title: Opinion of the European Central Bank of 7 January 2020 on national defence (CON/2020/2)

text: OPINION OF THE EUROPEAN CENTRAL BANK of 7 January 2020 on national defence (

text: ) Introduction and legal basis

text: On 6 November 2019 the European Central Bank (ECB) received a request from the Estonian Ministry of Justice for an opinion on a draft law on national defence (hereinafter the ‘draft law’). The ECB’s competence to deliver an opinion is based on Articles 127(4) and 282(5) of the Treaty on the Functioning of the European Union and the third indent of

text: Article 2(1) of Council Decision 98/415/EC

text: , as the draft law relates to Eesti Pank and the ECB’s tasks concerning the prudential supervision of credit institutions pursuant to Article 127(6) of the Treaty. In accordance with the first sentence of Article 17.5 of the Rules of Procedure of the European Central Bank, the Governing Council has adopted this opinion.

text: 1. Purpose of the draft law

text: 1.1 The draft law revises and updates the legal framework for organising the defence of the Republic of Estonia in defence situations. The stated purpose of national defence and thereby the measures envisaged in the draft law is to preserve the independence and sovereignty of the State of Estonia, the ‘inseparable and indivisible’ integrity of its land, territorial waters and airspace and its constitutional order. 1.2 According to the draft law, a defence situation is an event or chain of events the consequences of which are a direct threat to the independence and sovereignty of the Republic of Estonia, to its territorial integrity, constitutional order or to society as a whole, the resolution of which is not possible without applying the organisational measures envisaged in the draft law, limiting the fundamental rights and freedoms of persons, and without the involvement of additional persons and material resources . Under the draft law the Government of the Republic of Estonia is responsible for assessing whether a defence situation exists . In addition, for the purposes of resolving a defence situation, the draft law allows the Estonian Parliament to declare, on the proposal of the President of the Republic of Estonia, a state of emergency or, in the case of an armed or equivalent attack or aggression against the independence, sovereignty or territorial

text: 1 Riigikaitseseadus, eelnõu.

text: on the consultation of the European Central Bank by national authorities regarding draft legislative provisions (OJ L 189, 3.7.1998, p. 42). integrity of the Estonian State, a state of war, if it is not possible to resolve the relevant situation without having recourse to additional powers or measures included in the draft law limiting the fundamental rights and freedoms of persons . 1.3 The draft law introduces the concept of a defence task. Such tasks are either permanent or ad hoc and are necessary to resolve or support the resolution of a defence situation . According to the draft law, Eesti Pank is assigned the following permanent defence tasks: (1) to help define the monetary policy of the Union and to implement the monetary policy set by the ECB’s Governing Council; (2) to hold and manage official reserves in foreign currency; (3) to promote the stability of the financial system and exercise macroprudential supervision over the financial system; (4) to regulate the circulation of money, facilitate the issuance of euro banknotes and issue euro coins; (5) to collect and publish the statistics necessary for the performance of Eesti Pank’s functions; (6) to contribute to the efficient functioning of payments systems; and (7) to ensure the continuity of payment services and cash circulation services as vital services. Eesti Pank already has such tasks under existing legislation . 1.4 The draft law assigns to Finantsinspektsioon (the Financial Supervisory Authority) the following permanent defence tasks: (1) financial supervision over credit institutions and branches of foreign credit institutions in Estonia that are providers of vital services (currently four credit institutions are so designated, three of which are significant credit institutions and one is a less-significant credit institution); and (2) the resolution of a financial crisis during a defence situation. Finantsinspektsioon already has such tasks under existing legislation . 1.5 The draft law does not include further details on how the performance of such permanent defence tasks should occur and how this differs from the fulfilment of these obligations in circumstances not covered by the draft law. According to the explanatory memorandum to the draft law , the national defence plan will specify the defence duties and the manner in which these are to be fulfilled . The national defence plan is not a legal act, but a document coordinating activities among and giving guidance to relevant entities, institutions and persons. The explanatory memorandum states that the primary aim of assigning permanent defence tasks is to ensure that an entity assigned a permanent defence task has the necessary resources and personnel to fulfil the tasks assigned to it . 1.6 In the event of a defence situation the authorities tasked with permanent defence tasks, including Eesti Pank and Finantsinspektsioon, must carry these out at the order of the head of the defence

text: 6 See Section 52(1) of the draft law. Any reference in this opinion to a defence situation also encompasses states of war and emergency, unless specified otherwise.

text: 8 See Section 6 of the Law on the Financial Supervisory Authority (Finantsinspektsiooni seadus, RT I 2001, 48, 267, RT I, 04.12.2019, 5).

text: 9 Riigikaitseseaduse eelnõu seletuskiri.

text: 10 See the explanatory memorandum to the draft law, p. 28.

text: 11 See the explanatory memorandum to the draft law, p. 11. situation (the prime minister). In the event of a state of emergency or of war the carrying out of permanent defence tasks is at the initiative of the obliged entity . 1.7 During a defence situation the authority managing the defence situation (a governmental agency assigned by the Government of Estonia to manage the defence situation) may issue orders to entities. For constitutional institutions, such as Eesti Pank, such an order may be issued only if this does not interfere with the fulfilment of their main tasks . The draft law does not define what such main tasks are. This provision does not apply to orders given by the authority managing the defence situation to Finantsinspektsioon as it is not a constitutional institution, ministry or security authority. Rather, Finantsinspektsioon is an agency with autonomous competence and a separate budget, which operates at Eesti Pank, meaning that Eesti Pank does not have control over Finantsinspektsioon, and that, under Estonian law, Finantsinspektsioon is not considered to be part of Eesti Pank . The draft law envisages that the defence tasks of Finantsinspektsioon are to be specified in the national defence plan taking into account that Finantsinspektsioon acts independently in the conduct of financial supervision . In addition, the explanatory memorandum to the draft law states that when the tasks of Finantsinspektsioon are specified the fact that it is a part of the Single Supervisory Mechanism must be taken into account . 1.8 Under the draft law, persons are obliged to comply with measures taken during defence situations, and an administrative authority may issue orders to ensure the fulfilment of measures taken for resolving a defence situation . 1.9 In addition, entities entrusted with permanent defence tasks have a preparedness obligation. The preparedness obligation obliges an entity assigned with a permanent defence task to prepare for the performance of the permanent defence task, this includes ensuring that it has the requisite supplies and personnel for fulfilling its tasks . According to the explanatory memorandum to the draft law entities entrusted with permanent defence tasks must prepare and plan for carrying out their defence tasks. The explanatory memorandum goes on to state that this may include the need to acquire necessary supplies or to ensure contractually the delivery or access to necessary resources. Upon being appointed to perform a permanent defence task such entities have a duty to designate personnel and material resources for the fulfilment of defence tasks. The explanatory memorandum notes that the draft law does not specify how the preparedness obligation has to be fulfilled. It is intended that the relevant authorities should fulfil their preparedness obligations taking into account the national defence plan and strategic development documents of national defence .

text: 13 See Section 20 of the draft law.

text: 15 See Section 133 of the draft law.

text: 16 See the explanatory memorandum to the draft law, p. 196.

text: 18 See Section 53 of the draft law.

text: 19 See the explanatory memorandum to the draft law, pp. 104-105. The national defence plan is to function as a supra-institutional plan that gives guidance on how an entity having a permanent defence obligation should plan its activities related to national defence . 1.10 The draft law does not define the specific tasks and how Eesti Pank or Finantsinspektsioon would have to perform these in order to fulfil their preparedness obligation. Moreover, the draft law does not regulate the extent to which Eesti Pank or Finantsinspektsioon would be included in the national defence planning and to what extent their permanent defence tasks and the related preparedness obligations must be specified in the national defence plan and other strategic national defence documents. 1.11 The draft law does not specify any additional arrangements for supervising the fulfilment of the preparedness obligation. For Eesti Pank this means that the supervisory board of Eesti Pank would supervise the fulfilment of the preparedness obligation . Similarly for Finantsinspektsioon its supervisory board would supervise the actions of Finantsinspektsioon . 1.12 The draft law specifically requires that the Council of the European Union and the European Commission must be notified if measures taken under the draft law could undermine the functioning of the internal market within the meaning of Article 347 of the Treaty. The draft law envisages that such notification should take place prior to measures being implemented; however, if measures are needed immediately then notification can take place as soon as possible after the measures are adopted . 1.13 After the draft law is adopted, delegated regulations, the national defence plan and other strategic defence documents must also be adopted.

text: 2. General observations

text: 2.1 The ECB notes that under the Treaty several competences are conferred irrevocably on the Union. This includes the exclusive competence for monetary policy for Member States whose currency is 24 25 the euro , and such Member States may not therefore adopt unilateral measures in this field . Therefore, in adopting the euro a Member State irreversibly transfers to the Union monetary policy and other powers enumerated in the Treaty and the Statute of the European System of Central Banks and of the European Central Bank (hereinafter the ‘Statute of the ESCB’) with regard to European System of Central Banks (hereinafter the ‘ESCB’) tasks. In these fields, including defining and implementing monetary policy, promoting the smooth operation of payment systems, conducting foreign exchange operations consistent with the exchange-rate policy for the euro in relation to non-Union currencies, holding and managing the official foreign reserves of the Member States, and authorising the issuance of euro banknotes, certain policy-making and legislative powers, including contingency planning with respect to the continued performance of these tasks,

text: 20 See the explanatory memorandum to the draft law, p. 27.

text: 21 See Section 9 of the Law on Eesti Pank.

text: 22 See Section 7 of the Law on the Financial Supervisory Authority.

text: 25 See paragraph 2.1 of Opinion

text: . All ECB opinions are published on the ECB’s website at www.ecb.europa.eu. belong exclusively, under Articles 8 and 12 of the Statute of the ESCB, to the decision-making bodies of the ECB . Moreover, under Article 127(6) of the Treaty and

text: Council Regulation (EU) No 1024/2013

text: specific tasks concerning the prudential supervision of credit institutions have also been conferred upon the ECB. As previously noted by the ECB, pursuant to the principle of sincere cooperation under Article 4(3) of the Treaty on European Union, the Member States are obliged to assist the ECB in carrying out tasks which flow from the Treaties. This implies that Member States should refrain from taking any measures which could jeopardise the ECB’s or the ESCB’s objectives . 2.2 Article 347 of the Treaty envisages that a Member State may be called upon to take action in the event of serious internal disturbances affecting the maintenance of law and order, war, serious international tension constituting a threat of war, or in order to carry out obligations it has accepted for the purpose of maintaining peace and international security. Accordingly, in the event of emergency conditions under

text: Article 347

text: , which may include situations that would be classified as defence situations under the draft law, national authorities may be justified in exercising, on a temporary basis, powers that fall within the exclusive competence of the ESCB . 2.3 Any reliance on Article 347 of the Treaty must take place strictly under conditions laid down in the Treaty itself, as interpreted by the Court of Justice of the European Union. As has been expressed earlier, this Article deals with exceptional cases which are clearly defined and are to be interpreted in a restrictive manner, and it can therefore be understood only as a ‘hedging clause’ and not as an expression of any residual Member State competence . Moreover, the Court of Justice of the European Union has held that when acting due to urgency in areas of exclusive Union competence Member States may act only as ‘trustees of the common interest’ and not bring into force any interim measures except as part of a process of collaboration with the Union . Due to the exceptional nature of Article 347 of the Treaty, Member States should refrain from adopting preventive legislation in the absence of the conditions prescribed by Article 347 of the Treaty . If the national legislature wishes to rely on this provision it is for the Member State to ensure that the conditions for applying Article 347 of the Treaty are specifically fulfilled at the time of adopting the measure that conflicts with that Member State’s Treaty obligations. 2.4 The ECB understands that the national legislature approaches national defence taking a holistic approach whereby national defence includes not only the actions of specific defence authorities such as the armed defence forces and other specifically designated authorities, but also includes

text: 26 See paragraph 9 of Opinion

text: , paragraph 8 of Opinion

text: , and paragraph 2.1 of Opinion

text: Council Regulation (EU) No 1024/2013 of 15 October 2013

text: conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions (OJ L 287, 29.10.2013, p. 63).

text: 28 See paragraph 2.1 of Opinion

text: 29 See paragraph 2.2 of Opinion

text: 30 Judgment of the Court of Justice of 19 December 1968, Salgoil, 13/68, ECLI:EU:C:1968:54; Gilsdorfer and Brandtner, ‘Vorbem. zu den Artikeln 296 bis 298 EG’, No 3-5, in Bardenhewer-Rating, Grill, Jakob and Woelker (eds.), EG- und EU-Kommentar, 6th ed. (2004), p. 1534; paragraph 13 of Opinion

text: 31 See e.g. judgment of the Court of Justice of 5 May 1981, Commission v UK, 804/79, ECLI:EU:C:1981:93, paragraph 30; paragraph 13 of Opinion

text: 32 See C. Zilioli, ‘National Emergency Powers and Exclusive Community Competences – A Crack in the Dam?’ Legal Aspects of the European System of Central Banks, ECB, 2005, pp. 115-133, at pp 131-132. within national defence the actions of other public bodies and private persons within their respective fields of competence . As part of such a national defence policy the functions fulfilled by public bodies in usual circumstances, including central banking and prudential supervisory functions, support the resolution of national defence situations. This approach should not lead to a breach of Treaty obligations applicable to a Member State. By adopting the euro, Estonia transferred irreversibly to the Union monetary policy and other powers enumerated in the Treaty and the Statute of the ESCB. The decision-making for those tasks, including contingency planning with respect to the continued performance of those tasks, belongs exclusively, under Article 8 of the Statute of the ESCB, to the decision-making bodies of the ECB. Furthermore,

text: Regulation (EU) No 1024/2013

text: conferred on the ECB specific tasks concerning policies relating to the prudential supervision of credit institutions. According to Article 4 of the TEU, Member States have a duty to facilitate the achievement of the Union’s tasks and to refrain from any measure which could jeopardise the attainment of the Union’s objectives. 2.5 Under the draft law both Eesti Pank and Finantsinspektsioon are assigned permanent defence duties that correspond primarily to the tasks that these authorities already perform under applicable Union and national law. This cannot lead to setting aside or altering the obligations of Eesti Pank under the Treaty, specifically any obligations which Eesti Pank has due to its membership in the ESCB. In this respect, the ECB understands that, with the exception of the new national defence preparedness obligation (see section 3 below), the draft law does not aim at changing the existing obligations of Eesti Pank, including specifically under Union law, and merely seeks to ensure that the necessary resources and organisational arrangements for defence situations are in place . 2.6 The same considerations apply in respect of Finantsinspektsioon with regard to its duties arising from Article 127(6) of the Treaty and

text: Regulation (EU) No 1024/2013

text: . As the permanent defence tasks which the draft law assigns to Finantsinspektsioon have been partially conferred upon the ECB, the national legislative bodies might consider clarifying the draft law to confirm that this is without prejudice to the tasks and powers conferred on the ECB for prudential supervisory purposes under the Treaty and

text: Regulation (EU) No 1024/2013

text: . Also, the ECB notes that

text: Article 4(4) of Directive 2013/36/EU

text: of the European Parliament and of the Council requires Member States to ensure that the competent authorities have the expertise, resources, operational capacity, powers and independence necessary to carry out the functions relating to prudential supervision, investigations and penalties set out in that Directive and in

text: Regulation (EU) No 575/2013

text: of the European Parliament and of the Council . In addition, under the Basel Core Principles for effective banking supervision , the supervisor should have adequate resources for the conduct of effective

text: 33 Explanatory memorandum to the draft law, p. 7.

text: 34 Explanatory memorandum to the draft law, p. 104.

text: 35 Directive

text: of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive

text: and repealing Directives

text: and

text: (OJ L 176, 27.6.2013, p. 338).

text: Regulation (EU) No 575/2013

text: of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending

text: Regulation (EU) No 648/2012

text: (OJ L 176, 27.6.2013, p. 1).

text: 37 The Basel Core Principles for effective banking supervision are available on the Bank for International Settlements’ website at www.bis.org. supervision and oversight. As also Finantsinspektsioon is assigned with a preparedness obligation, the consulting authority could consider clarifying in the draft law that the preparedness obligation is without prejudice to the effective performance of the prudential supervisory tasks and powers of Finantsinspektsioon under relevant Union law. 2.7 In addition, the draft law could further clarify that it does not interfere with the independence of Eesti Pank under the Treaty. As noted above, the central government, as the authority managing the defence situation, has the power to issue orders, including potentially to Eesti Pank . The ECB understands that as the draft law does not allow for any interference with the performance of the ‘main tasks’ of Eesti Pank as a constitutional institution , there could be no interference with the tasks and duties of Eesti Pank as part of the ESCB. This point should, however, be explicitly clarified, for the avoidance of any doubt. 2.8 The ECB welcomes the fact that the draft law requires the Council of the European Union and the European Commission to be notified in certain cases. However, it is for the Member State to ensure that the draft legislation is not in breach of the Treaty when it is adopted, meaning that it does not introduce preventive legislation (see paragraph 2.3).

text: 3. Conferral of a new task on Eesti Pank

text: 3.1 New task of Eesti Pank 3.1.1 The draft law confers upon Eesti Pank the task of preparing for the performance of defence tasks (the preparedness obligation). The draft law does not specify the tasks falling within the scope of this obligation. The draft law instead requires an authority or a person assigned with a permanent defence task to prepare for the performance of a permanent defence task and indicates that this includes ensuring that persons with this obligation have the resources, reserves and staff necessary to fulfil the preparedness obligation (see paragraph 1.9). Based on the explanatory memorandum to the draft law, the ECB understands that the preparedness obligation vis-à-vis Eesti Pank could be specified in the national defence framework, including the national defence plan and other strategic national defence documents. Although these documents are not legislative acts, the ECB understands that they could lead to changes in the actions of Eesti Pank (see paragraph 1.9). In addition, the ECB understands that the preparedness obligation would necessarily require the co-ordination of Eesti Pank’s activities with the wider Estonian national defence framework and that this would likely lead to a need for Eesti Pank to contribute to Estonian defence planning. 3.1.2 The proposed national defence preparedness task of Eesti Pank would differ from internal contingency planning undertaken by ESCB central banks such as Eesti Pank. Contingency planning for the discharge of ESCB and other central banking tasks can take the form of an internally driven process whereby the ESCB central banks evaluate for themselves which resources they would need and how they should prepare for various emergency situations,

text: 38 See Section 20 of the draft law. including situations that could be characterised as defence situations, based on their own targets and strategies. By contrast, the proposed national defence preparedness task of Eesti Pank is driven by external strategic plans and aims set by the Estonian Government, and would require Eesti Pank to take into account considerations external to Eesti Pank, most notably the overarching national defence framework. This could lead to Eesti Pank acquiring resources it might not otherwise have considered relevant, participating in planning processes it would not otherwise have taken part in and/or developing processes it would not otherwise have introduced. This means, in effect, that the national defence preparedness task introduces, alongside any internal contingency planning process, an additional process driven by the national defence framework. As such, the proposed national defence preparedness task would differ from an internal contingency planning performed by Eesti Pank, including within the framework of the ESCB, and therefore involves the conferral of a new task on Eesti Pank. 3.1.3 The national defence preparedness task envisaged in the draft law also differs from the current tasks of Eesti Pank under Estonian law. It is noted that, according to a decree of the Government of the Republic of Estonia, up to 50% of the employees of Eesti Pank are considered as fulfilling positions with national defence relevance . The ECB understands this to mean that Eesti Pank should be ready to fulfil its usual tasks also in national defence situations, but potentially with only up to 50% of its staff. Eesti Pank also participates in defence planning and preparations based on the Law on emergencies as it is responsible for organising the continuity of payment and cash circulation services as vital services . This differs from the national defence preparedness task envisaged in the draft law. Under existing Estonian law, there is no specific legal obligation on Eesti Pank to follow the national defence framework, and to contribute to plans developed within the national defence framework, in particular for a wide range of Eesti Pank’s tasks. 3.1.4 The ECB underlines that a proposed conferral of new tasks on a national central bank (NCB) in the ESCB must be assessed against the prohibition on monetary financing under Article 123 of the Treaty. For the purposes of that prohibition,

text: Article 1(1)

text: (b)(ii) of

text: Council Regulation (EC) No 3603/93

text: defines ‘other type of credit facility’, inter alia, as ‘any financing of the public sector’s obligations vis-à-vis third parties’. 3.1.5 Ensuring that Member States implement a sound budgetary policy is one of the key objectives of the monetary financing prohibition, which may not be circumvented . Therefore, the task of financing measures, which are normally the responsibility of the Member States, and which are financed from their budgetary sources rather than by the NCBs, must not be entrusted to NCBs. To decide what constitutes financing of the public sector’s obligations vis-à-vis third parties, which can be translated as the provision of central bank financing outside the scope of central bank tasks, it is necessary to carry out, on a case-by-case basis, an assessment of whether the task to be

text: 40 See Section 2(1)(2) of the decree of the Government of the Republic of Estonia dated 23 September 2016, No 103 (RT I, 27.09.2016, 2, RT I, 26.04.2019, 12).

text: Council Regulation (EC) No 3603/93 of 13 December 1993

text: specifying definitions for the application of the prohibitions referred to in Articles

text: and

text: b(1) of the Treaty (OJ L 332, 31.12.1993, p. 1).

text: 43 Article 123 of the Treaty also serves the objective of maintaining price stability and reinforces central bank independence. undertaken by an NCB is a central bank task or a government task, i.e. a task within the responsibility of the Member States. In other words, adequate safeguards must be in place to ensure that circumventions of the objective of the monetary financing prohibition of maintaining a sound budgetary policy of Member States do not take place. 3.1.6 As part of its discretion in the exercise of its duty, on the basis of

text: Article 271

text: (d) of the Treaty and Article 35.6 of the Statute of the ESCB, to ensure that NCBs honour the obligations laid down by the Treaty, the Governing Council has endorsed safeguards of that kind in the form of criteria for determining what may be seen as falling within the scope of a public sector obligation within the meaning of

text: Article 1(1)

text: (b)(ii) of

text: Regulation (EC) No 3603/93

text: or, in other words, what constitutes a government task as follows: First, central bank tasks are in particular those tasks that are related to the tasks that have been conferred upon the ECB and the NCBs by the Treaty and the Statute of the ESCB. These tasks are mainly defined in

text: Article 127(2)

text: , (5) and (6) and Article 128(1) of the Treaty, as well as

text: Article 22

text: and Article 25.1 of the Statute of the ESCB. Second, as Article 14.4 of the Statute of the ESCB allows NCBs to perform ‘other functions’, new tasks, i.e. tasks that are not related to tasks that have been conferred upon the ECB and the NCBs, are not precluded per se. However, new tasks that are undertaken by an NCB and which are atypical of NCB tasks or which are clearly discharged on behalf of, and in the exclusive interest of the government or of other public sector entities should be considered government tasks. Third, an important criterion for qualifying a new task as atypical of an NCB task or as being clearly discharged on behalf of and in the exclusive interest of the government or other public sector entities is the impact of the task on the institutional, financial and personal independence of that NCB. In particular, the following aspects should be taken into account: (a) whether the performance of the new task creates conflicts of interest with existing central bank tasks which are not adequately addressed and does not necessarily complement those existing central bank tasks. If a conflict of interest arises between existing and new tasks, sufficient safeguards to mitigate that conflict should be in place. The complementarity between a new task and the existing central bank tasks should not be interpreted broadly, so as to lead to the creation of an indefinite chain of ancillary tasks. Such complementarity should be examined in relation to the financing of those tasks; (b) whether without new financial resources the performance of the new task is disproportionate to the NCB’s financial or organisational capacity, and may have a negative impact on the capacity to perform properly the existing central bank tasks; (c) whether the performance of the new task fits into the institutional set-up of the NCB in the light of central bank independence and accountability considerations; (d) whether the performance of the new task harbours substantial financial risks; (e) whether the performance of the new task exposes the members of the NCB decision-making bodies to political risks which are disproportionate and may also have an impact on their personal independence and, in particular, on the guarantee of term of office set out in Article 14.2 of the Statute of the ESCB. 3.1.7 Based on the criteria set out above, the following paragraphs assess whether the new task of Eesti Pank is in line with the prohibition of monetary financing. 3.2 Tasks related to the tasks conferred upon the ECB and the NCBs by the Treaty and the Statute of the ESCB 3.2.1 According to the draft law the purpose of national defence is to preserve the independence and sovereignty of the Estonian State, the inseparable and indivisible integrity of its land, territorial waters and airspace and its constitutional order. The functions of the NCBs under the Treaty and the Statute of the ESCB do not encompass these aims. The preparedness task is not therefore related to the tasks that have been conferred upon the ECB and the NCBs by the Treaty and the Statute of the ESCB. 3.3 Tasks which are atypical of NCB tasks 3.3.1 While the majority of NCBs of the ESCB do not appear to have been assigned national defence preparedness tasks, NCBs in several Member States have been assigned national defence preparedness tasks which are similar to the new task assigned to Eesti Pank . Based on this the

text: 44 In 10 Member States (Bulgaria, the Czech Republic, Finland, Greece, Hungary, Latvia, Lithuania, Poland, Slovakia and Slovenia) NCBs have been assigned some type of national defence preparedness obligations. In Bulgaria, pursuant to Article 42 of the Law on defence and armed forces of the Republic of Bulgaria, the Bulgarian National Bank (BNB) shall: (i) develop rules and norms for providing for the activity of the banking system during war time; (ii) in coordination with the Minister of Defence develop a plan for preparing the BNB in readiness for working during war time; and (iii) direct methodically the planning for preparing the banking system to be ready to work during war time. In the Czech Republic preparedness for crisis situations arises from Act No. 240/2000 Coll., Crisis law (

text: Article 13

text: ) and from 241/2000 Coll., On Economic Measures for Crisis Situations (

text: Article 23

text: ) and includes e.g. an obligation of the central bank to cooperate with the government, to adopt a proper crisis plan and to establish and operate a crisis crew. In Finland, the Law on emergency powers (2011/1552) applies to public organs and institutions such as Suomen Pankki, but only in emergency situations, and confers specific tasks on them. Emergency situations are explicitly defined in the Law on emergency powers. The Law on emergency powers also sets out a general preparedness obligation. In Greece, an Emergency Planning Office was established in the Bank of Greece in 1975, by virtue of Decision No 670/5/222984/24.9.1975 of the Minister of National Defence that was issued on the basis of Article 12 of Legislative Decree 17/1974 on emergency planning. The Emergency Planning Office deals with emergency planning policy issues including the design of emergency planning to the extent this is associated with the Bank of Greece’s competences, the measures to be taken during peace-time with a view to implementing emergency planning policy, and the monitoring of preparedness as regards the execution of emergency planning policy. In Hungary, according to Article 18(3) of Law CXIII of 2011 on national defence and the Hungarian armed forces and the measures adoptable under a special legal order (Law on national defence), Magyar Nemzeti Bank shall participate in the preparation for national defence in the performance of its tasks, in its area of operations, but shall be exempted from the requirement of economic and material service obligations. In Latvia, the functions of Latvijas Banka also apply in national defence situations and thus Latvijas Banka plans the preparedness for such situations, inter alia, within contingency planning. Latvijas Banka also participates in national defence planning at national level. In Lithuania, according to the Law on mobilisation and adoptive country support, Lietuvos bankas is a civil mobilisation institution. Paragraph 3.5 of the Government resolution on the State mobilisation tasks for State municipal institutions and Authorities of the Republic of Lithuania determines the mobilisation tasks for Lietuvos bankas as follows: to ensure (i) the supervision of activities of essential financial market participants supervised by Lietuvos bankas; (ii) the management and usage of the foreign financial assets of Lietuvos bankas; (iii) the delivery of cash for subjects of the mobilisation system who perform vital State functions; (iv) the performance of credit operations of Lietuvos bankas as well as the effective operation of the necessary information systems and databases; (v) the functioning of the necessary payment systems of Lietuvos bankas; (vi) international relations related to financial support for the Republic of Lithuania, as well as representation of the Republic of Lithuania in international institutions. In Poland, under

text: Article 11

text: paragraph 5 point 2 of the Law on Narodowy Bank Polski, the President of Narodowy Bank Polski (NBP) must perform tasks resulting from the universal duty to defend the Republic of Poland. Also, on the basis of

text: Article 18

text: paragraph 3 and Article 22(1) of the Law on the general defence obligation and

text: Article 11

text: paragraph 5 point 2 of the Law on Narodowy Bank Polski (and in some cases on the basis of Council of Ministers regulations), the President of NBP has issued various defence related ordinances. In Slovakia, according to Article 23 of Law No 179/2011 Coll. on economic mobilisation, as amended, Národná banka Slovenska (NBS) shall prepare and carry out measures in times of crisis in the foreign exchange field, including the proposed national defence preparedness task of Eesti Pank could be considered a task which is not atypical of NCB tasks. In several Member States the related costs for the NCBs are required to be reimbursed by the central government . 3.4 Tasks clearly discharged on behalf of and in the exclusive interest of the government 3.4.1 According to the draft law, the purpose of national defence is to preserve the independence and sovereignty of the Estonian State, the inseparable and indivisible integrity of its land, territorial waters and airspace and its constitutional order. Eesti Pank’s proposed national defence preparedness task would be clearly discharged on behalf of and in the exclusive interest of the Estonian Government. 3.5 Extent to which performance of the new task creates conflicts of interest with existing central bank tasks 3.5.1 The performance of the national defence preparedness task would be unlikely to give rise to any conflicts of interest with Eesti Pank’s existing central bank tasks. Rather, it could be seen as contributing to the fulfilment of Eesti Pank’s current tasks. However, it should be ensured that the assignment of permanent defence tasks to Eesti Pank does not conflict with Union law (see paragraph 2.5). 3.5.2 In addition, any supervision over the fulfilment of the national defence preparedness task rests with the supervisory board of Eesti Pank. This also means that Eesti Pank would be shielded from possible conflicts of interest and that Eesti Pank would be in a position to determine if the national defence preparedness task has been discharged properly. 3.6 Extent to which performance of the new task is disproportionate to the financial or organisational capacity of Eesti Pank 3.6.1 As previously noted by the ECB , the principle of financial independence requires that Member States may not put their NCBs in a position where they have insufficient resources to carry out both their ESCB-related tasks and their national tasks, from an operational and financial perspective. Furthermore, when allocating specific new tasks to NCBs, each NCB concerned should have protection of foreign reserve assets. NBS shall also (i) provide the cash banking services necessary for the activities of the armed forces of the Slovak Republic, armed security corps, the Slovak Intelligence Service and the Military Police, upon written agreement concluded with the Ministry of Finance and the State Treasury; (ii) control, within its field of competence, the performance of the measures of economic mobilisation; (iii) process and update information necessary for the performance of the measures of economic mobilisation within the specific application program of the unified information software; (iv) process the emergency plan of economic mobilisation according to instructions provided by the Ministry of Economy and determine access rights for other users within the specific application program of the unified information software. In Slovenia, Banka Slovenije is engaged in national defence planning during peacetime. According to the Law on defence, the government, which adopts the country’s defence plan, prescribes in detail the process of drawing up and the content of defence plans and the planning of production and services during wartime. This is done by the Decree on defence planning, which defines the scope and content of the defence plan, and the responsibility for defence planning (the scope of tasks related to the functioning of the defence system in emergency situations, war or crises).

text: 45 In Bulgaria, Article 13 of the Law on defence and armed forces of the Republic of Bulgaria provides that the financial provision for defence activities shall be borne by the State budget and other sources, provided for in a law or act of the Council of Ministers. In Lithuania, Article 31 of the Law on mobilisation and adoptive country support provides that the Ministry of Defence, the Mobilisation Department, the Lithuanian Army and civil mobilisation institutions shall be financed from the State budget for the implementation of the mobilisation system tasks established by the Law. In Slovakia, according to Article 1(2) of the Decree of the Ministry of Economy of the Slovak Republic No 552/2011 Coll. all expenses incurred by Národná banka Slovenska (NBS) as a result of economic mobilisation shall be reimbursed to the NBS from the State budget.

text: 46 See, for example, paragraph 4.6.1 of Opinion

text: . sufficient financial and human resources at its disposal to ensure that the tasks can be carried out without impacting on the NCB’s financial or operational capacity to perform its ESCB tasks. In order to ensure that Eesti Pank’s capacity to perform its ESCB-related tasks is not impaired, Eesti Pank must, therefore, be in a position to avail itself of the necessary resources to carry out its duties under the draft law. At this stage, it is not possible for the ECB to comment what additional resources, if any, Eesti Pank will require in order to perform its new national defence preparedness task under the draft law. It is noted nevertheless that the draft law does not provide for Eesti Pank to be reimbursed for the costs of carrying out this new task, while in at least three Member States reimbursement mechanisms for the performance of similar tasks have been included in the relevant national legislation (see paragraph 3.3.1). Although the ECB is not aware that the potential financial burden on Eesti Pank will be significant, also considering that the performance of the task will be supervised Eesti Pank’s supervisory board, the ECB invites the consulting authority to consider the impact of the draft law on the resources of Eesti Pank and to include a reimbursement mechanism in the draft law in order to avoid any potential breach of Article 123 of the Treaty. 3.7 Extent to which performance of the new task fits into the institutional set-up of Eesti Pank, in the light of central bank independence and accountability considerations 3.7.1 The potential impact of the new task on the institutional, financial and personal independence of Eesti Pank must also be taken into consideration. However, based on the draft law and the explanatory memorandum thereto, the ECB does not consider the new task as being in conflict with the institutional set-up. First, the supervision over the fulfilment of the task falls to the supervisory board of Eesti Pank, which in turn means that no other authority will gain control over Eesti Pank’s performance of this task. Second, the draft law does not include detailed and specific obligations that Eesti Pank would have to undertake in order to comply with its preparedness obligations. Hence, it would fall primarily on Eesti Pank itself to decide which specific actions are relevant to comply with the preparedness obligation. Nevertheless, given that national defence obligations can be specified in implementing acts, due consideration for the independence of Eesti Pank should also be considered when drafting acts of this kind. 3.8 Extent to which the performance of tasks harbours substantial financial risks 3.8.1 The draft law does not contain any specific provisions on liability in relation to Eesti Pank’s fulfilment of its national defence preparedness task. Furthermore, this task would seem to primarily require planning and coordination within Eesti Pank and with the competent national authorities. Hence the ECB is not aware of significant financial liabilities for Eesti Pank arising out of this task. 3.9 Extent to which the performance of the new task exposes members of the decision-making bodies of Eesti Pank to disproportionate political risks and impacts on their personal independence 3.9.1 The ECB does not consider that the new task would expose the members of the decision-making bodies of Eesti Pank to disproportionate political risks or that it would impact on their personal independence. As previously noted, the supervision over the fulfilment of the national defence preparedness task rests with the supervisory board of Eesti Pank. Moreover, national defence preparations and planning are primarily the tasks of other authorities and the additional involvement of Eesti Pank in national defence preparations will likely not be substantial. In such circumstances any impact on the members of Eesti Pank’s decision-making bodies should be limited. 3.10 Conclusion 3.10.1 Although the proposed national defence preparedness task of Eesti Pank could be considered to be a task which is not atypical to NCBs in the ESCB, this task would be clearly discharged in the exclusive interests of the Estonian Government, in order to preserve the independence and sovereignty of the Estonian State, the inseparable and indivisible integrity of its land, territorial waters and airspace and its constitutional order. Given that this task goes beyond the internal contingency planning tasks of a central bank, it is a government, rather than a central banking, task. Therefore, similar to the arrangements existing in a number of Member States which have conferred comparable tasks on their NCBs, the draft law should introduce a mechanism for the reimbursement of Eesti Pank for any costs incurred in the performance of this government task. This opinion will be published on the ECB’s website. Done at Frankfurt am Main, 7 January 2020. [signed] The President of the ECB Christine LAGARDE


text: Council Decision 98/415/EC of 29 June 1998

text: on the consultation of the European Central Bank by national authorities regarding draft legislative provisions (OJ L 189, 3.7.1998, p. 42).

text: The German legal order distinguishes between two types of credit institutions. Pursuant to Section 1(1) of the Banking Act (Kreditwesengesetz) of 9 September 1998 (Bundesgesetzblatt I p. 2776, as amended by article 91 of the law from 20 November 2019, Bundesgesetzblatt I S. 1626), a credit institution is an undertaking which conducts at least one of the banking businesses described in the second sentence of Section 1(1) of the Banking Act commercially or on a scale which requires commercially organised business operations. The banking businesses include deposit business and credit business, as well as specific securities-related activities such as principal broking services and safe custody business. An undertaking that acts a central counterparty is also categorised as a credit institution. Pursuant to Section 1(3d) of the Banking Act, a CRR credit institution is a credit institution that, in addition, meets the narrower definition of a credit institution set out in point 1 of

text: Article 4(1) of Regulation (EU) No 575/2013

text: of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending

text: Regulation (EU) No 648/2012

text: (OJ L 176, 27.6.2013, p. 1).

text: Gesetz zur Sanierung und Abwicklung von Instituten und Finanzgruppen of 10 December 2014 (Bundesgesetzblatt I p. 2091) as amended by Article 8(10) of the Law of 10 July 2019 (Bundesgesetzblatt I p. 1002) Law on recovery and resolution.

text: Directive

text: of the European Parliament and the Council of 15 May 2014 establishing a framework for the recovery and resolution of credit institutions and investment firms and amending

text: Council Directive 82/891/EEC

text: , and Directives

text: and

text: , and Regulations

text: (EU) No 1093/2010

text: and

text: (EU) No 648/2012

text: , of the European Parliament and of the Council (OJ L 173, 12.6.2014, p. 190). 5

text: Council Regulation (EU) No 1024/2013 of 15 October 2013

text: conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions (OJ L 287, 29.10.2013, p. 63). 6 The recovery planning is regulated in Chapter 1 of Part 2 of the Law on recovery and resolution. 7 See Sections 19 and 20 of the Law on recovery and resolution. 8 See Section 15 of the Law on recovery and resolution. 9 See Chapter 1 of Part 3 of the Law on recovery and resolution. 10 See Section 62(1)of the Law on recovery and resolution. 11 See Chapter 2 of Part 4, of the Law on recovery and resolution. 12 See Article 1 of the draft law, new Section 152b of the Law on recovery and resolution.

text: See Article 1 of the draft law, new Sections 152c and 152d of the Law on recovery and resolution. 14 See Article 1 of the draft law, new Section 152e of the Law on recovery and resolution. 15 See Article 1 of the draft law, new Section 152f of the Law on recovery and resolution. 16 See Section 62 of the Law on recovery and resolution. 17 See Article 1 of the draft law, new Section 152h of the Law on recovery and resolution. 18 See Article 1 of the draft law, new Section 152h(2) and (3) of the Law on recovery and resolution. 19 See Article 1 of the draft law, new Section 152h(5) of the Law on recovery and resolution.

text: See Article 1 of the draft law, new Section 152m of the Law on recovery and resolution. 21 Wertpapierhandelsgesetz of 9 September 1998 (Bundesgesetzblatt I p. 2708) as amended by Article 58 of the Law of 20 November 2019 (Bundesgesetzblatt I p. 1626). 22 See

text: Regulation (EU) 2019/834

text: of the European Parliament and of the Council of 20 May 2019 amending

text: Regulation (EU) No 648/2012

text: as regards the clearing obligation, the suspension of the clearing obligation, the reporting requirements, the risk-mitigation techniques for OTC derivative contracts not cleared by a central counterparty, the registration and supervision of trade repositories and the requirements for trade repositories (OJ L 141, 28.5.2019, p. 42). 23 See paragraphs 2.1 and 2.2 of the Explanatory Memorandum to the proposal for a regulation of the European Parliament and of the Council on a framework for the recovery and resolution of central counterparties and amending Regulations

text: (EU) No 1095/2010

text: (EU) No 648/2012

text: , and

text: (EU) 2015/2365

text: , COM(2016) 856 final. 24 . All ECB Opinions are published on the ECB’s website at See Opinion

text: Regulation (EU) No 806/2014

text: of the European Parliament and of the Council of 15 July 2014 establishing uniform rules and a uniform procedure for the resolution of credit institutions and certain investment firms in the framework of a Single Resolution Mechanism and a Single Resolution Fund and amending

text: Regulation (EU) No 1093/2010

text: (OJ L 225, 30.7.2014, p. 1). 26 In this context it is understood that in Germany there are two CCPs that have been authorised to offer services and activities in the Union in accordance with

text: Regulation (EU) No 648/2012

text: of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories (OJ L 201, 27.7.2012, p. 1): (1) Eurex Clearing AG, which it is understood is supervised as a less significant CRR credit institution within the framework of the Single Supervisory Mechanism, and (2) European Commodity Clearing, a non-CRR credit institution CCP supervised by BaFin. As a CRR credit institution, Eurex already falls under the scope of the Law on recovery and resolution. It is also understood that one of Eurex’s clearing members is the Deutsche Bundesbank.

text: See Article 22(3) of the Union’s CCP recovery and resolution proposal. 28 See paragraph 2.3.1 of Opinion

text: . 29 See paragraph 2.3.2 of Opinion

text: . 30 See Article 1 of the draft law, new Section 152b(1) in conjunction with new Section 152a(3) of the Law on recovery and resolution.

text: See paragraph 2.4.1 of Opinion

text: . 32 See Section 40(2) of the Law on recovery and resolution. 33 See paragraph 2.4.1 of Opinion

text: . 34 See section 7.5 (i) and (v) of the FSB's ‘Guidance on Central Counterparty Resolution and Resolution Planning’. 35 See paragraph 2.4.1 of Opinion

text: . 36 See paragraph 2.5.1 of Opinion

text: See Section 103(4) of the Law on recovery and resolution. 38 See paragraph 2.6.3 of Opinion

text: . 39 See Article 1 of the draft law, new Section 152h(5), of the Law on recovery and resolution. 40 See paragraph 2.1.3 of Opinion

text: . 41 See paragraph 2.7 of Opinion

publisher: Europeiska centralbanken

sprak: en

title: Opinion of the European Central Bank of 14 January 2020 on the recovery and resolution of central counterparties (CON/2020/3)

serie: con

text: OPINION OF THE EUROPEAN CENTRAL BANK of 14 January 2020 on the recovery and resolution of central counterparties (

text: ) Introduction and legal basis

type: rubrik

text: On 2 October 2019 the European Central Bank (ECB) received a request from the German Federal Ministry of Finance for an opinion on a draft law introducing dedicated rules for the recovery and resolution of central counterparties (CCPs) into the Law on recovery and resolution (hereinafter the ‘draft law’). The ECB’s competence to deliver an opinion is based on Articles 127(4) and 282(5) of the Treaty on the Functioning of the European Union (TFEU) and the third, fifth and sixth indents of

text: Article 2(1) of Council Decision 98/415/EC

text: , as the draft law relates to the Deutsche Bundesbank, payment and settlement systems, rules applicable to financial institutions insofar as they materially influence the stability of financial institutions and markets, and the specific tasks conferred upon the ECB concerning the prudential supervision of credit institutions under

text: Article 127(6)

text: TFEU. In accordance with the first sentence of Article 17.5 of the Rules of Procedure of the European Central Bank, the Governing Council has adopted this opinion.

type: stycke

text: 1. Purpose of the draft law

text: 1.1 The draft law’s main purpose is to create legal instruments relating to CCPs established in Germany, in addition to the existing recovery and resolution instruments for CRR credit institutions under the Law on recovery and resolution , which implements Directive

text: of the

text: European Parliament and of the Council . The draft law constitutes a supplementary chapter dedicated to CCPs in the Law on recovery and resolution. The provisions of the draft law apply to CCPs that are also CRR credit institutions within the meaning of European law, as well as to CCPs defined and licensed as credit institutions according to national law. For CCPs that do not hold a CRR credit institution licence, the Law on recovery and resolution, as supplemented by the draft law, will apply as if the CCP was a CRR credit institution. 1.2 The Law on recovery and resolution designates the Bundesanstalt für Finanzdienstleistungsaufsicht (Federal Financial Supervisory Authority, hereinafter ‘BaFin’) as the national resolution authority. BaFin is also the national supervisory authority, insofar as the ECB is not acting in its supervisory capacity in accordance with

text: Council Regulation (EU) No 1024/2013

text: . 1.3 The Law on recovery and resolution requires CRR credit institutions to draw up their own recovery plans . The supervisory authority may, however, in agreement with the Deutsche Bundesbank, decide to subject CRR credit institutions to simplified requirements or to exempt them from the obligation to draw up recovery plans altogether, subject to certain conditions relating to the institution’s systemic relevance . Recovery plans are subject to review by the supervisory authority, which decides in agreement with the Deutsche Bundesbank on their suitability . The Law on recovery and resolution also provides that the resolution authority must, in consultation with the supervisory authority, draw up resolution plans for all CRR credit institutions. However, it may draw up simplified resolution plans for certain CRR credit institutions taking into account their degree of systemic relevance . Finally, the Law on recovery and resolution sets out the conditions for the resolution of CRR credit institutions, allowing both the supervisory and the resolution authority, following mutual consultation, to determine whether an institution is failing or likely to fail . In this context, the Law on recovery and resolution confers wide-ranging resolution powers on the resolution authority and provides for resolution tools, in particular the sale of business tool, the bridge institution tool, the asset separation tool and the bail-in tool. However, the resolution authority may also take any other measures that are deemed necessary to achieve the resolution objectives . 1.4 The draft law supplements the Law on recovery and resolution by introducing additional requirements for the design of recovery plans by CCPs . It requires CCPs both to consider scenarios that may be of particular relevance for the critical functions of CCPs and to take

text: adequate measures to address these scenarios. To this end CCPs must ensure the effective implementation of the proposed measures, including the adaptation of their clearing conditions. 1.5 The draft law requires the supervisory authority to assess the proposed recovery plans of CCPs . If the supervisory authority concludes that the recovery plans do not meet the statutory requirements or that there are potential barriers to their successful implementation, it may request that CCPs revise their recovery plans. Should the CCPs not submit revised recovery plans, or if the recovery plans still do not meet the statutory requirements, the supervisory authority may, in addition to imposing the measures provided for under the Law on recovery and resolution, require CCPs to amend their contractual arrangements as necessary. 1.6 The draft law requires the resolution authority to draw up resolution plans for CCPs in consultation with the supervisory authority . Resolution plans must in particular take into account, in addition to the existing statutory requirements, their impact on CCPs’ clearing members, on their clients and on the financial systems in the relevant Member States and in the Union as a whole. Resolution plans must be reviewed at least annually and whenever certain major events arise. 1.7 The draft law entitles the resolution authority, following coordination with the supervisory authority and the Deutsche Bundesbank, to require in addition to the measures foreseen under the Law on recovery and resolution, a modification of CCPs to modify their clearing conditions and contractual arrangements if the resolution authority concludes that there are significant impediments to the resolvability of CCPs . In this regard the draft law empowers the Federal Ministry of Finance to adopt an ordinance setting out detailed provisions on changes necessary to achieve resolvability and appropriate amendments to the clearing conditions and contractual or other related arrangements of CCPs and the conditions under which such amendments may be ordered. 1.8 Where the resolution conditions, as set out in the Law on recovery and resolution , are met, the resolution authority may take, in addition to the measures stipulated in the Law on recovery and resolution, all necessary measures to achieve the resolution objectives, in particular it may: (a) terminate contracts, whereby the resolution authority may terminate all or only specific obligations of a CCP undergoing resolution; (b) reduce the profits to be paid to non-defaulting clearing members, and (c) make additional cash calls . However, before resorting to these resolution tools, the resolution authority must first enforce the contractual rights of the CCP. Under certain conditions the resolution authority may also desist from asserting contractual rights in full or in part . Furthermore, the resolution authority may not require an additional cash call from the Deutsche Bundesbank or a reduction in the Deutsche Bundesbank’s valuation gains.

text: 1.9 The draft law introduces safeguards and compensation rights for shareholders, creditors and clearing members whose losses in the resolution process exceed those in a presumed insolvency procedure (the ‘no creditor worse off than in insolvency’ principle) . 1.10 According to the explanatory memorandum, the draft law will be replaced by a Union regulation once such regulation is adopted. 1.11 The draft law also introduces amendments that need to be made to certain supervisory acts, in particular the Law on securities trading , in response to

text: Regulation (EU) 2019/834

text: of the European Parliament and of the Council . Finally, the draft law introduces several editorial changes to a variety of supervisory acts and ordinances.

text: 2. General observations

text: 2.1 The ECB welcomes the draft law’s general objective of preserving financial stability in the event of the distress or failure of a CCP. Due to their interconnectedness and market importance, CCPs must generally be considered to be of systemic importance. The failure or distress of a CCP is likely to impair the proper functioning of the financial system, which also has negative consequences for the rest of the economy. Minimising such contagion risks through robust CCP recovery and resolution arrangements is therefore critical. 2.2 The ECB shares the Commission’s view that a harmonised approach to the recovery and resolution of CCPs across the Union is appropriate . In the event of the distress or failure of a CCP, divergent approaches to their recovery and resolution across the Member States could lead to the disruption of critical functions to clearing members and clients across borders and wider financial instability, especially since cross-border membership of European CCPs is widespread. A European approach is also warranted to ensure that the legitimate concerns of all affected Union stakeholders are duly considered in the context of CCP recovery and resolution planning and execution, as well as to ensure a level playing field among Union CCPs. 2.3 The draft law regulates aspects of the recovery and resolution of CCPs that are provided for in the Commission’s 2016 proposal for a regulation of the European Parliament and of the Council on a framework for the recovery and resolution of central counterparties and amending Regulations

text: (EU) No 1095/2010

text: (EU) No 648/2012

text: , and

text: (EU) 2015/2365

text: (hereinafter the ‘Union CCP recovery and resolution proposal’), on which the ECB opined in 2017 . It is understood that the Union’s CCP recovery and resolution proposal is currently under discussion in the European Parliament and the Council, and that the decision-making process may be finalised in 2020. In this context, it is

text: understood that the German legislator will review the draft law once the Union’s CCP recovery and resolution proposal is adopted, in order to ensure full consistency with Union legislation. However, once Union legislation is adopted, the draft law will require additional adaptation, not just by the legislator but also on the part of CCPs, their clearing members and clients. 2.4 A national legislative proposal is subject to certain inherent restrictions that are not imposed on a proposal at Union level. First, a CCP may hold an authorisation as a CRR credit institution. The draft law has followed a consistent approach for the recovery and resolution of CCPs, irrespective of whether they are CRR credit institutions. However, the compulsory rules governing the recovery and resolution of CRR credit institutions are laid down in Directive

text: and

text: Regulation (EU) No 806/2014

text: of the European Parliament and of the Council . A national legislative proposal’s rules on the recovery and resolution of a CCP that is a CRR credit institution may further supplement Directive

text: and

text: Regulation (EU) No 806/2014

text: , however, it must not contradict the Union legal requirements. This limitation does not apply to CCPs that do not hold an authorisation as a CRR credit institution. Establishing diverging recovery and resolution rules for CCPs depending on their status as a CRR credit institution could undermine the objective of preserving a Union level playing field and, ultimately, financial stability. Second, under the Union’s CCP recovery and resolution proposal resolution colleges are to be established comprising Member State and Union authorities. A national proposal is necessarily limited to imposing rules only on authorities within its jurisdiction as it can only invite, but cannot dictate the input of authorities in other Member States. The draft law is similarly incapable of introducing a horizontal coordination of recovery and resolution plans across Union CCPs. 2.5 The draft law seeks synergies by building on the existing framework for bank recovery and resolution, according to which resolution and supervisory authorities should be prepared for, and have adequate recovery and resolution tools at their disposal to handle, situations involving the failure of credit institutions. However, due to their divergent functions, organisational structures and business models, the risks inherent in banks and CCPs are different. Specific tools and powers are therefore needed for CCP failure scenarios caused either by the default of the CCP's clearing members or by other non-default-related events. Therefore, an approach that simply supplements the rules for bank recovery and resolution may sometimes fail to respect the intricacies of a CCP recovery and resolution . For example, this shortcoming becomes apparent in connection with the initiation of a resolution.

text: Article 32(1) of Directive 2014/59/EU

text: requires that a CRR credit institution is determined as failing or likely to fail before its resolution can be initiated. According to the

text: Union’s CCP recovery and resolution proposal , a resolution authority may also initiate the resolution of a CCP irrespective of whether the CCP is failing or likely to fail if the CCP’s envisaged recovery measures could cause significant adverse effects for the financial system.

text: 3. Specific observations

text: It is recalled that the draft law would have to be reviewed once the Union’s CCP recovery and resolution proposal is adopted. The observations made in this opinion are therefore without prejudice to the need for the German legislator to adapt the draft legislation to any future Union legislation. Against this background the ECB acknowledges that the draft law has taken into account the Union’s CCP recovery and resolution proposal, but notes that there is still room for improvement in the following areas. 3.1 Recovery Planning 3.1.1 Recovery plans should be required to envisage severe scenarios, including the default of more than two clearing members to which a CCP has its largest exposures, and both idiosyncratic and system-wide stress scenarios, taking into account the potential impact of domestic and crossborder contagion in crises, as well as simultaneous crises in several significant markets . 3.1.2 It would be useful to clarify that BaFin’s review, as supervisory authority, must take place not only in the context of the initial approval of the recovery plan, but also at a later stage, when BaFin conducts or updates its assessment of the CCP's resolvability. This is important because otherwise BaFin is likely only to conduct its resolution planning and resolvability assessments after the CCP’s recovery plan has been finalised . 3.1.3 The draft law provides that CCPs may in principle benefit from the simplified procedure for designing a recovery plan, as laid down for credit institutions . Given the systemic nature of each CCP, the ECB expects that the requirements that must be satisfied for a simplified procedure for designing recovery plans to be applicable would not usually be fulfilled in the case of CCPs and that therefore, CCP recovery plans should, in practice, be excluded from such simplified procedures. 3.2 Resolution Planning 3.2.1 Resolution plans should clearly differentiate between potential stress scenarios that are related to a clearing member’s default and those that are due to other reasons. Similarly, in order to ensure that resolution plans are adequate for all relevant scenarios going beyond ‘extreme but plausible’ market conditions, the resolution plan should, in terms of default-related failure scenarios, take into consideration not only the default of one or more of the CCP's clearing members, but also the default of at least the three clearing members to which the CCP has the largest exposures,

text: considering that CCPs are already required under

text: Regulation (EU) No 648/2012

text: to hold sufficient financial resources to withstand the potential default of at least the two clearing members to which the CCP has the largest exposures . 3.2.2 The resolution plan should require that CCPs do not assume extraordinary public financial support, central bank emergency liquidity assistance or central bank liquidity assistance provided under non-standard collateralisation, tenor and interest terms . Moreover, given the importance of preempting potential taxpayer losses in resolution, the draft law should also expressly require BaFin, as resolution authority, to make prudent assumptions about the financial resources that may be required to achieve resolution objectives and the resources that it expects to be available under the CCP's rules and arrangements at the time of entry into resolution . 3.2.3 In order to ensure better consistency between the key aspects of the resolution plan and international standards , the following items should be added to the minimum content of resolution plans . First, an estimation of the timeframe for the replenishment of the financial resources of the CCP (i.e. default fund and regulatory capital). Second, a description of the general approach and decision-making processes followed by BaFin, as resolution authority, in key areas of resolution with the objective of fostering planning and stakeholder transparency around prospective resolution actions. This should include: (a) BaFin's prospective approach for triggering resolution, including key indicators that would influence BaFin's decision whether to put the CCP in resolution in different types of default and non-default related resolution scenarios; and (b) to the extent that BaFin needs to depart from the CCP's rules and arrangements, the general approach that BaFin would expect to follow in calculating and allocating losses, including the presumed choice and sequencing of different loss allocation tools, and how BaFin would expect to apply the ‘no creditor worse off than in insolvency’ safeguard and assess losses under the counterfactual for these purposes. Given the granular level of these requirements it may, however, be more appropriate to implement them via an announcement by BaFin, rather than in the draft law itself. 3.3 Resolvability BaFin, as resolution authority, should be empowered to require a CCP to set aside resources to increase its capacity for loss absorption, recapitalisation and the replenishment of pre-funded resources, should the available resolution funding be deemed insufficient. In order to give effect to this power, regulations adopted by the Ministry of Finance or BaFin under the draft law should, as regards assessing resolvability, specify minimum criteria to be considered by BaFin when assessing the adequacy of a CCP's resolution funding . As a minimum BaFin should take into account the following elements.

text: First, in the event of default-related resolution scenarios: (a) the risk characteristics, complexity and pricing uncertainties of the products cleared, and the related potential degree of error in initial and variation margin calculations; (b) the size, structure and liquidity of the underlying market in stressed conditions; (c) the number of clearing member defaults that would be covered by available pre-funded and committed resources under ‘extreme but plausible’ conditions; (d) the availability and potential impact on affected clearing members of tools such as partial tear-ups and variation margin gains haircutting; and (e) the credibility of unfunded arrangements in meeting the CCP's potential needs; and Second, and for all types of loss, the substitutability of the CCP in the markets it serves, and the credibility of any additional arrangements, such as insurance agreements or parental guarantees, that may be available to address uncovered credit losses. 3.4 Resolution tools In order to pre-empt moral hazard and minimise potential taxpayer losses, the use of State aid for the purpose of CCP resolution should not only be subject to the condition of approval under the Union State aid framework , but should also be dependent on credible mechanisms for the timely and comprehensive recovery of any resources provided . The ECB welcomes the exclusion of the Deutsche Bundesbank from certain CCP resolution tools, namely cash calls and the reduction in valuation gains . This is in line with the ECB’s stance as expressed in its opinion on the Union’s CCP recovery and resolution proposal, which emphasised the special features of central banks as CCP clearing members . The ECB therefore recommends that the other members of the European System of Central Banks also be excluded from the operation of the draft law. 3.5 ‘No creditor worse off than in insolvency’ principle The ECB notes that the ‘no-creditor-worse-off-than-in-insolvency’ principle is a critical safeguard to ensure that CCP participants, shareholders and other creditors would not be treated less favourably in resolution than under the hypothetical alternative scenario where the resolution authority would not have intervened and the CCP would have been liquidated under applicable insolvency law . At the same time, it is important that the valuation methodology underlying the application of the no-creditor-worse-off principle properly reflects the fair value of business continuity preserved by CCP resolution in order to avoid excessive compensation claims by relevant stakeholders. The need for a fair and balanced approach in this respect is underlined by the related risks for the public sector, with the financial burden ultimately being borne by taxpayers. Taking proper account of the fair value of business continuity preserved by CCP resolution is an essential consideration in the context of CCP resolution, which would only be envisaged to take place in exceptionally severe market events, where the disruption of a CCP’s critical functions would most likely be associated

text: with a large-scale destruction of financial value and very limited opportunities for bilateral clearing alternatives. The ECB therefore recommends that a fair valuation of the CCP for purposes of the application of the no-creditor-worse-off principle would need to be not only carried out in terms of the assets and liabilities reflected on the CCP's balance sheet at the point in time when resolution is triggered, but would need to be based on a more comprehensive, realistic assessment of the CCP's value in the event of its liquidation, taking full account of losses, replacement costs, and the destruction of value that would result from the closure or liquidation of the CCP.

text: This opinion will be published on the ECB’s website.

text: Done at Frankfurt am Main, 14 January 2020.

text: [signed]

text: The President of the ECB

text: Christine LAGARDE

type: vagledning

utgivare: ecb


text: Article 72(2) of the Law on bank bankruptcy (Закон за банковата несъстоятелност). 5 Article 16 of the Law on Hrvatska narodna banka (Zakon o Hrvatskoj narodnoj banci (Narodne novine br. 75/2008), Zakon o izmjenama i dopunama Zakona o Hrvatskoj narodnoj banci (Narodne novine br. 54/2013)). 6 For example in the Czech Republic and in Hungary.

text: Articles 165(1) and 165(2) of Guideline

text: (EU) 2015/510

text: of the European Central Bank of 19 December 2014 on the implementation of the Eurosystem monetary policy framework (ECB/2014/60) (OJ L 91 2.4.2015, p.3). 8 Point (j) of

text: Article 2 of Directive 98/26/EC

text: of the European Parliament and of the Council of 19 May 1998 on settlement finality in payment and securities settlement systems (OJ L 166, 11.6.1998, p. 45). 9 Articles 2(43) and 17(1) of Guideline

text: of the European Central Bank of 5 December 2012 on a Trans- European Automated Real-time Gross settlement Express Transfer system (TARGET2) (ECB/2012/27) (OJ L 30, 30.1.2013, p.1). 10 Guideline ECB/2012/27 of the European Central Bank of 5 December 2012 on a Trans-European Automated Realtime Gross settlement Express Transfer system (TARGET2) (OJ L 30, 30.1.2013, p.1). 11 To the extent that such funds qualify as non-monetary policy deposits other than government deposits, reference is made to Article 4(2) of Guideline

text: (EU) 2019/671

text: of the European Central Bank of 9 April 2019 on domestic asset and liability management operations by the national central banks (ECB/2019/7) (OJ L 113, 29.4.2019, p. 11). 12

text: Council Regulation (EC) No 3603/93 of 13 December 1993

text: specifying definitions for the application of the prohibitions referred to in Articles

text: and

text: b (1) of the Treaty (OJ L 332, 31.12.1993, p. 1). The provisions of Articles

text: and

text: b(1) of the Treaty establishing the European Community are now laid down in Articles 123 and 125(1) of the Treaty.

text: See ECB Convergence Report 2018, available on the ECB website at www.ecb.europa.eu. 14 The obligation of a liquidator to settle creditors’ claims as prescribed in Section IX of the Law on credit institutions remains unchanged by the draft law.

title: Opinion of the European Central Bank of 30 January 2020 on the right of insolvency administrators and liquidators of credit institutions to hold funds in an account in Latvijas Banka (CON/2020/4)

text: OPINION OF THE EUROPEAN CENTRAL BANK of 30 January 2020 on the right of insolvency administrators and liquidators of credit institutions to hold funds in an account in Latvijas Banka (

text: ) Introduction and legal basis

text: On 26 November 2019, the European Central Bank (ECB) received a request from the Ministry of Finance of the Republic of Latvia for an opinion on a draft law containing amendments to the Law on credit institutions (hereinafter the ‘draft law’). The ECB’s competence to deliver an opinion is based on Articles 127(4) and 282(5) of the Treaty on the Functioning of the European Union and the third indent of

text: Article 2(1) of Council Decision 98/415/EC

text: , as the draft law relates to Latvijas Banka. In accordance with the first sentence of Article 17.5 of the Rules of Procedure of the European Central Bank, the Governing Council has adopted this opinion.

text: 1. Purpose of the draft law

text: 1.1 Currently Latvian national law imposes an obligation on administrators of credit institutions that are insolvent to hold funds in an account opened at Latvijas Banka. The draft law seeks mainly to (i) change this obligation into a right, and (ii) to extend this right to liquidators of credit institutions that are being liquidated . 1.2 According to the draft law, a liquidator or administrator of a credit institution may hold the funds of a credit institution that is being liquidated or a credit institution that is insolvent, including funds recovered during the liquidation or insolvency process, in a euro account in Latvijas Banka in accordance with the terms and conditions applicable to the managing of such accounts in Latvijas Banka. Only the liquidator or administrator is entitled to transfer funds to such an account in Latvijas Banka from an account of the credit institution that is to be liquidated or credit institution that is insolvent that is held at a credit institution in an EU/EEA Member State. Similarly, only the liquidator or administrator is entitled to transfer funds from such an account in Latvijas Banka to the account of the credit institution that is to be liquidated or credit institution that is insolvent. The liquidator or administrator is also entitled to keep cash in the cashier’s office to the extent necessary for covering the current expenses of the liquidation or insolvency process. 1 Kredītiestāžu likums, Latvijas Vēstnesis, 163, 24.10.1995. 2

text: Council Decision 98/415/EC of 29 June 1998

text: on the consultation of the European Central Bank by national authorities regarding draft legislative provisions (OJ L 189, 3.7.1998, p. 42). 3 Pursuant to Article 6 of the Law on credit institutions, branches of third country credit institutions can exercise the existing right to keep funds in an account in Latvijas Banka during insolvency processes. Unless Article 6 of the Law on credit institutions is amended, branches of third country credit institutions that are being liquidated will also be able to exercise the right to keep funds in an account in Latvijas Banka.

text: 1.3 According to the Ministry of Finance, the draft law adopts a common approach to the rights of insolvency administrators and liquidators of credit institutions in relation to the holding of funds of such credit institutions in an account opened in Latvijas Banka and the holding of cash at its cashier’s office for covering current expenses of the liquidation or insolvency process.

text: 2. General observations

text: 2.1 Tasks of Latvijas Banka 2.1.1 Under the existing provisions of the Law on credit institutions, funds which have been obtained in the insolvency process of a credit institution by recovering or selling its assets, have to be transferred by the administrator to an account of the credit institution opened in Latvijas Banka. The draft law establishes a right (but not an obligation) of a liquidator or administrator to keep funds of a credit institution that is being liquidated or of a credit institution that is insolvent, including funds recovered during the liquidation or insolvency process, in an account in Latvijas Banka. Therefore the draft law’s proposed extension of the existing arrangements for insolvency administrators to liquidators of credit institutions that are being liquidated does not confer a new task on Latvijas Banka, but is rather a technical extension of Latvijas Banka’s existing task in this respect. 2.1.2 In addition, it should be noted that while the majority of national central banks (NCBs) in the European System of Central Banks (ESCB) do not appear to have been assigned tasks relating to the maintenance of accounts for insolvency administrators or liquidators, the ECB has identified one non-euro area Member State where an NCB has been given similar tasks. In Bulgaria, a trustee in bankruptcy can deposit funds of the credit institution that has declared bankruptcy into an account with Българска народна банка (the Bulgarian National Bank) . Also, in another non-euro area Member State (Croatia), credit institutions under voluntary or compulsory liquidation are obliged to allocate and maintain required reserves in an account with Hrvatska narodna banka (the 5 6 Croatian National Bank) . In some other non-euro area Member States , while the respective NCBs are not explicitly entrusted with a similar task of keeping funds of credit institutions that are being liquidated or that are insolvent, insolvency or liquidation as such does not automatically trigger a cancellation of the account in the respective NCB. In this regard, and also taking into account that it is generally not unusual for NCBs to provide banking services to various kinds of entities, the extended task of Latvijas Banka does not appear to be completely atypical of NCB tasks. 2.2 Consequences of insolvency or liquidation of a credit institution in relation to Eurosystem

text: operations

text: 2.2.1 Regarding the consequences of insolvency or liquidation of a credit institution in relation to Eurosystem monetary policy operations, each NCB in the Eurosystem is required to apply contractual or regulatory arrangements that, as a minimum, provide for events of default where, inter alia, a decision is made by a competent judicial or other authority to implement, in relation to

text: the counterparty, a procedure for the winding-up of the counterparty or the appointment of a liquidator or if the counterparty is, or is deemed to be, insolvent. In the event of a procedure for the winding-up of the counterparty or for the appointment of a liquidator, the default shall be automatic, whereas in the event the counterparty is, or is deemed to be, insolvent, the default may be automatic . 2.2.2 Regarding the consequences for opening an insolvency process in relation to a credit institution participating in a TARGET2 component system, the central bank or component operator shall immediately terminate without prior notice or suspend the participant’s participation in its TARGET2 component system if, inter alia, an insolvency process (defined as any collective measure provided either to wind up the participant or to reorganise it, where such measure involves the suspending of, or imposing limitations on, transfers or payments ) is opened in relation to the participant . Liquidation is not independently specified as the grounds for termination of participant’s participation in TARGET2 component and it is up to the legal order of each Member State to ascertain under the national law whether liquidation is a part of the insolvency process for the purpose of application of Guideline ECB/2012/27 of the European Central Bank .In Latvia, a credit institution can undergo a liquidation process in the event of, inter alia, insolvency pursuant to

text: Article 126(1)

text: 3) of the Law on credit institutions. If, however, the liquidation process is initiated prior to and/or in the absence of the credit institution becoming insolvent (for example, due to revocation of a banking licence or in the event of self-liquidation) a participant’s participation in TARGET2 could be terminated due to the participant’s failure to meet access criteria specified in

text: Article 17(1)

text: (b) of Guideline ECB/2012/27. 2.2.3 Against this backdrop, the rights of administrators of credit institutions that are insolvent and liquidators of credit institutions that are being liquidated to hold funds in accounts opened at Latvijas Banka under the draft law have no implications for Eurosystem operations. The funds held in such accounts shall be treated in accordance with the relevant rules adopted by the Governing Council of the ECB, including the application of the negative deposit facility rate . 2.2.4 The monetary financing prohibition set out in Article 123(1) of the Treaty prohibits, inter alia, overdraft facilities or any other type of credit facility with NCBs in favour of the public sector. The precise scope of application of the monetary financing prohibition is further clarified by

text: Council Regulation (EC) No 3603/93

text: which makes it clear that the prohibition includes any financing of

text: the public sector’s obligations vis-à-vis third parties. National legislation that provides for the financing by an NCB of credit institutions other than in connection with central banking tasks (such as monetary policy, payment systems or temporary liquidity support operations) would be incompatible with the monetary financing prohibition. In particular, the support of credit institutions that are insolvent and/or other financial institutions that are insolvent would be incompatible with this prohibition. The rationale is that by financing a credit institution that is insolvent, an NCB would be assuming a government task . Against this backdrop, no overdraft or other type of credit facility in favour of administrators of credit institutions that are insolvent or liquidators of credit institutions that are being liquidated holding accounts at Latvijas Banka would be possible. 2.3 Effect of the task on financial or organisational capacity of Latvijas Banka Under the draft law, Latvijas Banka will be able to access the necessary resources to carry out this task. Thus, Latvijas Banka will only hold funds of credit institutions that are being liquidated in accordance with terms and conditions applicable to the managing of such accounts in Latvijas Banka of Latvijas Banka, which will allow Latvijas Banka to set and apply fees for the provision of the respective service to a credit institution that is being liquidated. The draft law permits transfers only between the Latvijas Banka account of a credit institution that is being liquidated and accounts of that credit institution in other credit institutions in an EU/EEA Member State. This means that fund transfers from the Latvijas Banka account of the credit institution under liquidation to creditors or other entities will not be possible, and that fund transfers from the credit institution that is being liquidated to such creditors would be executed out of the relevant account in a credit institution . Considering the limited functionality of the account maintained at Latvijas Banka, it is expected that the account at Latvijas Banka would be used by a credit institution that is being liquidated for a very limited number of transactions. In this respect, it is not expected that Latvijas Banka will have to dedicate significant additional human, technical and financial resources to perform this extended task.

text: Done at Frankfurt am Main, 30 January 2020.

text: [signed]

text: The President of the ECB

text: Christine LAGARDE