Consultation Document: Review of Directive 94/19/EC on Deposit Guarantee Schemes

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1 BVI Eschenheimer Anlage 28 D Frankfurt am Main European Commission Directorate-General Internal Market Unit H1 SPA2/4/27, B-1049 Bruxelles Bundesverband Investment und Asset Management e.v. Contact: Peggy Steffen Phone: Fax: July 27th, 2009 Consultation Document: Review of Directive 94/19/EC on Deposit Guarantee Schemes Dear Sir or Madam, BVI 1 is grateful for the opportunity to participate in the consultation in relation to the review of Directive 1994/19/EC on deposit guarantee schemes ( DGS ). Our members are manager of mutual funds, both in retail and institutional sector, and asset management companies without permission to receive deposits or other repayable funds from the public and without permission to grant credits for own account. Therefore, our following comments are focused on questions 12 and 13 (scope of covered depositors) which refer solely to deposits by collective investment undertakings. Altogether, in Germany deposits by collective investment undertakings are guaranteed by mutual guarantee schemes and voluntary deposit guarantee schemes. However, legal protection for deposits by collective investment undertakings would cease to exist if these schemes were to be integrated into the DGS (cf. Question 8 of consultation paper) or in case the respective right to compensation should be curtailed. Therefore and to level the playing field at EU level, we support the notion to provide a harmonised minimum level of protection for deposits by collective investment undertakings. 1 BVI Bundesverband Investment und Asset Management e. V. represent the interest of the German investment fund and asset management industry. Its 92 members manage currently assets in excess of EUR 1.6 trillion both in mutual funds and mandates. For more information, please visit BVI is filed in the EU register of interest representatives ( ). Director General: Stefan Seip Managing Director: Rüdiger H. Päsler Rudolf Siebel Eschenheimer Anlage 28 D Frankfurt am Main Postfach D Frankfurt am Main Phone: Fax: info@bvi.de

2 Page 2 of 9, Date July 27th, 2009 I. Preliminary remarks: 1. German schemes a) Legal schemes Germany does not have only one deposit guarantee scheme covering all credit institutions subject to the DGS. In fact, there are two legal schemes which do not cover deposits by collective investment undertakings: Deposit guarantee and investor compensation scheme for private credit institutions (Entschädigungseinrichtung deutscher Banken GmbH, EdB ) Deposit guarantee and investor compensation scheme for public credit institutions (Entschädigungseinrichtung des Bundesverbandes Öffentlicher Banken Deutschlands GmbH, EdÖ ) To this extent and in accordance with Article 7 (2) and Annex I no. 5 of DGS, Germany has excluded management companies, including investment funds managed by them, investment companies and collective investment undertakings domiciled abroad from the legal guarantee (cf. paragraph 3 (2) number 3 of the German Act on deposit guarantee and investor compensation schemes). b) Voluntary schemes In addition to these legal deposit guarantee schemes, the following voluntary funds are established in Germany: Deposit Protection Fund of German Banks (Einlagensicherungsfonds deutscher Banken) which has been established as a dependent special fund within the Association of German Banks (Bundesverband deutscher Banken). In accordance with paragraph 6 (1) of the By-Laws of the Deposit Protection Fund of the Association of German Banks, all liabilities of banks to management companies and their custodian banks inasmuch as investment fund assets are concerned, and in fact in the same manner as liabilities to non-banks, are protected for each creditor up to a ceiling of 30 % of the liable capital as defined in paragraph 10 (2) of German Banking Act. However, a right in law to enforce restitution by the fund does not exist.

3 Page 3 of 9, Date July 27th, 2009 Voluntary Guarantee Fund of the Association of German Public Sector Banks (Einlagensicherungsfonds des Bundesverbandes Öffentlicher Banken Deutschlands, VÖB) The VÖB s Voluntary Guarantee Fund provides comprehensive security for deposits by collective investment undertakings regulated under the German Investment Act the unit holders of which are no credit institutions (cf. paragraph 14 (2) (b) of the By-Laws of the Voluntary Guarantee Fund of the Association of German Public Sector Banks). However, a right in law to enforce restitution by the fund does not exist. c) Mutual guarantee schemes Furthermore, in accordance with Article 3 (1) of DGS, Germany has exempted some credit institutions to which DGS applies from the obligation of membership to a legal deposit guarantee scheme. The following protection schemes are safeguard institutions as defined in paragraph 12 of the German Act on deposit guarantee and investor compensation schemes: Protection scheme of the Association of the Bundesverband der deutschen Volksbanken und Raiffeisenbanken e. V. (BVR) The BVR has set up a protection scheme with a guarantee fund and a guarantee network. The purpose of the protection scheme is to avert or remedy imminent or existing financial difficulties at the BVR s banks (institution protection) and to prevent any negative impact on confidence in cooperative banks. In accordance with paragraph 1 (3) of the statute of the BVR s protection scheme and no. 1 (d) of the procedural rules for the statute of the protection scheme, deposits and liabilities due to management companies for deposits of fund assets are always protected. Guarantee System of the Savings Bank Finance Group All the local savings banks, as well as Landesbanken and Landesbausparkassen, are affiliated to the guarantee system of the Savings Bank Finance Group. The Guarantee System is made up of a total of 13 guarantee schemes: the eleven regional savings bank guarantee funds,

4 Page 4 of 9, Date July 27th, 2009 Guarantee Fund of the Central Savings Banks and Central Giro Institutions, and Guarantee Fund of the Central Building Societies. These guarantee funds that have been integrated into a Joint Liability Scheme protect the affiliated institutions themselves, and in particular safeguard their liquidity and solvency. They are committed to always protect deposits and liabilities to management companies and their custodian banks in respect of fund assets deposits (cf. Art. 2 of the Rules for the Guarantee Funds). Given the fact that in Germany deposits by collective investment undertakings have been guaranteed by mutual guarantee schemes and voluntary deposit guarantee schemes at the time of implementation of the DGS into German law, the German legislator decided to exclude these deposits from the legal guarantee under the DSG. 2. Deposits by collective investment undertakings and bankruptcy proceedings First of all, deposits by collective investment undertakings are relevant for each type of investment fund, but especially for money market funds. In accordance with paragraph 49 of the German Investment Act, management companies may hold for the account of a fund only bank deposits which have a term of no more than twelve months. Such deposits may be maintained with a credit institution with its registered office in an EU or EEA Member State. The deposits can also be held with a credit institution which has its registered office in a third country with supervisory standards are acknowledged by BaFin as equivalent to those of Community law. Moreover, in accordance with the principle of risk diversification, management companies may only deposit up to 20 percent of a fund s value in bank deposits with an individual credit institution (cf. paragraph 60 (3) of the German Investment Act). These obligations result from Art. 19 (1) (f) and Art. 22 (1) of the UCITS Directive 85/611/EEC which coordinates regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS).

5 Page 5 of 9, Date July 27th, 2009 Furthermore, deposits by collective investment undertakings regulated by the German Investment Act and by the UCITS Directive must be kept in separated accounts. But in the event of closure of a German credit institution pursuant to bankruptcy proceedings, the deposits are not legally separated from the insolvency estate and investors are not entitled to claim full restitution of deposits against the liquidator of the insolvent bank. This case differs from the insolvency protection of other depositary assets (such as securities) which are kept separate from the insolvency estate and whereby investors are entitled to claim their recovery against the liquidator of the insolvent bank (cf. paragraph 32 of German Act on deposits of securities). This is the reason for our argument brought forward in the context of the call for evidence on review of Directive 1997/9/EC on investor compensation schemes ( ICSD ), that investors (such as UCITS or UCITS unit holders) should not be able to claim compensation for losses of assets under the ICSD in cases where the UCITS depositary or the institution which has been mandated to safe-keep the assets fail to perform their duties. With regard to the consultation at hand, we would like to add the following remarks: Question 12: Should the eligibility criteria as regards depositors (provided for in Annex 1 no of the Directive) be fully harmonised or should Member States retain some discretion to decide about eligibility of depositors? In our view, the eligibility criteria as regards depositors provided for in Annex 1 no. 5 of DGS should be fully harmonised at EU-level. As explained above, legal protection for deposits by collective investment undertakings would effectively not exist if the German mutual guarantee schemes and voluntary deposit guarantee schemes were to be integrated into the DGS (cf. question 8 of the consultation paper) or if these schemes should curtail the right to compensation for deposits by collective investment undertakings. In these cases, there would be no insolvency protection for these deposits. This problem is already existent in the event of closure of a German credit institution pursuant to bankruptcy proceedings.

6 Page 6 of 9, Date July 27th, 2009 More importantly, most German management companies hold for the account of their funds bank deposits which are maintained with a credit institution with its registered office in an EU or EEA Member State. However, some States exclude most deposits by investment undertakings from the scope of guarantee in accordance with Annex I no. 5 of DGS. Therefore, the management company or the investment company has to clarify which deposits are covered or not covered by a deposit guarantee scheme and which credit institution provides the most comprehensive protection. These proceedings are very sophisticated and could be avoided if the same level of protection for deposits by collective investment undertakings would apply throughout the EU. Furthermore, the sole object of investment funds is to invest the assets raised from the public based on the principle of risk-spreading. Thereby, the management company is bound to act in the sole interest of the fund investors. As a result, there is no difference in the interest position of investors holding direct deposits or units of investment funds, especially in case of money market funds which hold deposits with a credit institution. But in terms of applicable guarantee, direct holders of deposits enjoy the benefit of a fully harmonised protection and in contrast to fund investors whose deposits are not automatically guaranteed. This different level of protection is inexplicable. In this context, an exemption from protection under deposit guarantee schemes could be envisaged merely for special funds whose units are held exclusively by institutional investors having no right to compensation. Finally, competitive distortions between credit institutions in EU Member States could be avoided if the same level of guarantee were in place. If the eligibility criteria in Annex 1 no are harmonised, it could be considered to fully cover all depositors, to cover them only up to a certain percentage of the normal coverage level, or not to cover them at all. Question 13: Do you have background information or evidence whether a covered amount of is relevant for these enterprises? Which solution would you prefer? Please provide reasons. Would you prefer another option? Please describe.

7 Page 7 of 9, Date July 27th, 2009 Basically, we prefer the solution of granting full protection for deposits by collective investment undertakings defined in Annex 1 no. 5 DGS, because a covered amount of is an absolute minimum for these enterprises. BVI s research and statistic department has established that approximately 87 percent of mutual funds launched in Germany (without Open-Ended Real Estate Funds) and approximately 96 percent of money market funds launched in Germany hold more than in bank deposits. In detail: Cases with deposits > 0 Number of all mutual funds (in percent) Number of money market funds (in percent) 0 < deposits ,28 1, < deposits ,44 1,82 deposits > ,28 96,36 The median deposits of all these mutual funds amount to (approximately 5 percent of the median fund s value) and the median deposits of all money market funds amount to (approximately 12 percent of the median fund s value of money market funds). Management companies are only allowed to deposit up to 20 percent of the fund s value in bank deposits with an individual credit institution. However, in the majority of cases (approximately 88 percent), the general volume of a fund s deposits with a bank remains within the limit of 20 percent (in other cases, the deposits are allocated with at least two different institutions): Deposits in relation to the value of the funds Cases (in percent) 0 % < deposits 5 % 50,19 5 % < deposits 10 % 21,60 10 % < deposits 15 % 10,50 15 % < deposits 20 % 5,85 deposits > 20 % 11,86 As a result, a covered amount of per investment fund must be the absolute minimum level. But this amount would be not enough to effectively

8 Page 8 of 9, Date July 27th, 2009 protect the deposits by collective investment undertakings in the event of closure of a credit institution pursuant to bankruptcy proceedings. Against this backdrop, the following solution of a better protection could be considered for deposits by collective investment undertakings: Assuming that the median deposits of all mutual funds launched in Germany amount to (or of money market funds), the management company should be entitled to compensation up to a protection ceiling of minimum per investment fund in general or up to a protection ceiling of minimum per money market fund. The right of compensation could depend upon the condition that the management company is able to identify as many as 50 invested unit holders (or as many as 360 unit holders of money market funds) with a right to compensation. In detail: (covered deposits of unit trust) x 5 = 50 unit holders (covered amount per investor) Remark: The factor of 5 results of the ratio of the median deposits of the funds to the median value of the funds (covered deposits of money market fund) x 12 = 360 unit holders (covered amount per investor) Remark: The factor of 12 results of the ratio of the median deposits of the money market funds to the median value of the money market funds. Finally, the management company should have a right of compensation exceeding the covered amount of per investment fund (or per money market fund, respectively) if the management company is able to prove that more than 50 unit holders (or more than 360 unit holders of money market fund) have a right to compensation. The right to more compensation should then be limited to the actual value of deposits held for the account of a fund within the limit of 20 percent of the value of the fund.

9 Page 9 of 9, Date July 27th, 2009 We hope that our suggestions will help to devise a viable concept for the revision of the DGS. We would like to assure the Commission of our willingness to provide continuing assistance and to engage in further discussions on the subject at hand. Yours sincerely BVI Bundesverband Investment und Asset Management e.v. Alexander Kestler Peggy Steffen

Consultation of the EU Commission Services on the UCITS Depositary Function

Consultation of the EU Commission Services on the UCITS Depositary Function BVI Eschenheimer Anlage 28 D-60318 Frankfurt am Main European Commission Directorate General Internal Market and Services B-1049 Brussels Belgium Bundesverband Investment und Asset Management e.v. By e-mail: