The three main European financial regulators have issued a joint consultation on draft regulatory technical standards (RTS) relating to risk concentration and intra-group transactions within financial conglomerates.
The European Banking Authority (EBA), European Securities and Markets Authority (ESMA) and European Insurance and Occupational Pensions Authority (EIOPA) – together known as the ESAs (European Supervisory Authorities) – are aiming to enhance supervisory consistency in applying the Financial Conglomerates Directive (FICOD).
“While Member States have implemented the FICOD and apply financial conglomerate supervision, the wide discretion given to Member States in the FICOD hampers supervisory consistency. These RTS strive to enhance supervisory consistency with regard to risk concentration and intra-group transactions at the level of the financial conglomerate,” the ESAs said.
Intragroup transactions that are not performed at arm’s length may need to be reported to regulators. Some transactions may require the involvement of the board or of outside experts, and financial conglomerates may be required to report more freqntly than annually on risk concentration and intra-group transactions.
The consultation is open until 24 October 2014.
The consultation paper can be accessed at the three regulators’ websites. It can be found at the EIOPA website by clicking here.
(a) the solvency and liquidity position at the level of the financial conglomerate and of the individual entities within the financial conglomerate;
(b) the size, complexity and specific structure of the financial conglomerate including the existence of special purpose vehicles, ancillary entities, third countries entities;
(c) the specific risk management structure of the financial conglomerate and the features of the system of governance;
(d) the diversification of the financial conglomerate´s exposures and of its investment portfolio;
(e) the diversification of the financial conglomerate´s financial activities with respect to geographical areas and lines of business;
(f) the relationship, correlation and interaction between risk factors across the entities in the financial conglomerate, i.e. inter-risk concentration;
(g) the possibility of contagion effects within the financial conglomerate;
(h) the possibility of a circumvention of sectoral rules;
(i) the possibility of conflicts of interest;
(j) the level or volume of risks;
(k) a possible accumulation and interaction of exposures incurred by entities belonging to different financial sectors of the financial conglomerate, if not already reported at a sectoral level;
(l) exposures within a financial sector of the financial conglomerate, which are not reported under the provisions of the sectoral rules.
Article 3 says that ‘significant intra-group transactions’ may include the following transactions within a financial conglomerate:
(a) investments and intercompany balances including real estate, bonds, equity, loans, hybrid and subordinated instruments, collateralised debt, arrangements to centralise the management of assets or cash or to share costs, pension arrangements, provision of management, back office or other services, dividends, interest payments and other receivables;
(b) guarantees, commitments, letters of credit and other off-balance sheet transactions;
(c) derivatives transactions;
(c) [sic] purchase, sale or lease of assets and liabilities;
(d) intra-group fees related to distribution contracts;
(e) transactions to shift risk exposures between entities within the financial conglomerate, including transactions with special purpose vehicles or ancillary entities;
(f) insurance, reinsurance and retrocession operations;
(g) transactions that consist of several connected transactions where assets or liabilities are transferred to entities outside of the financial conglomerate, but ultimately risk exposure is brought back within the financial conglomerate.