Article 113 (6) CRR stipulates that an institution may decide, subject to the prior approval of the competent authorities, not to apply the requirements of paragraph 1 of this Article to the exposures of that institution to a counterparty which is either its parent undertaking, its subsidiary, a subsidiary of its parent undertaking or an undertaking linked by a relationship within the meaning of Article 12(1) of Directive 83/349/EEC.

Competent authorities are empowered to grant approval if - among others - the following condition is fulfilled: “(a) the counterparty is an institution, a financial institution or an ancillary services undertaking subject to appropriate prudential requirements”.

Ancillary service undertakings, as defined in Article 4(1)(18) CRR (“ancillary services undertaking” means an undertaking the principal activity of which consists of  owning or managing property, managing data-processing services, or a similar activity which is ancillary to the principal activity of one or more institutions) are not direct addressees of prudential rules of the CRR . However, they are supervised indirectly on a consolidated basis according to Article 18(6) CRR.

In this context, we deem that different interpretations on the notion of “appropriate prudential requirements” - as set out in Article 113(6)(a) CRR - are possible when granting a 0% risk weight to certain counterparties, amongst which ancillary service undertakings: whereas one could consider that such indirect and consolidated supervision is in itself sufficient to fulfil the requirement of “appropriate prudential requirements”, another line of thinking would be that there need to be additional prudential requirements, e.g. based upon other financial sector regulations or national law.

If so, however, it seems difficult to understand of what nature such requirements would be, especially if the ancillary services undertaking is not conducting bank-like activities, e.g. real estate management, which does not require any prudential requirements in most Member States. Therefore, one might also come to the conclusion that for certain counterparties and their business activities, prudential requirements would per se be inappropriate.

In turn, this means that a literal reading of the requirement that ancillary service undertakings need to be subject to prudential supervision will lead to an exclusion of all ancillary services undertakings which do not conduct financial markets regulated or comparable activities (however not constituting an financial institution) unless indirect consolidated supervision is deemed sufficient. In this case, however, the legislator would have introduced a criterion which is redundant, since the inclusion in consolidated supervision is required as per Article 113(6)(b) CRR in itself. On the other hand, the inclusion of the ancillary services undertakings as an eligible counterparty for the purpose of Article 113(6) and (7) CRR is the legislators clear intention. Requiring prudential requirements within a literal and strict understanding would possibly leave no room for ancillary service undertakings to benefit from Art 113 (6) and (7).

In our view, thus, three possible ways exist in reading “appropriate prudential requirements” for the purpose of Article 113(6)(a):

1. Literal reading: “Appropriate prudential requirements” can only be understood as financial markets regulation based solvency requirements or comparable national legislation that implies solvency or capital requirements to ancillary service undertakings. Indirect requirements as per consolidation rules is not sufficient and the appropriateness depends upon solvency requirements on some kind (i.e. irrespective of the business conduct of the ancillary service undertakings, without some prudential requirements in place, Article 113 (6) and (7) CRR cannot be applied).
2. Systematic reading: Since the legislators clear intention was to allow for a 0% RW of ancillary service undertakings, appropriate prudential requirements can also be considered to be indirect, consolidated requirements. Otherwise, the scope of application of Article 113 (6) and (7) CRR would unduly be reduced to institutions and financial institutions, since under a strict interpretation of prudential requirements, only such entities that are under financial markets regulations will be obliged to adhere to solvency or prudential requirements. These will however in most cases constitute a (financial) institution within the meaning of the CRR, hence such a reading would oppose the spirit of including ancillary service undertakings as of Article 113 (6) and (7) CRR.

Literal and systematic reading: The mere inclusion of an ancillary service undertaking in consolidated supervision is not in itself sufficient to fulfil Article 113(6)(a) CRR; however, the appropriateness of prudential requirements has to be assessed against the actual business activities of the undertakings in question in order to not unduly restrain the scope of Article 113 (6) and (7) CRR. Under such a reading, ancillary services that do not pose prudential risk (i.e. no bank like activities) do not require additional prudential requirements that apply parallel or above indirect consolidated requirements. In this instance, adherence to the relevant industrial or trade regulations can be considered sufficient. In cases where ancillary services constitute activities that are comparable to bank or financial markets regulated activities, also comparable prudential requirements have to be applied.