Circular D4/EB/1147: Adaptation of the Regulation on Own Funds for Stockbroking Companies

COMMISSION BANCAIRE ET FINANCIERE Prudential Supervision of Investment Firms Avenue Louise 99, B-1050 Brussels telephone +32(2)535.22.11 - fax +32(2)535.24.96 Brussels, July 24, 2000. D4/EB/1147 CIRCULAR LETTER TO STOCKBROKING COMPANIES Adaptation of the regulation on own funds of stockbroking companies

Madam, Sir,

By decree of July 4, 2000, the Commission modified the regulations of December 5, 1995, regarding the own funds of credit institutions and stockbroking companies, in order to bring them into conformity with European regulation1. The amending decree is currently submitted for the approval of the competent Ministers and will be published in the Belgian Monitor. Its entry into force is scheduled for July 21, 2000.

Pending the aforementioned approval and publication, we transmit to you, for informational purposes, the text of the amending decree, as well as the modifications made to the commentary on the aforementioned regulations. This information is intended to allow stockbroking companies to prepare for the definitive entry into force of the new provisions of the regulation on solvency. As soon as the approved text of the decree is published, the Commission will send to the companies a coordinated, updated version of the regulation of December 5, 1995, regarding own funds, as well as the related commentary.

The main adaptations made to the regulation on own funds can be summarized as follows2:

(a) regarding credit risk:

• application of a weighting coefficient of 50% to "mortgage backed securities" (Article 3, 1°);
• possibility of applying, under certain strict conditions, a weighting coefficient of 50% to loans granted after May 31, 2000, which are fully secured by mortgages on office or multi-purpose commercial premises (Article 3, 1°);
• obligation to calculate the replacement cost of derivative instruments according to the method based on market value, unless the establishment benefits from the "de minimis" regime provided for in Article 7 of the regulation on own funds (Article 3, 2°, first indent);

1 Directives 98/31/EC, 98/32/EC and 98/33/EC of June 22, 1998. 2 The articles referred to are those of the amending decree.

COMMISSION BANCAIRE ET FINANCIERE Circular Letter D4/EB/1147 2

• establishment of a specific regime for real estate bonds (Article 3, 5°);
• possibility of applying to claims held on regional or local public authorities of zone A, the lower weighting in force in the country of origin of these public authorities (Article 3, 6°);
• extension to the calculation of potential future credit risk of the application of legally valid netting agreements covering derivative instruments (Article 4, 2°);

(b) regarding market risks:

• removal, from 2005, of the exemption threshold - set at 2% - for the calculation of requirements regarding the coverage of exchange rate risk, and introduction of a "de minimis" regime (Article 5, § 5);
• introduction of own fund requirements for the coverage of risk on base products, including precious metals other than gold (Article 6);
• definition of the procedures governing the use of internal mathematical models (Article 7 and commentary).

(c) regarding risk concentration: removal of limits on risk concentration in the case of linked enterprises insofar as they are included in consolidated supervision (Article 2, § 6).

A copy of this letter is sent to your auditor(s).

Please accept, Madam, Sir, the expression of our distinguished sentiments.

A. NIESTEN, Director.

Attachments: 1. Modifications of the decrees 2. Adaptation of the commentary on the decrees