Ihr Zeichen, Ihre Nachricht Unser Zeichen, Sachbearbeiter Datum BSBV 189/2004 Dr.Rudorfer/Br Durchwahl 3137

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1 Mister Patrick Pearson Head of Unit European Commission, DG Internal Market C.1 200, rue de la Loi, C107 03/18 B-1049 Bruxelles Bundessparte Bank und Versicherung Wiedner Hauptstraße 63 Postfach Wien T +43 (0) DW F +43 (0) E bsbv@wko.at W Ihr Zeichen, Ihre Nachricht Unser Zeichen, Sachbearbeiter Datum BSBV 189/2004 Dr.Rudorfer/Br Durchwahl 3137 Treatment of CIUs in the Trading Book and Banking Book Working Document (CIU-WD) The section bank and insurance of the Austrian Federal Economic Chamber would like to comment on the Commission Services Working Dokument on the Review of Capital Requirements for Banks and Investment Firms as follows: A. General Remarks 1. We welcome the Commission's intention to look into the issue of the treatment of units or shares of investment funds (CIUs) held in the banking book. We appreciate the Commission's view that holdings in regulated investment funds can be treated as separate and distinct investments in the fund's component holdings using a look-through approach to either the actual holdings or the investment rules (mandate) of the fund both in the Standardised Approach (STA) as well as the in the IRB Approach (IRB) for the purpose of calculation of capital charges in the banking book. We believe, however, that the proposed methodologies need to be refined in detail as in part they are to onerous (see below at B). 2. However, in the case of CIUs that are credit rated by an External Credit Assessment Institution (ECAI), it would appear unnecessarily onerous to require credit institutions to look through to their underlying portfolio in order to assess risk. Instead, it should be stated that such CIUs could be placed according to their ECAI rating. 3. We would also like to have made clear that it is intended to allow a bank to apply the standardised look-through approach to one category of fund(s) while at the same time applying internal rating approaches to another category of investment fund(s) ( partial DVR

2 - 2 - use ). There is a practical requirement to use both approaches at the same time for different funds held in the banking book as a bank may not be in the position to, nor does it consider it economically feasible to, collect the wealth of information necessary to apply the internal rating approaches to all investment funds in the banking or trading book, e.g. for a small holding in a fund which invests in e.g. emerging market debt which is usually not analysed in the internal rating system of the bank in question. These alternatives are important in practical terms and the right step into finishing the implementation of the Accord. Furthermore as indicated a few definitions remain open and some clarification on whether the calculation of funds used as collateral will be somehow similar and simplified as well. In view of this paper we would however like to draw your attention once again to the related question of the quite unfavourable treatment of CIUs as collateral compared with direct investments as lined out in the July 2003 Commission Services Consultation Paper. On this matter we would thus like to propose that the general criteria on eligibility as collateral and the methods for calculation of discounts are brought in line with the proposals on the standardised approach in the current CIU- working paper: In detail we would suggest: Institutions which are aware of the underlying exposures of a CIU may calculate an average credit risk mitigation effect based on those exposures using the supervisory volatility adjustments set out in Annex (b) (i) ff. of the July 2003 Commission Services Consultation Paper. Institutions may rely on a third party to calculate and report, in accordance with the methods set out in Annex (b) (i) ff., an average credit risk mitigation effect based on the exposures actually held by the CIU. The third party may also report the foreign exchange positions of the CIU. The correctness of the calculation and report shall be adequately ensured. Institutions may calculate the average credit risk mitigation effect for CIUs of which only the investment mandate of the CIU is known as described in Article II(ii) 6. of the CIU- working paper using the supervisory volatility adjustments set out in Annex (b) (i) ff. of the July 2003 Commission Services Consultation Paper. B. Specific Remarks Trading Book Treatment of CIUs 1) Ad 4.: We believe that the eligibility criteria are sufficiently wide to accommodate all EU and third country investment funds which are held in the trading book of EU credit institutions. We doubt that a definition of CIUs beyond these eligibility criteria adds relevant value to the matter in question. 1) Numbers refer to the numbers of Annex I.

3 - 3 - Ad 5./6.: a) We believe that the simple alternative for exchange traded index tracker funds should be extended to other regulated index tracker funds that allow for daily redemption of units or shares at net asset value (NAV). These funds offer liquidity comparable to exchange traded funds. b) The simple alternative for exchange traded index tracker funds based on assumed positions representing those necessary to replicate the index or basket should be also available in the banking book in order to reduce administrative burden. c) Finally, we urge to recalibrate the suggested minimum correlation of 0.9 between daily price movements of the CIU and the index or basket is lowered to 0.8. Ad 8./9.: We ask to reconsider the requirement that the trading book institution is aware on a daily basis of the underlying investment of a CIU but could be extended a bit. While it is technically feasible to deliver daily portfolios/ risk weights to trading book institutions, we, however, believe this creates an, administrative burden on both the fund manager/administrator to compile and deliver the portfolio reports /risk weightings as well as the trading book institution to analyze these reports on a daily basis. Ad 10. : We suggest to limit the scope of application of the rule on leveraging in cases where only the investment mandate of the CIU is known (cf. last sentence of no. 10). In most CIUs which are allowed to pursue leveraged investment strategies, the investor (i.e. the bank) is either by law or in the fund rules not required to make any additional payments beyond the initial investment in order to pay for the debt of the CIU. In such cases it seems unreasonable to increase the capital burden of the bank investing in such CIUs as the leverage risk is borne by the fund manager and/or the institution which is extending credit to the CIU. After the CIU continues making investments in descending order until the maximum total investment limit is reached. This is perhaps the case for elder CIUs and a transition period with maybe a lower risk weight could be very helpful. Ad 11./12: As it is already the case in some member states the calculation of foreign exchange positions should not include hedged positions. Furthermore, if non hedged foreign exchange positions amount to less than 10 % of the assets of the CIU it should be possible to disregard them. Ad 14.: a) A capital requirement of 100% i.e. a full deduction of the amount of investment from the capital of the institution is unreasonable. Looking at the system of capital charges under Basel2/CAD the maximum risk weight under a fall back methodology should be a risk weight of 100% (or max. 150% in case of some rated bonds) which equates to a capital requirement of 8 %. This risk weight should be applicable not only as a fall back option.

4 - 4 - b) The risk weight 100% should be a true alternative in case of funds which either because of their actual investments and/or their investment rules will be always a candidate for a the highest risk weight. This is e.g. the case for most equity funds. For such funds it would constitute an unnecessary administrative burden to establish the individual risk weight of all holdings, i.e. the hundreds of different shares they hold in order to arrive at the highest risk weight c) In order to further reduce administrative burden for funds which do not want to use the look through approaches it may be further explored to set specific maximum risk weights (RW) used in the STA for specific classes of CIUs. Banking Book Treatment of CIUs STA In the Banking Book-Standardised Approach the general criteria are that the CIU is managed by a company which is subject to supervision in a member state and cooperation between competent authorities is sufficiently ensured. It shall include the categories of assets the CIU is authorised to invest in and to calculate the relative limits and methodologies if investment limits apply. In practise, often the management of an investment fund is splitted by different managers. It should be made clear, if the above criteria are meant for all parties involved. Ad 2.: We believe that the scope of eligibility criteria is wide enough to capture all holdings of EU or third country CIUs held in the banking book. Our further comments on item No. 4 Trading Book Treatment (TBT) are also applicable to the banking book issue. Ad 3./4.: We suggest to add that Collective Investment Units (CIU) held in the banking book for purposes of the STA can either be treated as: A single investment, based on the credit rating assessment of the CIU by a nominated ECAI; or As separate and distinct investments in the CIU s component holdings based on a lookthrough approach, where this is provided by a third party, e.g. the managing company of the CIU, on at least a e.g. monthly basis; or A single investment, based on the weight of the majority of the fund s holdings, where this is provided by a third party, e.g. the managing company of the CIU, on at least a e.g. monthly basis (see above item 14 TBT). Furthermore we would like to draw your attention to the fact, that the daily calculation of risk weights is only feasible through sophisticated and cost-thriving IT-systems, which are normally not at hand in small institutions. Instead of asking for daily reports on the composition of CIUs and the subsequent daily calculation of risk weights, the commission proposal should rather focus on the availability of this information.

5 - 5 - If information on the composition of a CIU is constantly available, institutions should be permitted to calculate the average risk weight based on those exposures on a practically attainable time-frame, e. g. on a monthly basis. This would ensure that also smaller institutions are able to apply the look-through-approach. If the commission proposal is not altered in the way mentioned above, smaller institutions will be forced to apply the simpler method as set out in paragraph 6, i. e. calculating the risk weight on the basis of assuming that the CIU invests, to the maximum extent allowed under its mandate, in the asset classes attracting the highest capital requirement. Considering the commission s objective to give incentives to apply more risk-sensitive approaches in calculating risk weights, an alteration of the criteria for the look-through-approach should be feasible. Ad 7./8.: Our comments above on item 11/12 TBT are applicable. Ad 9.: We oppose a risk weight of 1250% which excessively overstates the true risk of CIUs. CIUs are a regulated, supervised, and risk diversified investments. Our comments on number 14 TBT above are also applicable in the context of the banking book. Banking Book Treatment of CIUs IRB Ad 2.: We believe that the scope of eligibility criteria is wide enough to capture all holdings of EU or third country CIUs held in the banking book. Our comments on item No. 4 Trading Book Treatment (TBT) are also applicable to the banking book issue. Ad 3.: We believe that the STA and the IRB should not lead to unequal treatment of holdings of CIUs. As a result to the extent that an institution is not able to determine a risk weight for a CIU portfolio holding under the IRB we do not believe it is appropriate to accord these investments the next highest risk weight to the credit quality step which would normally aply under the STA. Instead the institution should be allowed to apply the risk weight established under the STA. As a result the suggested risk weights of 200% (bonds), 300% (publicly traded equity), and 400% (other equity) should to be capped at a lower risk weight. Ad 6./7.: Our comments above on item 11/12 TBT are applicable. Ad 8.: We oppose a risk weight of 1250% which excessively overstates the true risk of CIUs. CIUs are a regulated, supervised, and risk diversified investments. Best regards, Dr. Herbert Pichler Department Bank and Insurance Austrian Federal Economic Chamber

CESR s draft advice to the European Commission on the eligible assets of UCITS

CESR s draft advice to the European Commission on the eligible assets of UCITS CESR Bundessparte Bank und Versicherung Wiedner Hauptstraße 63 Postfach 320 1045 Wien T +43 (0)5 90 900-DW F +43 (0)5 90 900-272 E bsbv@wko.at W http://wko.at/bsbv Ihr Zeichen, Ihre Nachricht vom Unser