EU and third countries: investments’ equal treatment
In view of expected investments from countries outside the EU, the Capital Requirements Regulation No 575/2013 sets out certain rules to entities in third countries, which financial institutions can benefit from more favorable treatment. The rules through the Implementing Act will enter into force on 1 January 2015; thus, 3rd countries’ investments will be equivalent to rules applied in the EU.
The „Capital Requirements Regulation“ No 575/2013 foresees that certain categories of exposures to entities located in third countries – including central governments – can benefit from a more favorable treatment in terms of capital requirements
These exposures are subject to more favorable treatment according to the European Commission’s Implementing Decision determining that a third country’s prudential supervisory and regulatory requirements are at least equivalent to those applied in the EU.
In the absence of such an Implementing Decision, relevant exposures in those countries would be subject to disproportionately high capital requirements with respect to the degree of risk involved.
In the past, some EU states have granted such recognition to individual third countries on a unilateral basis. The adoption of this Implementing Decision allows the EU to move towards a uniform treatment of third country exposures by establishing a common list of third countries with EU-wide recognition. This is a necessary step in the context of a single banking market.
The Commission will periodically review the list in order to add any other country that proves to be eligible for a positive equivalence assessment.
The Implementing Act will enter into force on 1 January 2015. Once the new rules become applicable, any existing preferential treatment based on national assessments will cease to exist.
Third country banks’ access to the EU financial sector
This Implementing Decision does not change the basic conditions laid down in EU law, reflecting the EU international commitments in access to the EU market to third country operators. It allows EU banks (and investment firms) with exposures to counterparties or investments in sovereign or public sector debt in «equivalent» third countries to apply preferential capital requirements, comparable to those applied to similar EU exposures.
This will allow the deepening of financial relationships with third countries that implement equivalent regulatory and supervisory arrangements. It will also have a positive impact on the capacity of the EU financial industry to finance the EU real economy.
The Implementing Act enters into force on 1 January 2015; then any existing preferential treatment based on national assessments will cease to apply.
More on „equivalency“
Equivalency exists in all cases where the relevant third country’s framework implements a series of operational, organisational and supervisory standards, comparable to those embodied in the relevant EU legislation, which allow the third country to achieve the same final objectives as the EU in terms of:
1) ensuring the stability and integrity of both the domestic and global financial system in its entirety;
2) ensuring effective and adequate protection of depositors and other consumers of financial services;
3) promoting cooperation between different actors of the financial system, including regulators and supervisors;
4) ensuring independent and effective supervision;
5) ensuring proper implementation and enforcement of relevant internationally agreed standards.
Recognised third countries
Following the assessment, the supervisory and regulatory arrangements of the following countries were found equivalent for the respective categories of exposure:
For exposures to credit institutions: Australia, Brazil, Canada, China, Guernsey, Hong Kong, India, the Isle of Man, Japan, Jersey, Mexico, the Principality of Monaco, Saudi Arabia, Switzerland, Singapore, South Africa and the USA;
For exposures to investment firms: Australia, Brazil, Canada, China, Saudi Arabia, Singapore, Mexico, South Africa and the USA;
For exposures to exchanges: Brazil, Canada, China, India, Japan, Mexico, Saudi Arabia, Singapore, South Africa and the USA.
These countries and territories account for over 90% of European credit institutions’ non-EU exposures.
However, the list of countries included in this Decision is not exhaustive. It was not possible for the purposes of this Decision to evaluate the full set of third countries in which EU institutions have exposures. For this purpose, the Commission and the European Banking Authority, EBA have set up a process to ensure that the list of equivalent third countries is updated regularly. In this context, they have developed a specific method to enable an assessment of third countries for which no independent evaluation of compliance with international benchmarks exists. The next updates are scheduled for 2016 and 2017.
In addition, at the latest within 5 years, the Commission, with the assistance of the EBA, will review the initial list of third countries that have been found equivalent for the purposes of exposures to foreign credit institutions with a view to establishing an updated and consolidated list.
With regard to stock exchanges and investment firms, Directive 2014/65/EU and Regulation No 600/2014 on markets in financial instruments (so-called MiFID 2/R) introduce a harmonised third-country equivalence regime for third country investment firms’ access to the EU when they are providing services to professional clients and eligible counterparties. The new regime also provides for decisions to recognise third country trading venues as equivalent for the purposes of the trading obligation (for shares and derivatives) and clearing access. Equivalence assessments undertaken for the purposes of MiFID 2/R will provide a basis for revising the list of third countries included in this Implementing Decision. The Commission should therefore be ready to adopt under MiFID 2/R equivalence decisions which will be used to review this Implementing Decision; these decisions are expected to be adopted by the end of 2016.
The process for assessing equivalence is, by its nature, a permanent and ongoing one given the continuous evolution of supervisory and regulatory arrangements at national, EU and global levels. This means that for countries considered equivalent in the present Decision and in future updates, the Commission can undertake individual reviews of compliance with the conditions on the basis of which equivalence has been granted, taking into account any relevant developments that may impact on the recognition of equivalence.
Eugene Eteris baltic-course.com
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