Europe Considers Capital Adequacy Framework for Securities Firms

Washington, DC, February 21, 2001 - The European Commission launched on February 5 a second round of consultations on a new capital adequacy framework for banks and investment firms. The Capital Adequacy Directive generally applies to investment firms, including managers of pension funds, that are subject to the requirements of the Investment Services Directive (ISD). The ISD currently does not apply to funds or their managers.

The Commission’s consultative paper on capital adequacy complements the work of the Basel Committee. The Commission is seeking comments on the consultative paper by May 31, 2001, and intends to issue proposals for a revised capital adequacy framework in the fall of 2001.

The paper focuses on issues of particular concern to the European Union (EU) and highlights differences between the Basel proposals and the EU approach. The consultative paper discusses numerous topics and issues, including the "internal ratings based" and "revised standardized" approaches, credit risk mitigation, consolidated capital requirements, interest rate and operational risks, the supervisory review process, and disclosure requirements. Although the current Capital Adequacy Directive does not apply to UCITS funds, non-UCITS funds, or managers of these funds, the EU Council recently has been considering imposing certain minimum capital requirements of the Capital Adequacy Directive on management companies of UCITS funds. If the UCITS amendments incorporate a requirement of the Capital Adequacy Directive into the UCITS Directive, the new framework for capital adequacy also may have implications for the management companies of UCITS funds.