. e) Sign coordination and cooperation agreements with other competent authorities aimed at facilitating and establishing effective supervision of the groups entrusted to its supervision and assuming the additional tasks resulting from such agreements. f) Warn, as soon as possible, the holder of the Ministry of Economy and Finance, and the other national or foreign supervisory authorities affected, of the emergence of an urgent situation, and in particular in those cases where there is an adverse evolution of financial markets, which may compromise liquidity in the market and the stability of the financial system of any Member State of the European Union in which entities of a group subject to the supervision based on the consolidated basis of the Bank of Spain have been authorized or in which significant branches of a Spanish credit institution are established, as contemplated in the following letter g). g) Make requests to the competent authorities of the supervision of a credit institution authorized in the European Union with branches in Spain for these to be considered as significant branches, as well as, in the absence of a joint decision on this matter, resolve on their significant character. In these cases, in accordance with the procedure determined by regulation, the Bank of Spain will promote the adoption of a joint decision on the request with the other competent authorities of other Member States responsible for the supervision of the various entities integrated in the group. Likewise, it shall be the responsibility of the Bank of Spain, in accordance with the procedure determined by regulation, to resolve by joint decision, the equivalent requests formulated by the competent authorities of the countries where branches of Spanish credit institutions are located, as well as, in the absence of a joint decision on this matter, recognize the resolution on their significant character of said competent authority. Likewise, the reasons that the Bank of Spain must take into account to consider whether a branch is or is not significant will be specified by regulation, which will in any case include the market share of the branch, the potential impact of the suspension or cessation of the entity's operations on market liquidity and the size and importance of the branch." Five. The following section 2 bis is added to article ten bis: "2 bis. Within the framework of the cooperation referred to in the first paragraph of letter d) of the previous section, the Bank of Spain, as consolidated supervisor of a group or as the competent authority responsible for the supervision of the subsidiaries of a EU parent credit institution or a EU parent financial holding company in Spain, will do everything in its power to reach a joint decision on the application of article 6.4 of this Law and section 1 of this article to determine the adequacy of the consolidated level of own funds possessed by the group in relation to its financial situation and risk profile and the level of own funds necessary for the application of article 11, to each of the entities in the banking group and on a consolidated basis. The joint decision shall be adopted within a period of four months from the presentation by the consolidated supervisor, to the other relevant competent authorities, of a report including the risk assessment of the group, in accordance with article 6.4 and section 1 of this article. The joint decision will also duly take into consideration the risk assessment of the subsidiaries carried out by the relevant competent authorities in accordance with article 6.4 of this Law and section 1 of this article and the reservations expressed by the other competent authorities. The joint decision shall be set out in a document containing the fully reasoned decision which the Bank of Spain, when it is the consolidated supervisor, will remit to the EU parent credit institution. In case of disagreement and at the request of any of the other affected competent authorities, the Bank of Spain, before adopting the decision referred to in the following paragraph, will consult the European Banking Supervisory Committee; the result of the consultation will not be binding on it. In the absence of the aforementioned joint decision among the competent authorities within four months, the Bank of Spain, when acting as consolidated supervisor, will adopt the decision regarding the application of section 1 of this article, as well as articles 6.4 and 11 of this Law, on a consolidated basis, after duly taking into consideration the risk assessment of the subsidiaries carried out by the relevant competent authorities and, where appropriate, the result of the consultation with the European Banking Supervisory Committee. Likewise, in the absence of the aforementioned joint decision, the Bank of Spain, as responsible for the supervision of the subsidiaries of a EU parent credit institution or a EU parent financial holding company, will take a decision on the application of section 1 of this article and of articles 6.4 and 11 of