1.credit institutions shall mean all institutions that satisfy the definition in the first indent of Article 1 of the First Council Directive (77/780/EEC) of 12 December 1977 on the coordination of laws, regulations and administrative provisions relating to the taking up and pursuit of the business of credit institutions (10) which are subject to the requirements imposed by Directive 89/647/EEC;
2.investment firms shall mean all institutions that satisfy the definition in point 2 of Article 1 of Directive 93/22/EEC, which are subject to the requirements imposed by the same Directive, excluding: - credit institutions, - local firms as defined in 20, and - firms which only receive and transmit orders from investors without holding money or securities belonging to their clients and which for that reason may not at any time place themselves in debit with their clients;
3.institutions shall mean credit institutions and investment firms;
4.recognized third-country investment firms shall mean firms which, if they were established within the Community, would be covered by the definition of investment firm in 2, which are authorized in a third country and which are subject to and comply with prudential rules considered by the competent authorities as at least as stringent as those laid down in this Directive;
5.financial instruments shall mean the instruments listed in Section B of the Annex to Directive 93/22/EEC;
6.the trading book of an institution shall consist of: (a) its proprietary positions in financial instruments which are held for resale and/or which are taken on by the institution with the intention of benefiting in the short term from actual and/or expected differences between their buying and selling prices, or from other price or interest-rate variations, and positions in financial instruments arising from matched principal broking, or positions taken in order to hedge other elements of the trading book; (b) the exposures due to the unsettled transactions, free deliveries and over-the-counter (OTC) derivative instruments referred to in paragraphs 1, 2, 3 and 5 of Annex II, the exposures due to repurchase agreements and securities lending which are based on securities included in the trading book as defined in (a) referred to in paragraph 4 of Annex II, those exposures due to reverse repurchase agreements and securities-borrowing transactions described in the same paragraph, provided the competent authorities so approve, which meet either the conditions (i), (ii), (iii) and (v) or conditions (iv) and (v) as follows: (i) the exposures are marked to market daily following the procedures laid down in Annex II; (ii) the collateral is adjusted in order to take account of material changes in the value of the securities involved in the agreement or transaction in question, according to a rule acceptable to the competent authorities; (iii) the agreement or transaction provides for the claims of the institution to be automatically and immediately offset against the claims of its counter-party in the event of the latter's defaulting; (iv) the agreement or transaction in question is an interprofessional one; (v) such agreements and transactions are confined to their accepted and appropriate use and artificial transactions, especially those not of a short-term nature, are excluded; and (c) those exposures in the form of fees, commission, interest, dividends and margin on exchange-traded derivatives which are directly related to the items included in the trading book referred to in paragraph 6 of Annex II. Particular items shall be included in or excluded from the trading book in accordance with objective procedures including, where appropriate, accounting standards in the institution concerned, such procedures and their consistent implementation being subject to review by the competent authorities;
7.parent undertaking, subsidiary undertaking and financial institution shall be defined in accordance with Article 1 of Directive 92/30/EEC;
8.financial holding company shall mean a financial institution the subsidiary undertakings of which are either exclusively or mainly credit institutions, investment firms or other financial institutions, one of which at least is a credit institution or an investment firm;
9.risk weightings shall mean the degrees of credit risk applicable to the relevant counter-parties under Directive 89/647/EEC. However, assets constituting claims on and other exposures to investment firms or recognized third-country investment firms and exposures incurred to recognized clearing houses and exchanges shall be assigned the same weighting as that assigned where the relevant counterparty is a credit institution;
10.over-the-counter (OTC) derivative instruments shall mean the interest-rate and foreign-exchange contracts referred to in Annex II to Directive 89/647/EEC and off-balance-sheet contracts based on equities, provided that no such contracts are traded on recognized exchanges where they are subject to daily margin requirements and, in the case of foreign-exchange contracts, that every such contract has an original maturity of more than 14 calendar days;
11.regulated market shall mean a market that satisfies the definition given in Article 1 (13) of Directive 93/22/EEC;
12.qualifying items shall mean long and short positions in the assets referred to in Article 6 (1) (b) of Directive 89/647/EEC and in debt instruments issued by investment firms or by recognized third-country investment firms. It shall also mean long and short positions in debt instruments provided that such instruments meet the following conditions: such instruments must firstly be listed on at least one regulated market in a Member State or on a stock exchange in a third country provided that that exchange is recognized by the competent authorities of the relevant Member State; and secondly both be considered by the institution concerned to be sufficiently liquid and, because of the solvency of the issuer, be subject to a degree of default risk which is comparable to or lower than that of the assets referred to in Article 6 (1) (b) of Directive 89/647/EEC; the manner in which the instruments are assessed shall be subject to scrutiny by the competent authorities, which shall overturn the judgment of the institution if they consider that the instruments concerned are subject to too high a degree of default risk to be qualifying items. Notwithstanding the foregoing and pending further coordination, the competent authorities shall have the discretion to recognize as qualifying items instruments which are sufficiently liquid and which, because of the solvency of the issuer, are subject to a degree of default risk which is comparable to or lower than that of the assets referred to in Article 6 (1) (b) of Directive 89/647/EEC. The default risk associated with such instruments must have been evaluated at such a level by at least two credit-rating agencies recognized by the competent authorities or by only one such credit-rating agency so long as they are not rated below such a level by any other credit-rating agency recognized by the competent authorities. The competent authorities may, however, waive the condition imposed in the preceding sentence if they judge it inappropriate in the light of, for example, the characteristics of the market, the issuer, the issue, or some combination of those characteristics. Furthermore, the competent authorities shall require the institutions to apply the maximum weighting shown in Table 1 in paragraph 14 of Annex I to instruments which show a particular risk because of the insufficient solvency of the issuer or liquidity. The competent authorities of each Member State shall regularly provide the Council and the Commission with information concerning the methods used to evaluate the qualifying items, in particular the methods used to assess the degree of liquidity of the issue and the solvency of the issuer;
13.central government items shall mean long and short positions in the assets referred to in Article 6 (1) (a) of Directive 89/647/EEC and those assigned a weighting of 0 % in Article 7 of the same Directive;
14.convertible shall mean a security which, at the option of the holder, can be exchanged for another security, usually the equity of the issuer;
15.warrant shall mean an instrument which gives the holder the right to purchase a number of shares of common stock or bonds at a stipulated price until the warrant's expiry date. They may be settled by the delivery of the securities themselves or their equivalent in cash;
16.covered warrant shall mean an instrument issued by an entity other than the issuer of the underlying instrument which gives the holder the right to purchase a number of shares of common stock or bonds at a stipulated price or a right to secure a profit or avoid a loss by reference to fluctuations in an index relating to any of the financial instruments listed in Section B of the Annex to Directive 93/22/EEC until the warrant's expiry date;
17.repurchase agreement and reverse repurchase agreement shall mean any agreement in which an institution or its counter-party transfers securities or guaranteed rights relating to title to securities where that guarantee is issued by a recognized exchange which holds the rights to the securities and the agreement does not allow an institution to transfer or pledge a particular security to more than one counter-party at one time, subject to a commitment to repurchase them (or substituted securities of the same description) at a specified price on a future date specified, or to be specified, by the transferor, being a repurchase agreement for the institution selling the securities and a reverse repurchase agreement for the institution buying them. A reverse repurchase agreement shall be considered an interprofessional transaction when the counter-party is subject to prudential coordination at Community level or is a Zone A credit institution as defined in Directive 89/647/EEC or is a recognized third-country investment firm or when the agreement is concluded with a recognized clearing house or exchange;
18.securities lending and securities borrowing shall mean any transaction in which an institution or its counter-party transfers securities against appropriate collateral subject to a commitment that the borrower will return equivalent securities at some future date or when requested to do so by the transferor, being securities lending for the institution transferring the securities and securities borrowing for the institution to which they are transferred. Securities borrowing shall be considered an interprofessional transaction when the counterparty is subject to prudential coordination at Community level or is a Zone A credit institution as defined in Directive 89/647/EEC or is a recognized third-country investment firm or when the transaction is concluded with a recognized clearing house or exchange;
19.clearing member shall mean a member of the exchange or the clearing house which has a direct contractual relationship with the central counterparty (market guarantor); non-clearing members must have their trades routed through a clearing member;
20.local firm shall mean a firm dealing only for its own account on a financial-futures or options exchange or for the accounts of or making a price to other members of the same exchange and guaranteed by a clearing member of the same exchange. Responsibility for ensuring the performance of contracts entered into by such a firm must be assumed by a clearing member of the same exchange, and such contracts must be taken into account in the calculation of the clearing member's overall capital requirements so long as the local firm's positions are entirely separate from those of the clearing member;
21.delta shall mean the expected change in an option price as a proportion of a small change in the price of the instrument underlying the option;
22.for the purposes of paragraph 4 of Annex I, long position shall mean a position in which an institution has fixed the interest rate it will receive at some time in the future, and short position shall mean a position in which it has fixed the interest rate it will pay at some time in the future;
23.own funds shall mean own funds as defined in Directive 89/299/EEC. This definition may, however, be amended in the circumstances described in Annex V;
24.initial capital shall mean items 1 and 2 of Article 2 (1) of Directive 89/299/EEC;
25.original own funds shall mean the sum of items 1, 2 and 4, less the sum of items 9, 10 and 11 of Article 2 (1) of Directive 89/299/EEC;
26.capital shall mean own funds;
27.modified duration shall be calculated using the formula set out in paragraph 26 of Annex I. INITIAL CAPITAL