Amendment of rules (foreign collective investment institutions)

Amendment of rules on reporting by foreign collective investment institutions registered with the CNMV

CNMV Circular 2/2011 of 9 July 2011 (BOE of 26 July 2011) on reporting by foreign collective
investment institutions registered with the CNMV repeals and replaces CNMV Circular
2/2006 of 27 June 2006.30 The Circular writes into the Spanish legal system the latest
precepts of Union legislation31 which came into force on 1 July 2011.
Under the new notification procedure, collective investment institutions (CIIs) have to submit
the relevant documentation to the competent authority of the home Member State.
That documentation shall include the notification letter, which contains the identity of the
entity empowered to represent the CII before the CNMV and the information on the provisions
for marketing the CII in the host Member State. In this respect, the Circular spells out
the specific information which the foreign CII must include in the notification letter, for
which purpose it sets out a standard format of the marketing report.32
Certain information on the foreign CII must be kept up to date electronically.
The requirements regarding the CII documentation to be sent to the CNMV are changed, the
information required to be disclosed to investors is adjusted somewhat, the requirement to register
compartments in the CNMV register is eliminated, and the content of the communication to
be made to the CNMV pursuant to Article 52 of the Personal Income Tax Regulations is broadened
to include information on compartments and/or classes to be reported for tax purposes.
Lastly, non-harmonised CIIs are no longer required to send information electronically.
The Circular came into force on 1 July 2011.

AMENDMENT OF LEGISLATION (CREDIT INSTITUTION DEPOSIT GUARANTEE FUNDS)

AMENDMENT OF LEGISLATION ON CREDIT INSTITUTION DEPOSIT GUARANTEE FUNDS.

Royal Decree 771/2011 amends Royal Decree 2606/1996 by introducing a new regime for
additional contributions to these funds based on the remuneration of the deposits in
them.12 Specifically, the amounts of the deposits whose agreed remuneration exceeds the limits specified below shall be weighted at 500% (i.e. 400% more than the weight they
would have if they were included in that base) for the purpose of calculating the contributions
of the credit institutions belonging to the related deposit guarantee funds.

The limits above which the new weights will be applied are as follows: 1) sight deposits
whose annual interest paid in the periodic settlement of the account is more than 100 basis
points higher than average 1-month EURIBOR; 2) time deposits (or similar instruments)
up to three months whose agreed annual interest is more than 150 basis points higher than
average 3-month EURIBOR; 3) time deposits (or similar instruments) between three
months and one year whose agreed annual interest is more than 150 basis points higher
than average 6-month EURIBOR; and 4) time deposits (or similar instruments) with a term
of one year or more whose agreed remuneration is more than 100 basis points higher than
average 12-month EURIBOR.
Banco de España Circular CBE 3/2011 of 30 June 2011 (BOE of 2 July 2011) on additional
contributions to deposit guarantee funds sets out technical provisions implementing
the new precepts introduced by Royal Decree 771/2011.
The Circular contains two types of rules: those for identifying what is understood as deposit
remuneration in different practical cases, and those regulating ad hoc tools for calculating
the additional contribution.
Deposit remuneration shall comprise any explicit or implicit compensation or payment,
in cash or in kind, for maintaining a deposit. Thus the value of remuneration in kind shall
be that applicable under tax legislation, including any tax prepayments to be made for
the remuneration when they are borne by the institution. In variable-rate time deposits,
the remuneration shall be that which results from applying the reference index at the
deposit placement date over the whole of the agreed time period, disregarding possible
future modifications. In time deposits in which the interest rates change before maturity,
the interest rate taken shall be the average of the rates, weighting each by the time it is
to be applied. In hybrid financial instruments in which the embedded derivative does
not share similar characteristics and risks with the host contract, the interest rate used
to determine their remuneration shall be the maximum annual percent remuneration
receivable by the depositor on the amount deposited, if it is higher than the effective
annual interest rate corresponding to the host contract after the embedded derivative
has been stripped out; in the absence of the former, only the latter shall be taken. In any
event, any additional remuneration envisaged in the contract, be it in cash or in kind,
has to be included.
For the purpose of calculating the additional contributions to a deposit guarantee fund
stipulated in Royal Decree 771/2011, in sight deposits the specified limits shall be compared
with the remuneration of their average balances. These average balances shall be
the result of dividing the sum of the daily balances of each sight deposit by the number of
calendar days included in each settlement. In time deposits, comparison shall be with the
various limits set depending on the duration of the initially agreed deposit, disregarding
any potential partial repayments agreed in the contract. Subsequent renewals, whether
envisaged or not in the original contract, shall be considered as new deposits.
Law 6/2011 came into force on 13 April 2011, Royal Decree 771/2011 came into force on
5 June 2011 (except as provided in the case of the transitional regimes envisaged therein)
and Circular 3/2011 came into force on 4 July 2011.

COMPETENCE OF AND COOPERATION BETWEEN SUPERVISORS

STRENGTHENING OF THE COMPETENCE OF AND COOPERATION BETWEEN SUPERVISORS

The Law introduces various measures in this respect, such as the obligation of the Banco de España and the CNMV to take into account the effect of their decisions on the stability of the financial stability of other Member States, the regulation of colleges of supervisors and of common decisions within the framework of supervision of cross-border groups, and the possibility of designating a branch of a credit institution as being significant.
Along these lines, to the competences entrusted to the Banco de España and the CNMV as the authorities responsible supervising credit institutions and investment firms, respectively, and their respective consolidatable groups, are added the following new ones:
1 Require institutions and their groups to have in place remuneration policies and practices that are consistent with and promote sound and effective risk management and to limit variable remuneration when it is inconsistent with the maintenance of a sound capital base.
2 Use the information received in accordance with the disclosure criteria established in this Law to compare remuneration trends and practices.
3 Collect information on the number of individuals per credit institution in pay brackets of at least €1 million including the business area involved and the main elements of salary, bonus, long-term award and pension contribution.
That information shall be forwarded to the European Banking Authority and the European Securities and Markets Authority by the Banco de España and the CNMV, respectively.
Regarding European Union supervisory authorities, the new obligations set for the Banco de España and the CNMV include the following:
1 Planning and coordination of supervisory activities in cooperation with the competent authorities involved, in preparation for and during emergency situations, including adverse developments in credit institutions or in financial markets, using, where possible, existing defined channels of communication for facilitating crisis management.
2 The formulation of applications to the competent supervisory authorities of a credit institution or investment firm authorised in the European Union with branches in Spain for such branches to be deemed to be significant, and, in the absence of a joint decision in this respect, the issuance of a decision on whether the branch is significant.
Regarding this latter case, in accordance with the legally stipulated procedure, the Banco de España or, as applicable, the CNMV shall work towards the adoption of a joint decision on the application with the other competent authorities of other Member States entrusted with supervising the various institutions forming part of the group. Also, they shall be responsible for ruling, through a joint decision, on the equivalent applications made by the competent authorities of countries in which branches of  Spanish credit institutions are located, and, in the absence of a joint decision in that respect, for recognising the decision by such competent authority on the branch’s significant nature. In these procedures, a branch shall be considered to be significant on the basis of such reasons as market share in terms of deposits, the likely impact of a suspension or closure of the operations on market liquidity or on the payment and clearing and settlement systems, and the size and
the importance of the branch in terms of number of clients.
Also, the Law strengthens the close cooperation with other competent authorities responsible for the supervision of foreign credit institutions or investment firms, parents, subsidiaries or investees in the same group. Within this cooperation framework, the Banco de España and, where applicable, the CNMV shall do everything in their power to reach a joint decision to determine the adequacy of the consolidated level of own funds held by the group with respect to its financial situation and risk profile and the required level of own funds for each entity within the banking group and on a consolidated basis. The joint decision shall also duly consider the risk assessment of subsidiaries performed by relevant competent authorities.
The joint decision shall be adopted according to the legally stipulated procedure.
In order to facilitate the exercise of their tasks with other EU competent authorities, the Banco de España and the CNMV shall establish colleges of supervisors and ensure appropriate coordination and cooperation with third-country competent authorities.
Colleges of supervisors shall provide a framework for the following tasks, among others:
1) exchanging information; 2) agreeing on voluntary entrustment of tasks and voluntary
delegation of responsibilities where appropriate; 3) determining supervisory examination
programmes based on a risk assessment of the group; 4) increasing the efficiency of supervision
by removing unnecessary duplication of supervisory requirements; and 5) consistently
applying the prudential requirements for the taking up and pursuit of the business
of credit institutions across all entities within a banking group without prejudice to the
options and discretions available in EU legislation;
When the Banco de España or the CNMV supervise an institution with significant branches, they shall also establish and preside a college of supervisors to facilitate the exchange of information. Legal provisions may be promulgated specifying the characteristics to be met by these colleges, the composition of which shall be determined by the Banco de España or the CNMV, as appropriate.

Lastly, the Law reforms the exchange of information by the Banco de España with central banks and other bodies with a similar function in their capacity as monetary authorities.
Under this reform, which addresses the exchange of information and cooperation between supervisory authorities, it is expressly provided that such exchange may refer to the information relevant for the exercise of their respective statutory tasks.

CHANGES IN LIQUIDITY RISK MANAGEMENT POLICY

A substantial change was made to the risk management policy of credit institutions, specifically
that regarding liquidity risk. The Banco de España will periodically assess the
overall management of this risk and encourage the development of sound internal methodologies.
Its assessments shall take into account the role played by credit institutions in
financial markets. However, the Banco de España shall detail the method and procedure
to be used in these assessments.
Credit institutions shall establish robust strategies, policies, processes and systems for
the identification, measurement, management and monitoring of liquidity risk over an appropriate
set of time horizons, including intra-day, so as to ensure that credit institutions maintain adequate levels of liquidity buffers. Those strategies, policies, processes and systems shall be tailored to business lines, currencies and entities and shall include adequate allocation mechanisms of liquidity costs, benefits and risks.
Credit institutions shall consider different liquidity risk mitigation tools, including a system of limits and liquidity buffers in order to be able to withstand a range of different stress events and an adequately diversified funding structure and access to funding sources.
Those arrangements shall be reviewed regularly.
As under the previous legislation, alternative scenarios shall be considered and the assumptions
underlying decisions concerning the funding position shall be reviewed regularly.
Credit institutions shall adjust their strategies, internal policies and limits on liquidity risk
and develop effective contingency plans, taking into account the outcome of the alternative
scenarios considered.

CHANGE IN LIMITS ON LARGE EXPOSURES

The new legislation generally maintains the limit such that the value of all the exposures of
a credit institution to a customer (entity or economic group) may not exceed 25% of its
own funds.
Where that customer is a credit institution or investment firm, or where the economic
group includes one or more credit institutions or investment firms, the value of all exposures
may not exceed 25% of the credit institution’s own funds or €150 million, whichever
the higher, provided that the sum of exposure values to all customers in the economic
group that are not credit institutions or investment firms does not exceed 25% of the
credit institution’s own funds.
Where the amount of €150 million is higher than 25% of the credit institution’s own funds,
in accordance with the policies and procedures to manage and control concentration risk,
the value of the exposure shall not exceed a reasonable limit in terms of the credit institution’s
own funds. That limit shall not be higher than 100% of the credit institution’s own
funds.
The previous limit that total large exposures could not exceed 800% of the credit institution’s
own funds is eliminated.
The following exceptions to limits on large exposures are also eliminated: 1) holdings in
certain insurance companies up to a maximum of 40% of own funds, and 2) claims on
certain central governments and central banks of countries that are denominated and financed
in the borrower’s national currency.

Amendment of legislation (payment and securities settlement systems)

The new Law also extends to interoperable systems the legal regime under Law 41/1999 for
insolvency of a system participant, the procedures established and the effects on transfer orders
and on collateral. It should be noted that the opening of an insolvency proceeding against
a participant or operator of an interoperable system does not prevent the funds or securities
available in that participant’s liquidation account from being used to meet its obligations in that
system during the business day in which the insolvency proceeding was opened.
As regards Royal Decree-Law 5/2005, credit claims18 are included as part of the collateral
that can be used in financial transactions. However, credit claims in which the debtor is a
consumer, a micro enterprise or a small enterprise may not be used as financial collateral,
save where the collateral taker or the collateral provider of such credit claims is one of the
institutions listed in Royal Decree-Law 5/2005.19
It continues to be legally required that financial collateral agreements be in writing, or in a
legally equivalent form, with no further requirement for their creation, validity, perfection,
priority, enforceability or admissibility as evidence. The creation of the security interest shall
require, in addition to registration of the collateral agreement, the provision of the asset
designated as collateral, and registration of such provision in writing or in a legally equivalent
form. However, in the case of credit claims, the inclusion in a list of claims submitted in
writing, or in a legally equivalent manner, to the collateral taker is sufficient to identify the
credit claim and to evidence the provision of the claim provided as financial collateral between
the parties and against the debtor or third parties. A debtor that pays before being
notified of the provision of a security interest shall be released from the related obligation.
Debtors of credit claims may validly waive, in writing or in a legally equivalent manner: 1)
their rights of set-off vis-à-vis the creditors of the credit claim and vis-à-vis persons to
whom the creditor assigned, pledged or otherwise mobilised the credit claim as collateral;
and 2) their rights arising from banking secrecy rules.
Regarding the rights of substitution and disposal of collateral provided for in Royal Decree-
Law 5/2005, the right of disposal shall not apply when the collateral is a credit claim and the
right of substitution shall not apply when the collateral is a non-fungible credit claim.20
In the event of enforcement of collateral arrangements by the collateral taker due to non-compliance
with the obligations or any enforcement event agreed by the parties, when the collateral
is in the form of credit claims, these shall be realised by sale or appropriation and by setting
off their value against, or applying their value in discharge of, the relevant financial obligations.
Finally, the rest of the text of Royal Decree-Law 5/2005 is revised so as to correct and
clarify other matters not relating to the transposition of the directive, and to resolve some
problems of legal uncertainty.
In addition, Law 22/2007 of 11 July 2007 on the distance marketing of consumer financial
services was amended. Specifically, the consumer’s prior consent is required for a supplier
to use automated calling systems without human intervention or fax messages as a
means of distance communication.
The Law came into force on 1 July 2011, except for the amendment to Law 22/2007, which
came into force on 13 April 2011.