18 Nov ESAs Consult on the Reporting of Intra-Group Transactions and Risk Concentration for Financial Conglomerates
November 18, 2020 –The Joint Committee of the European Supervisory Authorities (ESAs) – the European Banking Authority (EBA), the European Insurance and Occupational Pensions Authority (EIOPA) and the European Securities Markets Supervisory Authority (ESMA) – consults on draft Implementing Technical Standards (ITS) on the reporting of intra-group transactions and risk concentration for Financial Conglomerates. The consultation, launched on 22 May 2019 and still ongoing, was developed under Article 21a(2b) and (2c) of Directive 2002/87/EC of the European Parliament and of the Council of 16 December 2002 on the supplementary supervision of credit institutions, insurance undertakings and investment firms in a financial conglomerate (FICOD).
The ESAs proposed to create a single framework for the reporting of intra-group transactions and risk concentration by financial conglomerates. The ITSs will consist of one single set of templates and a single embedded dictionary using common definitions and a single set of instructions to fill in the templates. The harmonization of the intra-group transaction and risk concentration templates seeks to fully align the reporting under FICOD in order to strengthen the supervision of group-specific risks, in particular contagion risk.
This consultation will apply to credit institutions, insurance undertakings, reinsurance undertakings, investment firms, asset management companies or alternative investment fund managers. Financial conglomerates are large groups with significant activities in more than one financial sector (banking, investment, insurance). They tend to be complex in structure, operate across borders and the wider group can contain unregulated entities (from a financial legislation perspective) and also entities not involved in financial services.
Financial Conglomerates Directive (FICOD) Reporting Requirements – Intra-group transactions
Member States “shall require regulated entities or mixed financial holding companies to report on a regular basis and at least annually to the coordinator all significant intra-group transactions of regulated entities within a financial conglomerate” (Article 8(2) FICOD).
Intra-group transactions are defined by Article 2 (18) FICOD as: “all transactions by which regulated entities within a financial conglomerate rely directly or indirectly on other undertakings within the same group or on any natural or legal person linked to the undertakings within that group by close links, for the fulfilment of an obligation, whether or not contractual, and whether or not for payment”.
Transactions are presumed to be significant if its amount exceeds at least 5% of the total amount of capital adequacy at the level of a financial conglomerate.
The intra-group transactions that would need to be reported are those between:
- regulated entities of different sectors belonging to the same financial conglomerate
- regulated entities of the same sector belonging to the same financial conglomerate
- a regulated entity and a non-regulated entity belonging to the same financial conglomerate
- a regulated entity and any natural or legal person linked to the undertakings of the financial conglomerate by close links as set out in Article 2 (13) FICOD.
The reporting requirement for intra-group transactions consists of six blocks of templates:
- A summary template giving an overview of intragroup transactions
- Equity type debt or asset, an overview of intragroup transactions by all individual entities included in the scope of consolidation of the reporting entity regarding debt instrument, equity instruments or other asset transfer
- Derivatives, an overview of intragroup transactions by all entities included in the scope of the reporting regarding derivatives
- Off balance sheet items and contingent liabilities
- Insurance and reinsurance
- Profit and loss
Financial Conglomerates Directive (FICOD) Reporting Requirements – Risk concentration
Risk concentration is defined as “all risk exposures with a loss potential borne by entities within a financial conglomerate, which are large enough to threaten the solvency or the financial position in general of the regulated entities in the financial conglomerate, whether such exposures are caused by counterparty risk/credit risk, investment risk, insurance risk, market risk, other risks, or a combination or interaction of these risks”.
Member States “shall require regulated entities or mixed financial holding to report on a regular basis and at least annually to the coordinator any significant risk concentration at the level of the financial conglomerate”.
There is no threshold specified for the determination of significance of risk concentration to be reported.
The reporting requirement for risk concentration consists of three blocks of templates:
- Risk concentration exposure by counterparties
- Risk concentration exposure by currency, sector, country
- Risk concentration exposure by asset class and rating
These templates include all significant risk concentrations (direct and indirect) between entities in scope of group supervision and third parties
For more information please visit: EIOPA website
Jurisdiction: European Union
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