Response to consultation on Guidelines on Connected Clients
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1. In cases of SPV’s involved in the securitisation with an insolvency-remote set up and further features of high quality securitisations warranting that there is no channel of contagion between the SPV and the originator constituting a single idiosyncratic risk
We refer to point 3 of our special remarks. Auditors require with reference to IFRS 10 in many cases the inclusion of SPV’s from securitisation in the consolidated financial statements. Often it suffices that the originator has sold its loan or lease receivables to an SPV involved in a securitisation transaction, render the servicing and holds a securitisation position. For instance, such securitisation position may exist to fulfil the risk retention requirements pursuant to Article 405 CRR or may stem from overcollateralisation. Through the inclusion of the SPV in the originator’s consolidated financial statements, a case of control is assumed based on IFRS 10 in conjunction with Article 4(1) (37) CRR. However, no single idiosyncratic risk exists in many of such cases. This, in particular, applies to SPV’s involved in the securitisation with an insolvency-remote set up and further features of high quality securitisations warranting that there is no channel of contagion between the SPV and the originator constituting a single idiosyncratic risk. Without the possibility to rebut the group of connected clients pursuant to Article 4 (1) (39) (a) CRR due to the missing single idiosyncratic risk, a group of connected clients between the originator and the SPV involved in the securitisation would have to be constituted which would impede the funding opportunities of the originator and all the companies including that of the real economy that belong to such a group due to large exposure limitations. This would not be justified.
2. Majority of voting rights with comprehensive minority protection rights of the minority shareholders that prevent control by the majority shareholder.
Pursuant to § 290 (2) of the German Commercial Code, in all case of the enumeration a dominant influence and thus control pursuant to Article 4 (1) (37) CRR is irrefutably presumed. This is notably of relevance in the case of § 290 (2) (1) of the German Commercial Code: Regardless of the actual rights of control, it is irrefutably presumed that one company has a dominant influence over the other company if one company holds the majority of voting rights of the other company. A constitution of a group of connected clients is, however, not appropriate in those cases where there are minority protection rights in favour of the minority shareholder that prevent a dominant influence of the majority shareholder. For instance, in many joint venture agreements, it is stipulated that irrespective of a formal majority of 51% of the voting rights all important matters require the prior consent both of the majority shareholder and the minority shareholder. In such a case, there is no control according to IFRS 10 but control pursuant § 290 (2) (1) of the German Commercial Code. The possibility to rebut the constitution of a group of connected clients allows the formation of a group of connected clients that is aligned with the actually existing control rights that constitute a single idiosyncratic risk and contributes to a more uniform formation of group of connected clients.
‘When conducting this assessment, institutions should consider the following non-exhaustive list of indicators of control taking into account the specific circumstances of each case.’
For instance, a shareholding of more than 50% in another company is specified as indicator of control. Holding a majority of shares in itself only leads to control, however, if it is accompanied by a similar majority of voting rights or by other rights ensuring a dominant influence. Where, for instance, majorities in terms of shares and voting rights diverge, there is no control by a majority shareholder. In Germany, this notably is of relevance is case of limited partnerships (Kommanditgesellschaften) with majority limited partners (Mehrheitskommandisten) under standard articles of association. In this case, the limited partner, whose personal liability is limited to the amount of capital he has invested, holds the majority of the shares but merely has no right of control, because the company is controlled and dominated by the general partner (Komplementär).
We have reservations about the indicator ‘blocking minority’ because the ability to effectively block important decisions does not mean control. It is common sense that control typically requires rights to actively participate in decision to steer and control an undertaking. A mere right to block or prevent decisions is usually not sufficient. Hence, IFRS 10 does not presume control due a potential blocking minority.
We appreciate those thresholds as a trigger for intensifying the assessment on economic dependencies.
We therefore suggest amending paragraph 23 of the draft EBA Guidelines as follows:
‘Institutions should consider, in particular, the following situations that may constitute a single risk based on economic dependency:’
Question 1: Are you aware of any situations where the existence of a control relationship among clients does not lead to a ‘single risk’?
Most significant examples are the following from our point of view:1. In cases of SPV’s involved in the securitisation with an insolvency-remote set up and further features of high quality securitisations warranting that there is no channel of contagion between the SPV and the originator constituting a single idiosyncratic risk
We refer to point 3 of our special remarks. Auditors require with reference to IFRS 10 in many cases the inclusion of SPV’s from securitisation in the consolidated financial statements. Often it suffices that the originator has sold its loan or lease receivables to an SPV involved in a securitisation transaction, render the servicing and holds a securitisation position. For instance, such securitisation position may exist to fulfil the risk retention requirements pursuant to Article 405 CRR or may stem from overcollateralisation. Through the inclusion of the SPV in the originator’s consolidated financial statements, a case of control is assumed based on IFRS 10 in conjunction with Article 4(1) (37) CRR. However, no single idiosyncratic risk exists in many of such cases. This, in particular, applies to SPV’s involved in the securitisation with an insolvency-remote set up and further features of high quality securitisations warranting that there is no channel of contagion between the SPV and the originator constituting a single idiosyncratic risk. Without the possibility to rebut the group of connected clients pursuant to Article 4 (1) (39) (a) CRR due to the missing single idiosyncratic risk, a group of connected clients between the originator and the SPV involved in the securitisation would have to be constituted which would impede the funding opportunities of the originator and all the companies including that of the real economy that belong to such a group due to large exposure limitations. This would not be justified.
2. Majority of voting rights with comprehensive minority protection rights of the minority shareholders that prevent control by the majority shareholder.
Pursuant to § 290 (2) of the German Commercial Code, in all case of the enumeration a dominant influence and thus control pursuant to Article 4 (1) (37) CRR is irrefutably presumed. This is notably of relevance in the case of § 290 (2) (1) of the German Commercial Code: Regardless of the actual rights of control, it is irrefutably presumed that one company has a dominant influence over the other company if one company holds the majority of voting rights of the other company. A constitution of a group of connected clients is, however, not appropriate in those cases where there are minority protection rights in favour of the minority shareholder that prevent a dominant influence of the majority shareholder. For instance, in many joint venture agreements, it is stipulated that irrespective of a formal majority of 51% of the voting rights all important matters require the prior consent both of the majority shareholder and the minority shareholder. In such a case, there is no control according to IFRS 10 but control pursuant § 290 (2) (1) of the German Commercial Code. The possibility to rebut the constitution of a group of connected clients allows the formation of a group of connected clients that is aligned with the actually existing control rights that constitute a single idiosyncratic risk and contributes to a more uniform formation of group of connected clients.
Question 2: What is the likely impact of the clarification of having an exceptional case when the existence of a control relationship does not lead to a ‘single risk’? Please provide an estimation of the associated quantitative costs.
This cannot be answered because EBA’s understanding of “exceptional case” is unclear. However, if originators were forced by supervisory guidance to constitute a group of connected clients between the originator and the SPV it would have a severely hamper the funding of the originators by means of securitisation. We would like to repeat that there is no single idiosyncratic risk. This is the case for both STS- and Non-STS securitisation.Question 3: Do you see a need for further clarification of the accounting provisions which are relevant for large exposures purposes? If yes, please point out the exact indicator of control according to the Directive 2013/34/EU or Regulation (EC) No 1606/2002 which should be clarified with respect to the large exposures regime.
No. We welcome the clarification that the consolidated financial statements prepared in accordance with the provisions of EU law are to be taken as the main indicator of control within the meaning of Article 4 (1) (37) in conjunction with (39) of the CRR.Question 4: Are there any other indicators of control in the case of a similar relationship which are useful to add to this list of indicators?
No, each case of control depends on the circumstance of the single case. However, there are a number of standard constellations that constitute the rebuttable presumption of control. The list of indicators is useful and helpful and comprises all relevant well-known constellations that may constitute control. A further extension of the list of control indicators is not necessary because EBA already has clarified that it is a “non-exhaustive list of indicators of control”. We understand the indicators specified as a list of features that may indicate a control relationship and where the existence of control has to be examined. To clarify that the list of indicators is not only a checklist but that the specific circumstances of each case have to be taken into consideration, we would welcome if sentence 2 of paragraph 13 c of the draft EBA Guidelines would be completed as follows:‘When conducting this assessment, institutions should consider the following non-exhaustive list of indicators of control taking into account the specific circumstances of each case.’
For instance, a shareholding of more than 50% in another company is specified as indicator of control. Holding a majority of shares in itself only leads to control, however, if it is accompanied by a similar majority of voting rights or by other rights ensuring a dominant influence. Where, for instance, majorities in terms of shares and voting rights diverge, there is no control by a majority shareholder. In Germany, this notably is of relevance is case of limited partnerships (Kommanditgesellschaften) with majority limited partners (Mehrheitskommandisten) under standard articles of association. In this case, the limited partner, whose personal liability is limited to the amount of capital he has invested, holds the majority of the shares but merely has no right of control, because the company is controlled and dominated by the general partner (Komplementär).
We have reservations about the indicator ‘blocking minority’ because the ability to effectively block important decisions does not mean control. It is common sense that control typically requires rights to actively participate in decision to steer and control an undertaking. A mere right to block or prevent decisions is usually not sufficient. Hence, IFRS 10 does not presume control due a potential blocking minority.
Question 5: What would be the cost of the assessment of the existence of control relationships in the case of subsidiaries exempted from accounting consolidation? Please provide an estimation of quantitative costs. In your experience, how significant are these cases?
This is difficult to assess and would require a more comprehensive analyses. Yet we feel that the necessary efforts are high and do not outweigh the benefits in most cases. With regard to IFRS in most cases those companies are exempted from the consolidation of the group that are not material for the assessment of the financial situation of the group. In addition, it is often difficult to obtain the documents that are required for an assessment. Against this backdrop, it should be allowed to abstain from further investigations, if there is no clear indication of control such as the majority of voting rights and if the exposure of such company that is not included in the consolidation is not material.Question 6: Is the guidance provided in section 5. ‘Alternative approach for exposures to central governments’ clear? If not, please provide concrete suggestions.
In principle,yes.Question 7: What is the likely impact of considering that clients are connected as soon as the failure of a client would lead to ‘repayment difficulties’ of another client? Please provide an estimation of any associated quantitative costs.
This is very difficult to assess and would depend on the grading of the repayment difficulties. We are of the opinion that the repayment difficulties have to be existence-threatening (refer to our specific remarks to “payment difficulties” above). In case of repayment difficulties that are only temporary the impact could be very high.Question 8: Are the situations described in the list in paragraph 23 as constituting economic dependency clear? If not, provide concrete suggestions. In particular, do you have any comments regarding the introduction of the threshold of ‘at least 50%’ in points c), d), f) and g)?
The situations described in the list are more or less clear. We reject an obligatory constitution of economic dependency based on a hard threshold and refer to our specific remarks.We appreciate those thresholds as a trigger for intensifying the assessment on economic dependencies.
We therefore suggest amending paragraph 23 of the draft EBA Guidelines as follows:
‘Institutions should consider, in particular, the following situations that may constitute a single risk based on economic dependency:’