The issue is that the term and definitions for "institution" and "unregulated financial entity" are not complementary and thus could cover the same counterparts. Could EBA confirm that they don't want to have the same entities reported in the 2 groups ("institutions" and "unregulated financial entities") and clarify both terms?
Article 394 paragraph 2 states that institutions should report "its 10 largest exposures on a consolidated basis to institutions as well as its 10 largest exposures on a consolidated basis to unregulated financial entities,(...)". But institutions are defined under Article 4(1)(3) are "a credit institution or an investment firm" where: - credit institution are defined under article 4(1)(1) "undertaking the business of which is to take deposits or other repayable funds from the public and to grant credits for its own account;" and - Investment firms are defined under Article 4(1)(2) "a person as defined in point (1) of Article 4(1) of Directive 2004/39/EC, which is subject to the requirements imposed by that Directive, excluding the following (...)" This means concretely that there is no geographical limitation for credit institutions. But unregulated financial entities are defined under Article 142(1)(5) as "any other entity that is not a regulated financial sector entity but performs, as its main business, one or more of the activities listed in Annex I to Directive 2013/36/EU or listed in Annex I to Directive 2004/39/EC;", A regulated financial sector entity is defined as a financial sector entity (which cover any credit institution) that "is, or one of its subsidiaries is, subject to prudential regulation in the Union or to the laws of a third country which applies prudential supervisory and regulatory requirements at least equivalent to those applied in the Union;" This means for instance that a Chinese bank would be considered as an "institution" (credit institution) and could be reported as such for the large exposure purpose but also as an "unregulated financial entity" because it doesn't fall in the category of "regulated financial sector entity" - since its prudential regulation is - for now - not considered as equivalent - but it performs one on the activities listed in Annex I to directive 2013/36/EU - for instance "acceptance of deposit", or "lending" and would also be reported. This conflict in term of perimeter will lead to implementation issues and will reduce the regulator's visibility of the institution's exposures to unregulated financial entities.
For the purposes of calculating the value of exposures in accordance with Part Four of Regulation (EU) No 575/2013 (CRR), the term 'institutions', as specified in Article 391 of the CRR, covers the following:
Put differently, undertakings established in third countries which fulfil the definition of the term 'institution' as specified in point 3 of Article 4(1) of CRR without being subject to prudential supervisory and regulatory requirements at least equivalent to those applied in the EU are excluded from the category of 'institutions'. These undertakings are qualified as 'unregulated financial sector entities' for the reporting requirement in Article 394(2) of the CRR.
Credit institutions and investment firms that are subject to the prudential supervisory and regulatory requirements specified in Directive 2013/36/EU and the CRR cannot be qualified as 'unregulated financial sector entities'.
In addition, financial institutions authorised and supervised by the Member States' competent authorities and subject to prudential requirements comparable to those applied to institutions in terms of robustness, in accordance with Article 119(5) of the CRR, also cannot be qualified as 'unregulated financial sector entities'.
The terms 'institution' and 'unregulated financial sector entity' are therefore mutually exclusive and cannot cover the same counterparties irrespective of whether these entities are established in third countries or in the EU. As a result, a counterparty cannot be reported simultaneously as an 'institution' and as an 'unregulated financial sector entity' for large exposure reporting purposes.
See further Q&A 516.
Update 16.09.2021: This Q&A has been archived in light of the change(s) in Article 394 to Regulation (EU) No 575/2013 (CRR), applicable from 28.06.2021.