## GERMANY — Report on Observance of Standards and Codes (_cr11170)

## Source details

**Canonical URL:** [GERMANY — Report on Observance of Standards and Codes (_cr11170)](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11170.pdf)

## Other formats

- [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11170.pdf.md)
- [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11170.pdf.json)

---

### Summary
- In general, the level of observance of the BCP is high, even though specific weaknesses remain.
- Authorities recognize that the size and sophistication of the German financial system demand that supervision go beyond the standards, and are working to make further improvements reflecting regulatory and financial policy initiatives occasioned by the global crisis.
- Detailed assessment highlights:
  - Microprudential supervision needs greater emphasis—also on a forward-looking basis—on capital adequacy.
  - A need for more pro-active on-site supervision and improved data gathering.
  - Authorities should be ready to demand progressively stronger remedial action as a particular institution’s situation becomes more precarious; implementing a more formalized “ladder” of supervisory actions would be useful.

### Information and Methodology Used for the Assessment
- Assessment based on:
  - A study of the legal and regulatory framework.
  - A self-assessment prepared by the German authorities.
  - Detailed discussions with government representatives, BaFin, the Bundesbank, industry associations, and private sector participants.
- Assessors: William Ryback (external expert) and Constant Verkoren (IMF, Monetary & Capital Markets Department).
- Methodology:
  - Conducted in accordance with the Core Principles (CP) Methodology published in October 2006 by the BCBS.
  - Qualitative assessment of each CP; compliance with “essential” and “additional” criteria assessed, but ratings based solely on “essential” criteria.
  - Prepared on factual situation at mission time, noting initiatives in train but not yet completed or implemented.
- Mission visit: Germany in January–February 2011 as part of the FSAP Update.

### Institutional and Macroprudential Setting and Market Structure
- Financial system characteristics:
  - Complex and highly diversified.
  - Banking system based on a “Three Pillar” system (private banks, savings banks and associated Landesbanken, cooperative banks) with a relatively high portion of public banking.
  - Private commercial banks hold less than 30 percent of system-wide assets and are relatively concentrated in the two largest, internationally active banks.
  - Major banks have large exposures abroad through branches and subsidiaries, cross-border lending, and market operations.
- Crisis experience and structural issues:
  - Initial shocks from subprime markets in July 2007 led to two smaller banks being rescued.
  - Following Lehman Brothers, liquidity rollover requirements at another institution in early October 2008 threatened stability.
  - Major private banks suffered market losses and difficult access to financing; loan quality deteriorated as recession deepened.
  - Crisis revealed serious and systemic risks across the Landesbanken sector; structural reform of this sector remained outstanding.
- Policy response:
  - Authorities prevented widespread financial stress, provided stimulus, and initiated overhaul of financial stability framework.
  - Support measures included guarantees, recapitalization, and asset purchases; gross amount made available exceeded 20 percent of GDP, of which less than half was actually used.
  - At mission time the health of the financial sector had stabilized via strong policy support channeled through exceptional measures; financial stresses had abated but pockets of vulnerability remained and restructuring for weaker institutions was not completed.

### Preconditions for Effective Banking Supervision
- Macroeconomic and institutional framework:
  - Monetary policy within the European System of Central Banks.
  - Budgetary policy within fiscal framework based on predefined rules and European Stability Pact requirements.
- Legal and regulatory framework:
  - Comprehensive and regularly updated banking legal framework.
  - Regulations provide minimum standards determined by Basel II as implemented through the Capital Requirements Directive.
  - Company law governed by the German Commercial Code (Handelsgesetzbuch).
  - German Corporate Governance Code adopted February 2002.
  - German-listed companies required to apply IFRS since 2005.
  - BaFin mandated to maintain fair and transparent market conditions as part of securities market supervision.
- Deposit insurance and resolution:
  - Three categories of deposit schemes: mandatory schemes and voluntary schemes providing additional arrangements and guarantees.
  - Restructuring Act (Restrukturierungsgesetz) came into effect on January 1, 2011, providing mechanisms for orderly restructuring or resolution.
  - Under the Restructuring Act BaFin may—under certain circumstances—order an institution to sell all assets or systemically critical business segments to another institution or a government-owned bridge bank.

### Main Findings — Overall Assessment (Banking)
- Current assessment confirms a high degree of compliance with the Basel Core Principles, but highlights weaknesses to be addressed.
- Supervisory framework enhanced since the 2003 FSAP; noteworthy improvements include increased emphasis on proactive supervision and more sophisticated identification of bank-specific and systemic risk factors.
- Many regulations revised reflecting EU directive amendments; supervisory authorities are addressing remaining weaknesses.

### Assessment of German Banking Supervision (paragraphs 15–21)

- Capital adequacy and use of supervisory powers (CP6)
  - Findings:
    - Capitalization of the German banking sector has seen an upward trend during the past years.
    - Weaknesses exist in the supervision of capital adequacy.
    - BaFin’s legal powers to impose higher capital requirements were expanded and specified through new legislation in August 2009.
    - Specific guidance for supervisors on effective use of these new powers has only very recently become available and has not yet been extensively tested in practice.
    - The use of stress tests to scrutinize capital adequacy of individual institutions needs further enhancement.
    - Efforts to improve the quality of capital need to be intensified.
    - Events during the global crisis revealed some banks to be severely under-capitalized.
  - Recommended actions:
    - Firmly embed use of the new powers to impose higher capital charges, commensurate with institutions’ risk profiles, in supervisory processes.
    - Enhance the use of rigorous stress tests as instruments to closely scrutinize capital adequacy of individual institutions.
    - Continue to closely monitor institutions’ efforts to strengthen their capital base in anticipation of Basel III and intervene strongly if progress seems lacking.

- Risk management practices and supervisory inspection (CP7)
  - Findings:
    - Crisis exposed severe shortcomings in risk management at banks, including at certain German banks.
    - Supervisory authorities encouraged to further their inspection work focusing on liquidity risk management, senior management’s risk oversight, stress testing capabilities, and IT infrastructure supporting risk management.
    - Analytical assessments of institutions’ risk-bearing capacity need deepening; more rigorous and tailored stress tests are needed.
  - Recommended actions:
    - Proactively increase scope and frequency of supervisory inspections.
    - Enhance quantitative analyses of capital adequacy relative to individual institutions’ risk profiles by embedding rigorous stress tests.

- Methods of ongoing supervision, reporting, and data granularity (CP21)
  - Findings:
    - Multiple instances where granularity of formal regulatory reporting was insufficient.
    - BaFin mitigated by requesting systemically relevant institutions to report more detailed information more frequently.
    - Additional reporting should be replaced with a standardized, comprehensive framework ensuring timely reporting of all material risks on a sufficiently granular basis.
    - German authorities working on substantial amendments to the regulatory reporting framework, with parts expected to become effective during 2011.
  - Recommended actions:
    - Extend reporting requirements and develop a standardized, comprehensive framework ensuring timely, sufficiently granular reporting on all material risks.

- Accounting, disclosure, and audit oversight (CP22)
  - Findings:
    - Accounting and disclosure practices largely comply with CP22, but diverging valuation practices risk inhibiting consistency and distorting peer comparisons.
    - New regulatory power to demand a change of the responsible auditor (granted end-December 2010) had not yet been tested.
  - Recommended actions:
    - Encourage standardization of valuation practices to allow more meaningful comparisons across institutions.

- Corrective and remedial powers; formal “ladder” of supervisory actions (CP23 and CP1(d))
  - Findings:
    - BaFin’s remedial and corrective powers are comprehensive.
    - BaFin needs to be ready to demand progressively stronger remedial action as institutions’ situations worsen.
    - BaFin lacks a formalized “ladder” of actions to ensure timely and appropriate supervisory measures commensurate with the nature and seriousness of issues.
    - Restructuring Act effective January 1, 2011 expanded remedial and corrective powers and provided mechanisms for orderly restructuring or resolution.
  - Recommended actions:
    - Develop a consistent and well documented ladder of supervisory actions to promote consistency, resist special interest pressure, and contribute to public confidence.

- Consolidated supervision and cross-border cooperation (CP24–25)
  - Findings:
    - Multiple supervisory colleges established per CRD requirements.
    - Appropriate MoUs and written agreements reflecting EBA and BCBS guidance have been agreed with many supervisory authorities.
    - Supervisory cooperation improved through colleges and bilateral contacts.
    - Important next steps: extend and deepen cross-border cooperation, prevent supervisory overlap, and ensure effective and swift information sharing among supervisors.
  - Recommended actions:
    - Continue to enhance cooperation and information sharing cross-border.
    - Develop formalized, detailed framework for assessing supervision regime of non-EEA competent authorities to determine level of reliance.
    - Grant BaFin authority to close foreign offices of German institutions or impose conditions if host supervisor oversight is inadequate or access to necessary information cannot be gained.
    - Prepare and agree joint recovery and resolution plans for German global systemically important financial institutions.

- Other specific supervisory findings and recommended actions (by CP)
  - Selected items:
    - CP1: Reevaluate BaFin’s reporting requirements vis-à-vis the BMF; strengthen protection of BaFin’s President and Executive Directors; clarify liability protection of BaFin staff not designated as civil servants.
    - CP5: Amend KWG so material acquisitions are subject to prior approval.
    - CP8: Improve consistency in asset classification and provisioning across audit firms; enhance credit risk inspection depth and frequency.
    - CP9: Develop and publish standardized criteria for classifying assets as impaired.
    - CP10/CP11: Restrict opportunities for retroactive approval of large exposures and related-party exposures.
    - CP14: Enhance reporting for foreign currency position risk; increase liquidity risk inspections and use MaRisk enhancements.
    - CP15: Strengthen IT inspection capacity; require reporting of material operational risk incidents to supervisors.
    - CP18: Remediate weaknesses from FATF Mutual Evaluation; review BaFin’s AML/CFT enforcement strategy.
    - CP19/CP20: Enhance use of rigorous stress tests as forward-looking tools; maintain and supplement reliance on external auditors with supervisory inspections typically performed by Bundesbank staff at BaFin’s request.

### Authorities' General Response and Intended Use of the FSAP Assessment
- Authorities express appreciation to the IMF and assessment teams and strongly support the FSAP.
- Authorities “appreciate the assessment” and “will use it to critically reflect their current practices and make changes and adjustments where appropriate.”
- Improvements already underway (pre-FSAP):
  - CP15: BaFin and Bundesbank agree with FSAP evaluation; creation within BaFin of a separate unit for IT risk regulation and auditing started in 2010 and assumed will be established during 2011.
  - CP21: German authorities implementing new reporting requirements to improve granularity.
- Overarching comments:
  - Capital adequacy (CP6), risk management (CP7) and liquidity management (CP14) issues “will be dealt with in preparations for and the implementation of Basle III/ CRD IV.”
  - Authorities note recent regulatory and supervisory initiatives had not been sufficiently tested and applied in reality; they prefer a focus on supervisory outcomes rather than execution of measures.
- Areas where authorities consider regime meets IMF requirements:
  - CP5: Section 12 of the KWG seen as fully in line with EU requirements; acquisition of participating interests outside financial sector deemed a business decision.
  - CP6/CP7: Bundesbank carries out bottom-up and top-down stress tests covering solvency risk, macroprudential issues, liquidity risk, and systemic stability; results regularly presented to Heads of Banking Supervision and risk committees; interaction with banks includes methodological discussions and challenges to banks’ internal exercises.
  - CP9: External auditors report on “noteworthy loans” on a single-loan basis pursuant to section 25 para 1 of PrüfbV; explanatory notes list indicators including probable nonpayment or past due by 90 days or more.
  - CP10: General rule requires unanimous senior manager decision prior to incurrence of a large exposure exceeding 10 percent of the institution’s own funds (Section 13 subsection 2, sentence 2 KWG) with two limited exceptions.
  - CP11: Acknowledged lack of aggregate reporting of loans to related parties but noted supervisors obtain information under section 25 (2) No. 1 PrüfbV where loans are noteworthy.
  - CP18: BaFin has made efforts to strengthen AML/CFT enforcement; FATF has not criticized BaFin for failing to identify and sanction AML/CFT violations in a timely manner.
  - CP22: German accounting and disclosure rules in line with European directives and law; valuation divergences linked to IFRS framework and IAS 39 pending revision.

### Insurance Core Principles (ICP) — High-Level Summary and Assessment
- General assessment:
  - Insurance regulation and supervision generally of a high standard; most enhancements from 2003 assessment implemented.
  - Further enhancements needed for Solvency II implementation: increased on-site inspection frequency, enhanced resources for group-wide supervision, and improved stability analysis through sophisticated stress testing for larger insurers.
- Assessment context:
  - ICP assessment part of 2011 FSAP Update; main mission took place in January–February 2011.
  - Assessor: Fausto Parente of the ISVAP.
- Methodology:
  - Based on review of laws and regulations in force at the time, discussions with supervisors and market participants, and additional material provided by authorities.
  - Access to on-site inspection reports limited due to legal restrictions on sharing institution-specific information.
- Institutional and market structure overview:
  - BaFin is the insurance supervisor; BMF has legal and supervisory control over BaFin.
  - Supervision based on the Insurance Supervision Act (VAG).
- Insurance sector statistics (selected):
  - Sector consisted of 621 companies at end-2010: 98 life insurers, 265 nonlife insurers (including 48 health insurers), 152 Pensionskassen, 36 reinsurers, others including 40 death benefit funds and 30 Pensionsfonds.
  - Of roughly €1.4 trillion in total assets, €804 billion was held in life insurers at end-2009.
  - Pensionskassen and Pensionsfonds held roughly €133 billion in total assets at end-2009.
- Main findings and recommendations (selected):
  - Level of observance of ICPs is very high; authorities working to implement regulatory and policy initiatives occasioned by the global crisis.
  - New rules issued to improve corporate governance, risk management, and internal control.
  - Reinsurers subject to more extensive regulation; new regulations anticipate some Pillar 2 requirements of Solvency II, easing transition starting in 2013.
  - Risk-based system implemented to select supervisory priorities and allocate resources.
  - Capacity needs:
    - Implementation of Solvency II will require enhancement of BaFin supervisory resources in quantity and quality.
    - On-site inspection frequency should be increased; current practice is at least every eight years for medium/low-impact insurers.
    - Group-wide supervision and supervisory cooperation need enhancement for large cross-border groups.
    - Refinement of stress testing techniques recommended.
    - Review split of competences between BaFin and local Chambers of Industry and Commerce regarding intermediaries’ market conduct supervision.
- Recommended Action Plan (selected ICP items):
  - ICP2: Consider explicitly mentioning systemic stability as supervisory objective.
  - ICP3: Strengthen regulatory resources for internationally active insurance groups and Solvency II implementation; consider public disclosure of reasons for removal of board members.
  - ICP4: Continue developing risk-based supervisory approach; enlarge risk model to include group-wide supervision; use stress testing to prioritize supervision.
  - ICP11/ICP12/ICP13/ICP14/ICP17/ICP20/ICP21/ICP22/ICP24/ICP26/ICP28: Series of recommendations to enhance stress testing, reporting timeliness, on-site inspection frequency, group-wide supervision, actuarial expertise, investment and derivatives monitoring, intermediaries’ supervision, and prompt remediation of FATF-identified AML/CFT weaknesses.
- Authorities’ response: Authorities broadly agree with the assessment.

### Table 3 — ICP Summary (selected points)
- ICP 1: “Insurance supervision in Germany is facilitated by sound and progressive financial sector policy framework and financial market infrastructure.”
- ICP 2: “The objectives fixed under the law are mainly focused on the protection of the policyholders.”
- ICP 3: “BaFin is operationally independent and subject to clear accountability mechanisms; its staff is experienced and qualified.”
- ICP 4: “BaFin is moving toward a more risk-based supervisory approach ... a risk model to select and prioritize the supervisory analysis has been made operational.”
- ICP 5: “BaFin is empowered to, and does regularly exchange information with other supervisors, both within and beyond the EU.”
- ICP 6–16 (selected): Licensing regime clear and transparent; suitability checks robust; on-site inspection frequency for medium-impact insurers should be increased; preventive and corrective powers adequate and to be refined under Solvency II.

### Group-wide Supervision (Insurance)
- Regulatory frameworks for insurance groups and financial conglomerates broadly in line with EU directives.
- Implementation of Solvency II (effective January 2013) will strengthen BaFin’s supervision of insurance groups, subject to adequacy of regulatory resources.
- VAG establishes high-level risk management requirements supplemented by BaFin circulars; effectiveness regularly assessed.
- BaFin monitors technical provisions by off-site examinations and on-site inspections and can require insurers to remedy shortfalls.
- Investments: quantitative limits for primary insurers; reinsurance follows “prudent person principle.”
- Intermediaries: BaFin not directly responsible; recommendation to analyze split of competences and improve consumer protection at point of sale.
- Information and transparency: BaFin publishes market data and analysis, often with considerable time lags.
- Recommended Action Plan for insurance (selected group-wide items):
  - Increase resources and actuarial expertise for Solvency II valuation complexity.
  - Harmonize group capital adequacy calculation and valuation criteria.
  - Regularly address group-wide effects in stress tests.
  - Shorten publication time lags for aggregate insurance data.

### Securities Regulation and Market Infrastructure (Selected Findings)
- Issuers (Principles 14–16):
  - Prospectus approved by BaFin required for securities offered to public or admitted to trading on a regulated market.
  - Material event reporting applies for issuers on regulated markets.
  - Financial statements must comply with IFRS.
  - Substantial shareholder disclosure and takeover legislation (mandatory bid at 30 percent) provide framework for change of control.
  - Issuers must publish annual and half-yearly reports; for issuers of shares interim management statements or quarterly reports required.
  - Issuers must disclose material price sensitive information without delay; BaFin guidance and supervision effective.
- Collective Investment Schemes (Principles 17–20):
  - CIS operators must hold BaFin license, keep fund assets segregated, publish annual and semiannual reports, and produce prospectuses in line with IOSCO Principles.
  - Valuation methodology detailed in legislation; BaFin relies heavily on audit reports and performs limited on-site inspections.
  - Concern: limited on-site inspections increase risk that undesirable conduct is not detected timely.
- Intermediaries (Principles 21–24):
  - BaFin license required to provide financial services; ongoing risk-based capital requirements and prudential requirements apply to authorized institutions.
  - Nonbank intermediaries not permitted to hold client assets/funds and thus not subject to detailed ongoing risk-based capital requirements.
  - No specific ex ante procedures for failure of an intermediary; ad hoc court-ordered insolvency process used for nonbank sector.
- Secondary Markets (Principles 25–30):
  - Exchanges and MTFs require authorization; TSOs conduct real-time monitoring under ESA supervision; BaFin investigates and acts on market abuse.
  - Transparency obligations in place for shares and certificates representing shares but not other instruments.
  - Concern: dispersal of trading across multiple venues highlights absence of integrated overview of activity.
  - BaFin reviews daily trading reports and enforcement indicates market abuse detection is working well.
- IOSCO Implementation — Summary recommendations:
  - Ensure uniform regulatory standards across functionally similar products and services (urgency).
  - Consider mechanisms to strengthen formal independence of State ESAs and streamline BaFin reporting obligations to BMF.
  - Increase use of on-site inspections and refine risk assessment system; additional resources will be required.
  - Work toward more complete transparency regime in context of MiFID review, including standards for data interoperability and consolidated post-trade reporting for equities.

### Eurex Clearing AG — CPSS-IOSCO CCP Assessment (Selected Findings)
- High-level assessment:
  - Eurex observes the CPSS-IOSCO Recommendations for Central Counterparties (RCCPs).
  - Sound, transparent, and enforceable legal basis for activities; comprehensive risk management framework; default rules clearly stated.
  - Participants’ assets and collaterals kept in regulated national and international depositories; Eurex uses central bank money for cash settlement of most transactions.
  - Legal uncertainty exists for client assets portability; addressed by legislative proposals.
- Regulatory and oversight gaps:
  - Eurex is regulated and supervised as a bank; no dedicated regulatory regime covering CCP business.
  - BaFin does not fully observe recommendation on regulation and oversight for CCPs as no specific regime defined.
  - Bundesbank lacks legal basis to oversee Eurex as a financial market infrastructure.
- Key statistics of Eurex, 2006–2010 (Table 8):
  - Number of transactions (millions):
    - Equities: 73.48, 109.98, 129.15, 94.23, 96.45
    - Debt instruments: 0.009, 0.089, 0.115, 0.085, 0.097
    - Derivatives: 1,526.75, 1,899.80, 2,165.04, 1,687.16, 1,896.92
    - TOTAL: 1,600.24, 2,009.87, 2,294.31, 1,781.48, 1,993.47
  - Value of transactions (EUR billions): 108,039.4, 127,156.4, 116,757.3, 80,525.9, 99,838.9
  - Average daily value of transactions (EUR billions): 423.7, 504.6, 459.7, 317.0, 390.0
  - Peak value of transactions (EUR billions): 945.2, 1,287.1, 1,110.3, 802.3, 841.1
  - Number of clearing members: 119, 118, 109, 117, 128
    - Foreign clearing members: 66, 66, 60, 65, 75
  - Clearing fund (EUR millions): 752, 895, 1,392, 1,259, 912
- Main findings on Eurex against RCCPs (selected Recitals):
  - Legal Framework (Rec. 1): Adequate legal basis for netting, asset protection, and DVP finality; adequate default rules and effective use of collateral.
  - Participation requirements (Rec. 2): Well-defined access and exit criteria; members must be regulated entities with minimum capital.
  - Financial risk management (Rec. 3–6): Comprehensive risk management, real-time exposure monitoring, intra-day margin calls, back testing and stress testing; defined financial resources to withstand default of three largest participants in extreme but plausible conditions.
  - Default procedures (Rec. 6): Rules allow transfer of customer positions, close-out, and pro rata assignment; legal issue: German insolvency law does not fully support portability of customer positions and collateral; parliamentary amendment to Article 104a under discussion.
  - Money settlements (Rec. 9): Uses central bank money for EUR and CHF; relies on private banks for some FX settlement; recommended action to consider settling in central bank money and/or increasing number of settlement agent banks for FX.
  - Operational risk (Rec. 8): Robust business continuity arrangements, two geographically separated IT processing sites, real-time data mirroring, annual contingency testing with participants.
  - Governance (Rec. 13): Governance arrangements clear and publicly available; recommendations to increase independent board members and for BaFin to explore defining an explicit public interest objective for Eurex.
- Recommended Action Plan for Eurex and authorities (selected):
  - Require Eurex to consult authorities in advance for material changes to clearing conditions.
  - BaFin to define and disclose objectives and policies with regard to CCP activities; consider issuing a dedicated regulatory regime for CCPs or develop special rules in Banking Law.
  - Bundesbank to be provided legal mandate to oversee Eurex as a CCP and participate in onsite inspections; BaFin and Bundesbank to recruit additional staff for clearing oversight.
  - Address legal basis for portability of customer collaterals (amend Article 104a of insolvency law under discussion).
  - Consider central bank settlement for FX and/or increase settlement agent banks; make differentiated price policy public; increase independent board members.
- Authorities’ response excerpt:
  - Eurex notes supervisory board members are elected by shareholders only and Eurex cannot influence their decision regarding supervisory board composition.

*Prepared by the Monetary and Capital Markets and European Departments; FSAP Update mission visited Germany in January–February 2011. Approved by José Viñals and Antonio Borges on June 20, 2011.*

*Source: _cr11170 (IMF FSAP chapter covering paragraphs 15–21 and associated tables and recommendations).*

### 2011. The views expressed in this document are those of the staff team and do not necessarily reflect

### GERMANY — Report on Observance of Standards and Codes

### Summary
- In general, the level of observance of the BCP is high, even though specific weaknesses remain.
- Authorities recognize that the size and sophistication of the German financial system demand that supervision go beyond the standards, and are working to make further improvements reflecting regulatory and financial policy initiatives occasioned by the global crisis.
- The detailed assessment indicates:
  - Microprudential supervision needs greater emphasis—also on a forward-looking basis—on capital adequacy.
  - A need for more pro-active on-site supervision and improved data gathering.
  - Authorities should be ready to demand progressively stronger remedial action as a particular institution’s situation becomes more precarious; implementing a more formalized “ladder” of supervisory actions would be useful.

### Information and Methodology Used for the Assessment
- The assessment was based on:
  - A study of the legal and regulatory framework.
  - A self-assessment prepared by the German authorities.
  - Detailed discussions with key stakeholders including government representatives, BaFin, the Bundesbank, the Association of German Banks (Bundesverband Deutscher Banken), the German Savings Banks Association (Deutscher Sparkassen- und Giroverband), the National Association of German Cooperative Banks (Bundesverband der Deutschen Volksbanken und Raiffeisenbanken), and private sector participants in the banking and financial markets.
- The assessors were William Ryback (external expert) and Constant Verkoren (IMF, Monetary & Capital Markets Department).
- The assessment was conducted in accordance with the Core Principles (CP) Methodology published in October 2006 by the Basel Committee on Banking Supervision (BCBS).
  - It involved a qualitative assessment of each CP.
  - It assessed compliance with both the “essential” and the “additional” criteria, but assigned ratings solely on the basis of compliance with the “essential” criteria.
  - The assessment was prepared on the factual situation at the time of the mission, taking notice of regulatory initiatives in train but not yet completed or implemented.
- The mission visited Germany in January–February 2011 as part of the FSAP Update.

### Institutional and Macroprudential Setting and Market Structure
- Germany’s financial system is complex and highly diversified.
- The banking system is based on a “Three Pillar” system (private banks, savings banks and the associated Landesbanken, and cooperative banks) with a relatively high portion of public banking.
- Private commercial banks hold less than 30 percent of system-wide assets and are relatively concentrated in the two largest, internationally active banks.
- Major banks have large exposures abroad through branches and subsidiaries, cross-border lending, and market operations, both in Europe and worldwide.

- Crisis experience and structural issues:
  - Parts of Germany’s banking sector were hit hard during the financial crisis due to international connections.
  - Germany felt the force of the first shocks from the subprime mortgage markets in July 2007 when two smaller banks had to be rescued at significant costs to the German taxpayer.
  - Following the failure of Lehman Brothers, liquidity rollover requirements at another institution in early October 2008 constituted another threat to financial stability.
  - Major private banks suffered market losses and difficult access to financing, and, as the recession deepened, faced deteriorating loan quality.
  - The crisis revealed serious and systemic risks to financial stability across the Landesbanken sector; to date, the much needed structural reform of this sector remains outstanding.
- Policy response:
  - Authorities prevented widespread financial stress, provided stimulus, and initiated an overhaul of the financial stability framework.
  - Support measures included guarantees, recapitalization, and asset purchases; the gross amount made available exceeded 20 percent of GDP, of which less than half was actually used.
  - At the time of the mission, the health of the financial sector had stabilized via strong policy support, channeled through exceptional measures. Financial stresses had abated but pockets of vulnerability remained and the restructuring process for weaker institutions was not completed.

### Preconditions for Effective Banking Supervision
- Germany has a solid institutional framework supporting sound macroeconomic policies:
  - Monetary policy is conducted within the European System of Central Banks framework.
  - Budgetary policy is conducted within a fiscal framework based on predefined rules and within the requirements of the European Stability Pact.
- Legal and regulatory framework:
  - The German legal framework for the banking sector is comprehensive and regularly updated.
  - German regulations on banking supervision provide a framework of minimum standards determined by the Basel II standards (as implemented in Europe through the Capital Requirements Directive).
  - The structure of financial institutions is governed by company law (German Commercial Code — Handelsgesetzbuch) and other laws.
  - Corporate governance requirements have been laid down in the German Corporate Governance Code (Deutschen Corporate Governance Kodex), adopted in February 2002.
  - German-listed companies have been required to apply International Financial Reporting Standards (IFRS) since 2005.
  - The German legislative framework contains safeguards regarding disclosure and transparency.
  - As part of securities market supervision responsibilities, BaFin is to maintain fair and transparent conditions in markets.
- Deposit insurance and resolution:
  - The Three Pillar system has resulted in a fairly complex structure of deposit insurance schemes: three categories of deposit schemes exist, consisting of schemes that are mandatory for all banks, as well as voluntary schemes providing additional arrangements and guarantees for members.
  - On January 1, 2011 the Restructuring Act (Restrukturierungsgesetz) came into effect, providing mechanisms for orderly restructuring or resolution of troubled institutions.
  - As a consequence of the Restructuring Act, BaFin is currently allowed—under certain circumstances—to order an institution to sell all assets or systemically critical business segments to another institution or a government-owned bridge bank.

### Main Findings
- Overall assessment:
  - The current assessment confirms a high degree of compliance with the Basel Core Principles, but highlights a number of weaknesses to be addressed.
  - The German authorities have enhanced their supervisory framework since the 2003 FSAP, acting on prior recommendations and initiating improvements based on lessons from the global financial crisis.
  - Noteworthy improvements include increased emphasis on proactive supervision and more sophisticated identification of bank-specific and systemic risk factors.
  - Many regulations have been revised, reflecting amendments to EU directives. Although weaknesses remain, supervisory authorities are in many cases already addressing them.

- Objectives, Independence, Powers, Transparency, and Cooperation (CP 1):
  - The design of the German supervisory framework offers sufficient safeguards against government and/or political interference in day-to-day practices of the authorities.
  - The independent character of BaFin is clearly anchored in the legislative framework; BaFin is mandated to decide on individual cases without having to consult the Federal Ministry of Finance (BMF) or other government bodies; and BaFin is not reliant on government funding.
  - Areas for improvement:
    - Protection of the position of the President and Executive Directors of BaFin could be stronger.
    - Additional steps are necessary to safeguard legal protection of authorities as well as staff not designated as civil servants (their protection stems from the Collective Agreement for the Public Service and is not anchored in formal legislation).

- Licensing and Structure (CPs 2–5):
  - German legislation contains no rules requiring a German institution to obtain BaFin’s prior approval before acquiring a participating interest in or establishing corporate ties with another entity that is not a credit institution licensed in Germany.
  - Although in specific cases acquisitions are notified to BaFin, supervisory authorities have no power to prohibit such acquisitions ex ante.
  - Given inherent risks of such participating interests, a larger and more direct role for BaFin is advisable.

- Prudential Regulation and Requirements (CPs 6–18):
  - (Assessment text continues beyond the supplied excerpt.)

*Prepared by the Monetary and Capital Markets and European Departments; FSAP Update mission visited Germany in January–February 2011. Approved by José Viñals and Antonio Borges on June 20, 2011.*

### 15.      While it is acknowledged that the capitalization of the German banking

### Assessment of German Banking Supervision (paragraphs 15–21)

### Capital adequacy and use of supervisory powers
- Findings:
  - Capitalization of the German banking sector has seen an upward trend during the past years.
  - Weaknesses exist in the supervision of capital adequacy.
  - BaFin’s legal powers to impose higher capital requirements were expanded and specified through the enactment of new legislation in August 2009.
  - Specific guidance for supervisors on how to make effective use of the new powers has only very recently become available and has not yet been extensively tested in practice.
  - The use of stress tests as instruments to closely scrutinize the capital adequacy of individual institutions needs to be further enhanced.
  - Efforts to improve the quality of capital need to be intensified.
  - Events during the global crisis revealed some banks to be severely under-capitalized.
- Recommended actions (CP6):
  - Firmly embed the use of the new powers to impose higher capital charges, commensurate with institutions’ risk profiles, in supervisory processes.
  - Enhance the use of rigorous stress tests as instruments to closely scrutinize the capital adequacy of individual institutions.
  - Continue to closely monitor efforts of institutions to strengthen their capital base in anticipation of Basel III and intervene strongly if progress seems to be lacking.

### Risk management practices and supervisory inspection
- Findings:
  - Lessons from the financial crisis must be used to strengthen German institutions’ risk management practices and day-to-day supervision.
  - The crisis exposed severe shortcomings in risk management at banks, including at certain German banks.
  - German supervisory authorities are encouraged to further their own inspection work, focusing on liquidity risk management, senior management’s risk oversight, stress testing capabilities, and the IT infrastructure supporting the risk management process.
  - Analytical assessments of institutions’ risk-bearing capacity need to be deepened; more rigorous and tailored stress tests are needed to identify weaknesses and urge institutions to strengthen regulatory capital (quantity and quality) commensurate with risk profile.
- Recommended actions (CP7):
  - Pursue further strengthening of risk management practices at German institutions by proactively increasing the scope and frequency of supervisory inspections.
  - Enhance quantitative analyses of capital adequacy in relation to individual institutions’ risk profile by embedding more firmly the use of rigorous stress tests.

### Methods of ongoing supervision, reporting, and data granularity
- Findings:
  - Multiple instances identified where the granularity of information obtained via formal regulatory reporting was insufficient.
  - BaFin has mitigated this by requesting systemically relevant institutions to report more detailed information more frequently.
  - This additional reporting should be replaced with a standardized, comprehensive framework ensuring timely reporting of all material risks on a sufficiently granular basis.
  - German authorities were working on substantial amendments to the regulatory reporting framework, with parts expected to become effective during the course of 2011.
- Recommended actions (CP21):
  - Extend reporting requirements and develop a standardized, comprehensive framework that ensures timely reporting of a sufficiently granular nature on all material risks.

### Accounting, disclosure, and audit oversight
- Findings:
  - Accounting and disclosure practices largely comply with the relevant Core Principle (CP22), but diverging valuation practices risk inhibiting consistency and distorting peer comparisons.
  - The new regulatory power to demand a change of the responsible auditor, granted to BaFin at the end of December 2010, had not yet been tested in practice.
- Recommended actions (CP22):
  - Encourage standardization of valuation practices to allow more meaningful comparisons across institutions.

### Corrective and remedial powers; formal “ladder” of supervisory actions
- Findings:
  - BaFin’s suite of remedial and corrective powers is comprehensive.
  - BaFin needs to stand ready to demand progressively stronger remedial action as institutions’ situations worsen.
  - BaFin lacks a formalized “ladder” of actions to ensure timely and appropriate supervisory actions, commensurate with nature and seriousness of issues.
  - The Restructuring Act came into effect on January 1, 2011, further expanding remedial and corrective powers and providing mechanisms for orderly restructuring or resolution of troubled institutions.
- Recommended actions (CP23 and CP1(d)):
  - Develop a consistent and well documented ladder of supervisory actions to promote appropriate consistency, resist special interest pressure, and contribute to public confidence.

### Consolidated supervision and cross-border cooperation
- Findings:
  - Multiple supervisory colleges have been established per Capital Requirements Directive (CRD) requirements.
  - Appropriate Memoranda of Understanding (MoUs) and written agreements reflecting EBA and BCBS guidance have been agreed with a significant number of supervisory authorities.
  - Supervisory cooperation has been improved through supervisory colleges and regular bilateral contacts.
  - Important next steps: extend and deepen cross-border cooperation, prevent supervisory overlap, and ensure effective and swift information sharing among supervisors.
- Recommended actions (CP24–25):
  - Continue to enhance cooperation and information sharing on a cross-border basis.
  - Develop a formalized, detailed framework for assessing the supervision regime of non-EEA competent authorities to determine the level of reliance that can be placed on such authorities.
  - Grant BaFin the authority to close foreign offices of German institutions or impose conditions on their activities if oversight by the host supervisor is inadequate or if access to information necessary for consolidated supervision cannot be gained.
  - Prepare and agree joint recovery and resolution plans for German global systemically important financial institutions.

### Other specific supervisory findings and recommended actions (by CP)
- CP1 (Objectives, Independence, Powers, Transparency and Cooperation):
  - Reevaluate BaFin’s elaborate reporting requirements vis-à-vis the BMF to alleviate reporting burden.
  - Amend legislation to protect BaFin’s President and Executive Directors against arbitrary or obligatory transfers and ensure public disclosure of reasons for dismissal.
  - Clarify liability protection of BaFin staff not designated as civil servants.
  - Review legal position of supervisory authorities and provide explicit institutional protection for official actions, except in cases of gross negligence or willful misconduct.
- CP5 (Major Acquisitions):
  - Amend the KWG so acquisitions that may materially impact an institution’s risk profile are subject to prior approval.
- CP8 (Credit Risk):
  - Investigate possibilities to improve consistency in asset classification and provisioning across audit firms.
  - Evaluate supervisory capabilities on credit risk and improve depth and frequency of credit risk inspections.
- CP9 (Problem Assets, Provisions and Reserves):
  - Develop and publish standardized criteria for classifying assets as impaired to enable sensible comparisons across institutions.
- CP10 and CP11 (Large Exposures; Exposures to Related Parties):
  - Restrict opportunities for retroactive approval of large exposures and of exposures to related parties.
- CP14 (Liquidity Risk):
  - Enhance reporting requirements for foreign currency position risk.
  - Increase supervisory inspections focused on liquidity risk management and use recent MaRisk enhancements as a catalyst.
- CP15 (Operational Risk):
  - Beef up specialized IT inspection capacity and increase depth and frequency of targeted IT inspections.
  - Develop requirements for reporting material operational risk incidents to supervisory authorities.
- CP18 (Abuse of Financial Services / AML/CFT):
  - Remediate weaknesses identified through the FATF Mutual Evaluation as quickly as reasonably possible.
  - Review BaFin’s enforcement strategy and capabilities with regard to AML/CFT.
- CP19 and CP20 (Supervisory Approach and Techniques):
  - Enhance use of rigorous stress tests as forward-looking tools to identify vulnerabilities of individual institutions.
  - Maintain and supplement reliance on external auditors with supervisory inspections typically performed by Bundesbank staff at BaFin’s request; risk committees to identify broader threats and adjust supervisory initiatives accordingly.

*Source: _cr11170 (IMF FSAP chapter covering paragraphs 15–21 and associated tables and recommendations)*

### 22.      The German authorities wish to express their appreciation to the IMF and its

### _cr11170 - 22.      The German authorities wish to express their appreciation to the IMF and its

### Authorities' general response and intended use of the FSAP assessment
- The German authorities "wish to express their appreciation to the IMF and its assessment teams for this assessment."
- They "strongly support the FSAP, which promotes the soundness of financial systems in IMF-member countries and contributes to improving supervisory practices around the world."
- The authorities "appreciate the assessment" and "will use it to critically reflect their current practices and make changes and adjustments where appropriate."

### Improvements already underway (pre-FSAP)
- CP 15:
  - "BaFin and Bundesbank agree with the FSAP evaluation."
  - "The process to create within BaFin a separate unit for IT risk regulation and auditing with sufficient staff was started in 2010."
  - "It is assumed that during 2011 this unit will finally be established."
- CP 21:
  - "The German authorities are currently implementing new reporting requirements, which will improve inter alia the granularity of the information obtained."

### Overarching comments on supervisory focus and upcoming regulatory changes
- Capital adequacy (CP 6), risk management (CP 7) and liquidity management (CP 14):
  - "Issues in the regulatory framework ... will be dealt with in preparations for and the implementation of Basle III/ CRD IV."
- Supervisory execution vs. outcomes:
  - The authorities acknowledge that "commendable recent regulatory and supervisory initiatives had not been sufficiently tested and applied in reality" and view this as encouragement to improve practice.
  - They state they "are not convinced that the assessors’ focus on the execution of supervisory measures is warranted" and "prefer a focus on supervisory outcomes."

### Areas where authorities consider the current regime meets IMF requirements
- CP 5 (major acquisitions):
  - Section 12 of the KWG "in its current form is fully in line with the respective EU requirements."
  - Acquisition of participating interests outside the financial sector is "strictly a business decision in which the supervisor should not intervene."
  - Potential risks are limited by "quantitative limits" and managerial responsibility, with review by auditors and supervisory interventions if requirements are breached.
- CP 6 and CP 7 (use of stress tests):
  - "Deutsche Bundesbank carries out a broad variety of different bottom-up and top-down stress-test exercises."
  - Stress tests cover "solvency risk, macroprudential issues, liquidity risk, as well as systemic stability issues."
  - Communication: results are part of the overall assessment of banks’ soundness and "are regularly presented at the meetings of the Heads of Banking Supervision of Bundesbank and BaFin and at the risk committee meetings of Bundesbank and BaFin."
  - Interaction with banks: "results and methodological aspects of top-down stress tests are discussed with selected institutions" and in 2010 "there have been several meetings with institutions ... to discuss methodologies and results of supervisory top-down stress tests, and to challenge banks’ internal exercises with these results."
- CP 9 (problem assets, provisions and reserves):
  - External auditors "report on so-called 'noteworthy loans' on a single-loan basis" pursuant to "section 25 para 1 of the annual report regulation—'PrüfbV'."
  - Section 25 para. 2 of the PrüfbV: noteworthy loans include loans expected "to be at risk to become 'nonperforming' (or 'impaired') in major parts."
  - Explanatory notes to PrüfbV (section 25) list indicators for "nonperforming" loans for reporting purposes:
    - "The institution considers it unlikely that the borrower complies with his contractual payment obligations to the institution, its parent company, or its subsidiaries in full (without making use of collateral); or"
    - "A material liability of the borrower to the institution, its parent company, or its subsidiaries is past due for 90 days or more."
  - BaFin and Bundesbank opine that "the information reported by annual auditors is comparable and does not hamper comparisons across institutions."
- CP 10 (decision-making and retroactive approval):
  - As a general rule "the decision of the senior managers to unanimously grant a loan exceeding 10 percent of the institutions own funds has to be taken prior to the incurrence of a large exposure (Section 13 subsection 2, sentence 2 KWG)."
  - Two exceptions where unanimous decision may be after incurrence:
    - "in case of urgency of the transaction (sentence 3)"
    - "if an already existing exposure becomes a large exposure due to reduction of own funds (sentence 6)."
  - Authorities believe "the possibilities for retroactive approval are sufficiently restricted" and that removing exceptions would be "disproportionate" and for the second exception "simply impractical."
- CP 11 (exposures to related parties):
  - IMF statement that "the German supervisory framework lacks requirements on the (aggregate) reporting of loans to related parties" is acknowledged as correct but "falsely implies that German supervisors never obtain information on loans to related parties."
  - Section 25 (2) No. 1 of the PrüfbV: "stricter (single-loan-based) reporting requirements apply where particular loans to related parties must be regarded as noteworthy because of their size or the way they are structured."
- CP 18 (AML/CFT enforcement):
  - "BaFin ... has already made efforts to strengthen its enforcement strategy and capabilities with regard to AML/CFT ... to ensure that AML/CFT violations are identified and sanctioned effectively."
  - The FATF has not criticized BaFin for failing "to identify and sanction AML/CFT violations in a timely manner."
- CP 22 (accounting and disclosure):
  - "German accounting and disclosure rules are in line with European directives and European law, especially regarding the adoption of IFRS."
  - Discretion with regard to valuation of consolidated banking groups "has to be considered against the current IFRS rules."
  - Practical consequence: "different valuations until IAS 39 will be revised." The criticism is to the underlying accounting framework, not country-specific.

### Insurance Core Principles (ICP) — high-level summary and assessment (2011 FSAP Update)
- General:
  - "Insurance regulation and supervision is generally of a high standard, and most of the enhancements suggested in the 2003 assessment have been put in place."
  - Further enhancements needed for Solvency II implementation: "frequency of on-site inspections, the enhancement of resources devoted to group-wide supervision, and stability analysis, for example, through sophisticated stress testing for larger insurers and improved group-wide stability analysis."
- Assessment context:
  - The ICP assessment was part of the 2011 FSAP Update; main mission "took place in January–February 2011."
  - The assessor was "Fausto Parente of the ISVAP."
- Information and methodology:
  - Assessment based on "a review of the relevant laws and regulations in force at the time; discussions with the supervisors, other government bodies, and market participants; and additional material provided by the authorities."
  - Access to on-site inspection reports was limited "because of strong legal restrictions on the sharing of institution-specific information."
- Institutional and market structure overview:
  - "The German Federal Financial Supervisory Authority (BaFin) is the insurance supervisor."
  - "The Federal Ministry of Finance (BMF) has legal and supervisory control over BaFin."
  - Supervision is based on the "Insurance Supervision Act (VAG)."
- Insurance sector statistics and structure:
  - "The insurance sector consisted of 621 companies at end-2010, comprising 98 life insurers, 265 nonlife insurers (including 48 health insurers), 152 Pensionskassen, 36 reinsurers, others including 40 death benefit funds and 30 Pensionsfonds."
  - "Of the sectors’ roughly €1.4 trillion in total assets, €804 billion was held in life insurers at end-2009."
  - "The Pensionskassen and Pensionsfonds held roughly €133 billion in total assets at end-2009."
  - Despite the crisis and low interest rates, "soundness indicators have remained generally healthy across the insurance sector."
- Main findings:
  - "The level of observance of these standards is very high."
  - Authorities are "working to make further improvements, especially those needed to implement the regulatory and financial policy initiatives that have been occasioned by the global crisis."
  - New rules issued to improve "corporate governance, risk management, and internal control."
  - Reinsurance companies "are now subject to more extensive regulation and supervision" while recognizing differences with primary insurers.
  - New regulations "aim at anticipating some of the Pillar 2 requirements that will be implemented with Solvency II, paving the way for a smooth transition to the new risk-based solvency regime starting in 2013."
  - A new risk-based system has been "implemented" to select supervisory priorities and allocate supervisory resources efficiently.
- Capacity and supervisory resource needs:
  - Implementation of Solvency II will require enhancement of BaFin supervisory resources "both in terms of quantity and quality."
  - On-site inspection frequency should be increased, especially for medium-impact insurers; current practice is "to have an on-site inspection at least every eight years."
  - Group-wide supervision and supervisory cooperation need enhancement given presence of large cross-border groups.
  - Further refinement of stress testing techniques would be helpful.
  - Implementation of EU directive on insurance intermediaries is "a major step" but the split of competences between BaFin and the local Chambers of Industry and Commerce "should be reviewed" to ensure effective market conduct supervision and consumer protection.
- Reinsurer supervision:
  - Most requirements and supervisory tools for primary insurers are applied to reinsurers; the key exception is investment activity regulated by the "prudent person principle," requiring vigilance in application.

### Table 3 — ICP summary (selected points)
- ICP 1: "Insurance supervision in Germany is facilitated by sound and progressive financial sector policy framework and financial market infrastructure."
- ICP 2: "The objectives fixed under the law are mainly focused on the protection of the policyholders."
- ICP 3: "BaFin is operationally independent and subject to clear accountability mechanisms; its staff is experienced and qualified."
- ICP 4: "BaFin is moving toward a more risk-based supervisory approach ... a risk model to select and prioritize the supervisory analysis has been made operational."
- ICP 5: "BaFin is empowered to, and does regularly exchange information with other supervisors, both within and beyond the EU."
- ICP 6: "The licensing regime, based on EU directives, is clear and transparent."
- ICP 7: "BaFin performs robust due diligence on any proposed significant owner, board members, trustees, and appointed actuaries prior to licensing and after ..."
- ICP 8: "The conditions ... are clear and in line with the relevant EU directives. Portfolio transfers must be approved by BaFin."
- ICP 9: "BaFin has recently introduced new requirements for insurers, which strengthened the robustness of its assessment of insurers’ corporate governance."
- ICP 10: "BaFin has articulated clearly its supervisory expectation of insurers in implementing appropriate internal controls ..."
- ICP 11: "BaFin performs market analysis and stress tests ... Quantitative analysis will need to be enhanced ... through more comprehensive stress testing for large insurers."
- ICP 12: "BaFin has a systematic process to review regulatory returns and information provided by insurers as part of its off-site surveillance."
- ICP 13: "BaFin conducts on-site inspections ... However, the frequency of regular on-site inspection for the medium and low-impact insurers should be increased."
  - Recommendation: "at least brief inspection visits were conducted every three or four years for medium-sized insurers."
- ICP 14: "BaFin is empowered to take a range of preventative measures ... The implementation of Solvency II will imply further increase of flexibility ... by introducing a more specific intervention ladder based on the solvency ratios."
- ICP 15: "BaFin takes a proportionate approach in exercising its enforcement powers under the VAG."
- ICP 16: "Legislation provides for orderly exits of insurers and a high degree of protection for policyholders in the event of insolvency."

*IMF staff report text as provided in the source content unit*

### 17.   Group-wide supervision. The German regulatory frameworks for insurance groups and

### _cr11170 - 17.   Group-wide supervision. The German regulatory frameworks for insurance groups and

### Group-wide supervision
- The German regulatory frameworks for insurance groups and financial conglomerates are broadly in line with EU directives.
- The impending implementation of Solvency II will strengthen BaFin’s supervision of insurance groups, subject to the adequacy of regulatory resources.

### Risk assessment and management
- The VAG has established high-level requirements relating to insurers’ risk management, supplemented by BaFin circular and supervisory expectation.
- The effectiveness of insurers’ risk management system is regularly assessed by BaFin.
- The risk management requirements can be seen as an anticipation of Solvency II.

### Insurance activity
- BaFin directly reviews premium pricing for some classes of business.
- BaFin monitors insurance risks through its assessment of insurers’ risk management system and technical provisions.

### Liabilities
- There are clear, legal principles and regulatory guidelines for insurers to estimate their insurance liabilities.
- Audit reports of external auditors and appointed actuaries for certain line of businesses can also be used.
- BaFin monitors insurers’ technical provisions by off-site examinations as well as on on-site inspections, and has the power to require insurers to remedy any shortfall.

### Investments
- Regulatory requirements are in place for insurers to manage their investment risks in a manner proportionate to the nature, scale, and complexity of their operations.
- Specific quantitative limits are applicable on the investment activity of the primary insurer to ensure an adequate spread of the risks.
- For the reinsurance activity, the regulation follows the “prudent person principle.”

### Derivatives and similar commitments
- The regulatory policy and requirements for the use of derivatives by primary insurers are aligned with international best practice.
- Quarterly reporting is also defined.
- Provisions for reinsurance activity are more general, and the reporting requirements are less stringent.

### Capital adequacy and solvency
- The capital adequacy regime is based on EU directives (Solvency I).
- The implementation of Solvency II with effect from January 2013 will result in a more risk-sensitive regime that will enhance risk-based supervision.

### Intermediaries
- BaFin is not responsible for the direct supervision of the intermediaries.
- The implementation of the relevant EU directive has been a major step in enhancing the supervision of intermediaries, but it is difficult to assess the effectiveness of market conduct control performed by the competent supervisors.
- It is advisable to carry out such an analysis and take appropriate actions to continue improving the protection of policyholders at the point of sale.

### Consumer protection
- Various tools enable consumers to solve possible issues ranging from complaints to BaFin, the help of consumers’ associations, and the ombudsman.

### Information, disclosure and transparency towards markets
- BaFin publishes market data and analysis, although often with considerable time lags.

### Fraud
- The core requirements are in place.

### Anti-money-laundering, combating the financing of terrorism (AML/CFT)
- BaFin is in the process of addressing the weaknesses identified in the FATF, especially when dealing with the increased control of the insurers’ activity.
- There is no evidence that remedial actions are systematically taken by the Länder with regard to insurance intermediaries that they supervise.

### Recommended Action Plan — summary of recommendations
- The following recommendations aim to suggest measures to further improve insurance regulation and supervision. In many areas they go beyond the essential criteria of the ICPs.

- ICP 2. Supervisory objectives
  - Consideration could be given to explicitly mention systemic stability.

- ICP 3. Supervisory authority
  - Strengthen regulatory resources, particularly for supervision of internationally active insurance groups and implementation of Solvency II.
  - Public disclosure of the reasons for removal of board members should be envisaged.

- ICP 4. Supervisory process
  - BaFin should continue to develop a risk-based supervisory approach, by further enlarging the risk model to take into account group-wide supervision.
  - Stress testing and other quantitative supervisory techniques should strongly influence prioritization in the supervisory process.

- ICP 5. Supervisory cooperation and information sharing
  - Monitor application of confidentiality rules to avoid obstacles to full information sharing among supervisors.

- ICP 7. Suitability of persons
  - Consider power to extend similar requirements to other high-level managers who determine day-to-day policies.
  - Insurers should be required to report to BaFin as they become aware of circumstances relevant for the fitness and propriety of key functionaries.

- ICP 9. Corporate governance
  - Continue to check that mutual insurers follow procedures equivalent to the corporate governance code and adapt procedures as needed as Solvency II is introduced.

- ICP 11. Market analysis
  - BaFin should continue to develop stress testing capacity, especially regarding larger insurers and financial groups, and longer-term effects.

- ICP 12. Reporting to supervisors
  - Introduce an explicit obligation for the prompt notification of supervisors by insurers and auditors of any material changes which affect the current or foreseeable financial condition of an institution.
  - Keep reporting requirements up to date while containing regulatory burden; harmonize and centralize reporting requirements where possible.

- ICP 13. On-site inspection
  - Increase the frequency of regular on-site inspection for medium and low impact insurers to bring it closer to international best practice, without sacrificing risk-based supervision.

- ICP 14. Preventive and corrective measures
  - Keep the level of sanctions under review to ensure they remain effective as deterrents.

- ICP 17. Group-wide supervision
  - Increase the adequacy of resources, particularly for effective supervision of internationally active groups and financial conglomerates.
  - Develop the risk classification tool to include group-wide supervision.
  - Harmonize the supervisory approach in group capital adequacy calculation by issuing more detailed rules on, inter alia, the treatment of participation in credit institutions and valuation criteria to be used.
  - Regularly address group-wide effects in stress tests.

- ICP 20. Liabilities
  - BaFin should increase the number of staff equipped with actuarial expertise and related quantitative skills in view of Solvency II valuation complexity and differences.
  - Enhance BaFin’s advisory function in this field.
  - Refine and conduct liability-side stress tests more frequently to assess sensitivity to variations in actuarial assumptions and discount rates.

- ICP 21. Investments
  - Keep supervisory reporting requirements under review and continue developing BaFin’s internal assessment and monitoring given Solvency II valuation complexity.

- ICP 22. Derivatives and similar commitments
  - Complement the prudent person principle approach for reinsurers with reinforced off-site and on-site monitoring of such activities.

- ICP 24. Intermediaries
  - Carry out an analysis of the impact of the relevant EU directive and take appropriate actions to improve protection of policyholders at the point of sale.

- ICP 26. Information, disclosure and transparency towards markets
  - Shorten time lags in publication of aggregate insurance data.
  - Consider availability of preliminary data when over 90 percent of input data have been compiled on a more timely basis.
  - Consider enhancement of disclosure requirements applied to insurers in view of incoming Solvency II regime.

- ICP 28. AML/CFT
  - Authorities should continue to address weaknesses identified through the FATF Mutual Evaluation as quickly as reasonably possible.

### Authorities’ response
- The authorities broadly agree with the assessment.

*Source: _cr11170 - 17.   Group-wide supervision. The German regulatory frameworks for insurance groups and*

### 60.      Principles for issuers (Principles 14-16): A prospectus approved by BaFin is

### _cr11170 - 60.      Principles for issuers (Principles 14-16): A prospectus approved by BaFin is

### Principles 14–16: Issuers
- A prospectus approved by BaFin is required for securities offered to the public or admitted to trading on a regulated market.
- Material event reporting also applies for issuers of securities traded on a regulated market.
- Financial statements must be prepared in accordance with International Financial Reporting Standards.
- Substantial shareholder disclosure and specific takeover legislation, including mandatory bid requirements, provide an effective framework for change of control transactions.
- Issuers must publish annual and half-yearly reports, and (for issuers of shares) interim management statements or quarterly reports.
- Issuers must disclose material price sensitive information without delay.
- BaFin has published extensive guidance to assist issuers with their obligations, and its supervision of compliance with these obligations is effective.

### Principles 17–20: Collective Investment Schemes (CISs)
- Operators of collective investment schemes (CISs) must hold a license issued by BaFin.
- CIS operators (both asset management companies and investment stock corporations) must keep fund assets segregated.
- Operators must prepare and publish annual and semiannual reports for each fund.
- Each CIS requires a prospectus, the content of which must accord with IOSCO Principles.
- Asset valuation methodology is detailed in the legislation.
- BaFin uses annual audit reports extensively in its supervision, and undertakes a small number of on-site inspections.
- CIS operators must meet eligibility criteria including integrity requirements for managers and significant owners, minimum capital, and internal controls and risk management systems.
- Marketing of CISs can be undertaken without requiring a license issued by BaFin (provided no other BaFin regulated activity is involved), but is then regulated by licensing arrangements under the general commercial code.
- For retail funds, the CIS operator must issue a full prospectus and a simplified prospectus (to be replaced by the Key Information Document by mid 2011) and lodge a copy of the prospectus with BaFin.
- Operators must publish annual and half-yearly reports for each fund containing financial and other information about fund activities.
- The Investment Act and related legislation contains detailed provisions for valuation of CIS assets, timing of valuations, pricing of units on issue and redemption; compliance is monitored by internal audit and subject to annual external audit.
- Concern: BaFin is heavily reliant on analysis of audit reports and performs limited on-site inspections of CIS operators, increasing the chance that undesirable conduct is not detected in a timely fashion.

### Principles 21–24: Intermediaries
- A license issued by BaFin is required to carry on a business of providing financial services (a term that includes all forms of financial market activity, including proprietary trading and providing customer-specific advice about financial instruments, and operating an MTF).
- Ongoing risk-based capital requirements, mainly reflecting the institution’s credit and market risk, and other prudential requirements apply.
- Authorized institutions must provide monthly returns which are reviewed by the Bundesbank and BaFin.
- Eligibility standards include integrity of managers and owners of significant shareholdings, managers’ competence, resource requirements including capital, and adequacy of internal controls, risk management, and supervisory systems operational requirements.
- Nonbank intermediaries are not permitted to hold client assets or funds, and as a consequence are not subject to detailed ongoing risk-based capital requirements.
- Licensees must have risk management, compliance and internal control functions; compliance with these requirements is subject to specific review in the annual audit process reviewed by BaFin.
- There are no specific ex ante procedures for dealing with the consequences of the failure of an intermediary; for nonbank sector BaFin would deal with such a failure on an ad hoc basis with a focus on orderly winding up (through a Court-ordered insolvency process) and ensuring clients are informed. For banks involved in securities business, the Banking Department would be responsible.

### Principles 25–30: Secondary Markets
- Exchanges and MTFs require authorization by the relevant ESA or by BaFin (for MTFs).
- Exchange markets are subject to continuous supervision by the trading surveillance offices (TSOs) and ESAs, with BaFin responsible for investigating and taking action on market abuse.
- Transparency obligations in place for exchange markets and MTFs apply to trading in shares and certificates representing shares, but not other instruments traded on regulated markets.
- TSOs conduct real-time monitoring and supervision of exchange markets, under the supervision of the relevant ESA.
- ESAs monitor and respond to the work of TSOs, and conduct periodic reviews of overall exchange compliance.
- Two MTFs are licensed by BaFin as investment services enterprises under the Banking Act and are subject to additional MTF-specific obligations under the Securities Trading Act; BaFin is responsible for supervising the two licensed MTFs.
- The regulatory framework provides for pre and post trade transparency in equities, in line with MiFID requirements for exchange markets, MTFs, and systematic internalizers; permitted exceptions align with market norms in other jurisdictions.
- Concern: dispersal of trading across multiple venues highlights the absence of an integrated overview of activity.
- Insider trading, market manipulation (and front running) are both criminal and administrative offences; definitions are appropriately broad and apply to derivatives market activity as well as securities markets.
- BaFin reviews daily trading reports from all market participants to detect market abuse and insider trading; enforcement record indicates this activity is working well.
- Derivatives trading platforms monitor large positions and can set position limits. Large counterparty exposures for banks are monitored as part of prudential supervision.
- Systems for clearing and settlement are assessed as part of CPSS-IOSCO standards.

### Table 5 — Summary Implementation of the IOSCO Principles (selected principle findings)
- Principle 1: Responsibilities of BaFin and the State-based ESAs are clearly established by law; advice on, selling, and marketing of certain investment products (such as closed-end funds) are not regulated as fully as other investment services.
- Principle 2: BaFin is operationally independent with strong accountability to the BMF; ESAs are separate units within State Ministries which does not meet IOSCO formal independence standards.
- Principle 3: BaFin has extensive powers; limitation: can only make enforceable rules where Parliament expressly provides; resources appear adequate.
- Principle 4: BaFin and ESAs are subject to comprehensive administrative law requiring consistency and fairness; no formal requirement for BaFin to consider compliance costs when formulating policy.
- Principle 5: BaFin staff bound by extensive obligations including confidentiality; internal policies supplement civil service obligations.
- Principle 6 and 7: Not applicable for SRO framework due to exchanges and TSOs being public law entities.
- Principle 8: Regulators have broad supervisory, investigative, and enforcement powers and extensive information-gathering powers.
- Principle 9: BaFin can requisition information, inspect documents, enter premises, compel oral evidence (subject to self-incrimination limits), and impose substantial administrative fines; criminal prosecution is the responsibility of the public prosecutor.
- Principle 10: BaFin has a credible monitoring and enforcement program but is heavily based on analysis of reported material and makes limited use of on-site inspections, potentially delaying detection of conduct issues.
- Principle 11: BaFin and other regulators are obliged to cooperate and support one another and have extensive information sharing powers without materially significant limits inside the EU and with foreign regulators.
- Principle 12: BaFin is a signatory to the IOSCO MMOU, participates fully in European information-sharing arrangements, and has many unilateral MOUs with foreign regulators.
- Principle 13: BaFin cannot directly represent foreign regulators in court but can assist in gathering information, evidence, and other practical assistance.
- Principle 14: Issuers must have BaFin-approved prospectuses in line with IOSCO standards and publish periodic reports; BaFin supervision of disclosure obligations is effective.
- Principle 15: German company legislation provides shareholder rights framework; securities legislation provides transparency for substantial shareholdings and takeover legislation includes a mandatory bid at 30 percent holding.
- Principle 16: Issuers of traded securities must prepare audited consolidated financial statements complying with IFRS; auditors apply auditing standards analogous to IASs; compliance monitored by the Financial Reporting Enforcement Panel and BaFin; audit oversight conducted via the Chamber of Auditors supervised by the Auditor Oversight Commission.
- Principle 17–20: See CISs subsection above on licensing, segregation of assets, prospectus and reporting requirements, valuation and pricing rules, and concerns over limited on-site inspections.
- Principle 21–24: See Intermediaries subsection above on authorization, capital and prudential requirements, internal organization, and failure procedures.
- Principle 25–30: See Secondary Markets subsection above on authorization, supervision, transparency, market abuse detection and enforcement, large exposures, and clearing and settlement oversight.

*Source: IMF staff summary of the assessment material in the provided content unit.*

### 64.      The following recommendations aim to suggest measures to further improve

### _cr11170 - 64.      The following recommendations aim to suggest measures to further improve

### Recommended Action Plan to Improve Compliance with the IOSCO Objectives and Principles for Securities Regulation
- Responsibilities of the regulator (Principle 1)
  - The authorities should, as a matter of urgency, continue with steps to ensure that uniform regulatory standards apply across functionally similar financial market products and services, especially with regard to standards for advice on, selling, and marketing of products, as was recommended in 2003.
- Independence of the regulator (Principle 2)
  - The authorities should give consideration to:
    - a. mechanisms to strengthen the formal independence of the State ESAs;
    - b. reviewing the reporting obligations of BaFin to the BMF with a view to streamlining them; and
    - c. mechanisms, such as fixed term contracts, to ensure the position of the president and senior management of BaFin is secure and not open to potential arbitrary decisions based on political or other nonperformance-related considerations.
- Regulatory compliance programs (Principles 10, 17 and 21)
  - BaFin should continue to develop and refine its risk assessment system, and make more intensive use of on-site inspections by BaFin staff as part of its monitoring activities. This will require additional resources. It is understood that BaFin is moving in this direction.
- Market transparency (Principle 27)
  - The authorities should work toward achieving a more complete transparency regime in the context of the current European-wide review of aspects of the MiFID regime. At a minimum such a regime should include standards for data interoperability, and it should result in an effective mechanism to produce consolidated post-trade reporting for the equities market.

### Authorities’ response to recommendations
- The authorities broadly agree with the assessment.
- Legislative and supervisory steps described:
  - A proposal of the government on “grey capital market products” was published in April 2011. The law is scheduled to be published early 2012. According to the draft law, grey capital market products will be financial instruments in the terms of the Securities Trading Act (Wertpapierhandelsgesetz, WpHG). The new definition of financial instruments will cover all grey market products, which are currently subject to the non-securities investment prospectus regime: this includes registered bonds, shares in civil-law partnerships, general partnerships or limited partnerships, silent partnerships, participation rights, trust units and units in other closed-end funds. According to the draft, the new regulation provides full BaFin supervision over investment services in grey capital market products performed by investment firms under BaFin’s supervision. This means that the whole obligations of the WpHG are applicable.
  - The authorities note that not only the use of their enforcement powers is robust but also the supervisory system in which such powers are exercised. BaFin has implemented a coherent supervisory system with respect to CIS and Intermediaries. External auditors’ services on the one hand - and risk assessments, market contacts and on-site inspections made use of by BaFin staff, as well as e.g. mandates for focused audits and audit regulations specifying audits and auditor reports on the other hand, complement each other and build a consistent supervisory system.

### New IOSCO Principles — summary implementation findings
- Systemic risk monitoring and perimeter of regulation (New Principles 6 and 7)
  - Existing structures and practices in BaFin support a focus on systemic risk.
  - Within the Directorate responsible for cross-sector issues, there is a risk and financial markets analysis department.
  - Two years ago, BaFin established an organization-wide risk committee with representatives from all sectors, including insurance and supervision.
  - In late 2010, a new risk committee was formed to focus on the nonbank components of the securities industry, such as hedge funds.
- Securitization (New Principle 8)
  - Regulation of securitization will be done on an EU-wide basis, and include conflicts of interest provisions the major investor groups.
  - Detailed conflict rules for licensed market intermediaries are in force.
  - In January 2011, a new legislative framework for securitization came into effect in Germany. For new securitizations after January 1, 2011, it introduced:
    - a. a 5 percent retention rule (which is at a later stage planned to be increased to 10 percent);
    - b. disclosure rules for sponsor and originators of securitizations; and
    - c. a requirement that issuing institutions (banks) randomly select assets to be included in a securitization from a pool of assets selected for the securitization.
  - Assessment of measures to prevent conflicts of interest and misalignment of incentives are part of ongoing supervision of regulated entities. BaFin has published a related circular detailing the implementation of related legislation.
- Auditor oversight (New Principles 19–21)
  - Auditors are subject to a system of public oversight by requiring auditors to be subject supervision by the Chamber of Auditors.
  - Independence standards are specified in the Commercial Code, including a requirement for auditor rotation after 7 years.
  - The Commercial Code provides that audit standards adopted by the European Commission apply to statutory audits. Audit standards are largely in line with IASs.
- Credit rating agencies (New Principle 22)
  - Regulation of credit rating agencies (CRAs) is set at the EU. The relevant European Regulation (EC 1060/2009) provides rules regarding conflicts of interest, procedures, internal organization, transparency and the presentation of ratings, reflecting the IOSCO code of conduct for CRAs.
  - Current oversight is based on an integrated oversight model involving supervisory colleges. From mid-2011, ESMA will assume responsibility for CRA regulation.
- Analysts (Principle 23)
  - For licensed firms, research activities form part of regulated activities supervised by BaFin and are subject to MiFID and the Market Abuse Directive (MAD).
  - Independent analysts are not required to be licensed but are subject to regulations such as MAD.
- Hedge Funds (Principle 28)
  - Hedge funds are already subject to regulation in Germany under the regulation applying to collective investment schemes, and to additional rules that apply specifically to them.
  - The European Directive on Alternative Investment Funds Managers was formally approved in late 2010, and is expected to be transposed into national law and applied by Member States by 2013.

### Eurex Clearing AG observance of the CPSS-IOSCO Recommendations for Central Counterparties — Summary
- High-level assessment
  - Eurex observes the CPSS-IOSCO Recommendations for Central Counterparties (RCCPs).
  - Eurex has a sound, transparent, and enforceable legal basis to address legal risks related to its activities.
  - Eurex has developed a comprehensive and adequate risk management framework to address financial and operational risks.
  - Default rules and procedures are clearly stated in its rules and are available to participants.
  - Participants’ assets and collaterals are kept in regulated national and international depositories, although there is legal uncertainty for client’s assets portability which is addressed by legislative proposals.
  - Eurex uses central bank money for the cash settlement of most of its transactions.
  - Eurex governance arrangements and composition of management, boards, and committees are clear and publicly available.
- Regulatory and oversight gaps
  - Eurex is regulated and supervised as a bank, and all regulatory requirements are related to banking activities.
  - BaFin does not fully observe the recommendation on regulation and oversight, as it has not defined any specific regulatory regime that covers Eurex CCP business.
  - The Bundesbank does not have the legal basis to oversee Eurex as a financial market infrastructure.
- Impact of forthcoming CPSS/IOSCO Principles
  - Authorities provisionally evaluated the impacts of the draft CPSS/IOSCO Principles (still to be finalized by the end of 2011) on Eurex activities and concluded that the impact depends on the outcome of the current discussion.
  - It was expected that the new principles would not have a significant impact on Eurex, and it will be able to adjust to the new requirements as far as needed.

### Information, methodology, and institutional overview for Eurex assessment
- Information and methodology used
  - The assessment of Eurex against the CPSS/IOSCO RCCP was undertaken in the context of the IMF’s FSAP Update for Germany, which occurred from January 17–February 3, 2011.
  - Prior to the mission, Eurex conducted a comprehensive and clear self-assessment following the methodology of the RCCPs published in 2004.
  - The assessor benefited from discussions with BaFin, Deutsche Bundesbank, Eurex senior management and staff, and some major participants. Relevant documentation was made readily available.
- Institutional and market structure overview
  - Eurex provides central counterparty services for several stock exchanges and over-the-counter (OTC) transactions, offering fully automated, electronic, and straight-through post trade services for both cash instruments and derivatives such as equities, bonds, repo, and energy products.
  - Eurex was established in 1990 and is a wholly-owned subsidiary of Eurex Frankfurt AG, which in turn is jointly owned by Deutsche Börse AG and SIX Swiss Exchange.
  - Eurex is licensed as a credit institution and is regulated and supervised by BaFin. Eurex is also subject to the Bundesbank’s oversight. BaFin and the Bundesbank’s statutory mandate to regulate and oversee Eurex is based on their banking supervisory capacity (German Banking Act). Both BaFin and Bundesbank have formal and extensive cooperation to monitor Eurex activities.

### Key statistics of Eurex, 2006–2010 (Table 8)
- 1. Number of transactions (millions)
  - 1.1 Equities: 73.48, 109.98, 129.15, 94.23, 96.45
  - 1.2 Debt instruments: 0.009, 0.089, 0.115, 0.085, 0.097
  - 1.3 Derivatives: 1,526.75, 1,899.80, 2,165.04, 1,687.16, 1,896.92
  - TOTAL: 1,600.24, 2,009.87, 2,294.31, 1,781.48, 1,993.47
- 2. Value of transactions (EUR billions): 108,039.4, 127,156.4, 116,757.3, 80,525.9, 99,838.9
- 3. Average daily value of transactions (EUR billions): 423.7, 504.6, 459.7, 317.0, 390.0
- 4. Peak value of transactions (EUR billions): 945.2, 1,287.1, 1,110.3, 802.3, 841.1
- 5. Number of clearing members: 119, 118, 109, 117, 128
  - 5.1 Foreign clearing members: 66, 66, 60, 65, 75
- 6. Clearing fund (EUR millions): 752, 895, 1,392, 1,259, 912

### Main findings on Eurex against RCCPs (selected Recitals)
- Legal Framework (Rec. 1)
  - Eurex clearing activities are governed by laws, regulations, rules, and instructions that support enforcement of transactions, netting procedures, protection of customer assets, and DVP with finality.
  - Adequate rules for addressing a participant default exist, including effective use of collateral; settlement finality and collateral directives provide solid protection in Germany and other EEA countries.
- Participation requirements (Rec. 2)
  - Eurex access and exit criteria are well defined and publicly disclosed. Requirements for participants’ financial resources and operational reliability are defined according to membership category and types of services selected. All members must be regulated entities and must have a minimum capital requirement. Eurex reviews external credit ratings of applicants and assesses operational capability.
- Financial risk management (Rec. 3–6)
  - Eurex has a comprehensive risk management framework defined at Eurex and DBG levels. Eurex monitors participants’ exposure in real time, conducts intra-day margin calls, verifies margins via back testing and stress testing, and can require additional financial resources when unusual trading activity is detected. Stress testing policies and scenarios are discussed with market participants and the regulating authority and mitigating actions are available on the Eurex website.
- Custody and investment risks (Rec. 7)
  - Eurex securities and cash are held in national and international central securities depositories. Cash collateral is placed according to Eurex Treasury and Credit Policy. Private banks are used for non-Euro currencies, generally as repos. USD investments are carried out through repo transactions with Bank of New York Mellon and JP Morgan Chase as triparty agents.
- Operational risk (Rec. 8)
  - Business continuity arrangements are developed at the DBG holding level, covering all sites, networks control centers and business sites. DBG-level group risk management defines objectives and monitors overall risk profile, including a comprehensive BCM policy. Contingency plans and back-up facilities are regularly tested with market participants and relevant parties.
- Money settlements (Rec. 9)
  - Eurex uses both central bank money and private settlement banks for cash processing (margin and settlement). Central bank money is used for EUR and CHF and for settlement in the Euro area and Swiss markets. For GBP and USD, and global Eurobond settlement, private settlement banks and the two ICSDs (Clearstream Banking and Euroclear Bank) are used.
- Physical deliveries (Rec. 10)
  - Deliveries are carried out in book-entry form with obligations fulfilled via book transfer. Eurex Clearing Conditions define responsibilities to deliver and receive securities. The delivery process is supported by DVP and receive versus payment settlement.
- Risks in links between CCPs (Rec. 11)
  - Eurex has one link with European Commodity Clearing AG (ECC) in Germany. The contractual relation is extended by Eurex as counterpart of the ECC and the clearing member. Eurex has specific rules and risk methodology for linked CCPs aimed at minimizing the risk that obligations cannot be performed timely. Both are regulated and supervised by BaFin and designated payment systems, providing legal protection to finality.
- Efficiency (Rec. 12)
  - Eurex reviews pricing, service, and capacity regularly and performs benchmarking studies. Eurex applies higher prices to clear OTC transactions compared to exchange-traded transactions, which may encourage moving trade to exchanges but could imply cross-subsidization.

*Source: Excerpt from IMF FSAP Update for Germany assessment document (IMF staff report content as provided).*

### 84.      Eurex is a wholly-owned subsidiary of Eurex Frankfurt, which is owned by

### _cr11170 - 84.      Eurex is a wholly-owned subsidiary of Eurex Frankfurt, which is owned by

### Governance and ownership
- Eurex is a wholly-owned subsidiary of Eurex Frankfurt, which is owned by Eurex Zurich, and the latter is jointly owned by Deutsche Börse and SIX Swiss Exchange.
- Eurex governance arrangements and composition of the boards are clear and publicly available via the Eurex website.
- At its supervisory board, Eurex has representative from Deutsche Börse, market participants, and regulators (only as observers).
- Recommendation: Eurex should increase the number of independent board members taking into account the interests of small and medium-sized clearing members.
- Recommendation: Due to the crucial role of Eurex in the German financial market, BaFin may explore the possibility to define explicit public interest objective to Eurex such as to facilitate prompt, efficient, and sound clearing of securities transactions.

### Transparency (Rec. 14)
- Eurex discloses to its clearing members and other market participants its rules, procedures, and policy on its website.
- Disclosed items include governance issues, the rights and obligations of participants, procedures for handling risks, and fees for using its services.
- Important notices and information are posted on the website.
- Eurex has completed a comprehensive self-assessment following the RCCPs assessment methodology.
- Assessment finding: Eurex discloses to its clearing members and other market participants its rules, procedures, and policies on its website. These rules cover governance issues, procedures for handling risks, the rights and obligations of participants, and the costs of using its services.

### Regulation and oversight (Rec. 15)
- Eurex is regulated and supervised by several authorities:
  - In Germany: main regulator is BaFin, which cooperates with Deutsche Bundesbank.
  - As a global CCP: regulated and overseen by the Swiss Financial Market Supervisory Authority/Swiss National Bank.
  - Recognized overseas clearinghouse by the United Kingdom Financial Service Authority.
  - Multilateral Clearing Organization by the United States Commodities Futures Trading Commission and by the United States Securities and Exchange Commission.
- Licensed as a credit institution and subject to the banking act; Eurex does not have a specific regime for its CCP activities, although BaFin has been using the overall risk management provision to require Eurex to meet the CPSS/IOSCO recommendations.
- Findings and recommendations:
  - Eurex is regulated and supervised as a bank; all regulatory requirements are related to banking activities. There is no special regulatory regime that covers Eurex’ CCP business.
  - Both BaFin’s and the Bundesbank’s mandates to regulate, supervise and oversee Eurex are based on its banking status.
  - The Bundesbank does not have the legal basis to oversee Eurex as financial market infrastructure.
  - The Bundesbank should be provided with the legal mandate to oversee Eurex as a CCP. Further, the Bundesbank’s staff should participate in the onsite inspection of Eurex as a complementary to BaFin’s regulatory responsibility.
  - Given current involvement in domestic and international committees, BaFin and the Bundesbank should recruit additional staff to regulate and oversee clearing activities more effectively.
  - For full compliance with this recommendation:
    a. BaFin should define and disclose its objectives and policies with regard to CCPs activities.  
    b. BaFin should either issue a new regulatory regime dedicated to CCP activities, or further develop, in the Banking Law, special rules and requirements for CCP activities.  
    c. BaFin should request Eurex to consult BaFin for any material changes of its clearing conditions.

### CPSS-IOSCO recommendations: Detailed assessment highlights
- Legal risk (Recommendation 1)
  - Eurex is regulated as a credit institution with a single purpose to provide clearing activity.
  - The banking law and other legislation provide a sound, transparent, and enforceable legal basis for each aspect of its activities.
  - Eurex can change its clearing conditions without prior consultation or approval by the relevant regulator and overseer, although Eurex does so in practice.
  - Recommended action: relevant authorities should require Eurex to consult the authorities prior to deciding on any material changes of its clearing conditions.

- Participation requirement (Recommendation 2)
  - Eurex has adequate financial and technical requirements for participants based on types of membership and products/services used.
  - Full member requirements include: regulation by relevant authorities, adequate minimum capital, contribution to the clearing fund, qualified staff, minimum technical capability including network communication, and appropriate settlement arrangement.

- Measurement and management of credit exposures (Recommendation 3)
  - Eurex has a comprehensive and adequate risk management framework defined and implemented at the level of Eurex entity and the DBG.
  - Framework is reviewed regularly.
  - Tools to limit exposures include capital requirement, margin requirement, contribution to clearing fund, and other risk control mechanisms.
  - Intra-day risk controls are in place.

- Margin requirements (Recommendation 4)
  - Eurex relies on initial and variation margin requirements, met through cash and eligible securities deposited in regulated entities.
  - Eurex tests the risk-based margin model regularly; model and parameters are regularly validated internally and by the authorities.

- Financial resources (Recommendation 5)
  - Eurex has defined financial resources needed to withstand the default of three participants with the largest exposures in extreme, but plausible market conditions.
  - Eurex performs daily stress testing with extreme, but plausible market conditions, and can run stress tests on an intraday basis when needed.
  - Eurex has access to an intraday credit facility of the Eurosystem in line with the TARGET2 Guideline.

- Default procedures (Recommendation 6)
  - Default rules and procedures are clearly stated in clearing conditions; allow transfer of customers’ positions to another clearing member, close out, and settle defaulting member’s open positions.
  - Eurex can assign remaining positions pro rata to nondefaulting clearing members.
  - Legal issue: German insolvency law does currently not fully support portability of customer positions and collateral.
  - Parliamentary amendment to insolvency law is currently discussed that would allow CCP to transfer customer positions and collateral to another clearing member in the event of the original clearing member's default.

- Custody and investment risk (Recommendation 7)
  - Securities pledged to Eurex by participants are deposited only with CSDs and ICSDs supervised by national authorities; can be withdrawn only with consent of Eurex Clearing AG.
  - Processes and specialized staff monitor custodian banks, including daily monitoring and periodical review; assessment against recommendation 12 regarding accounting practices and safekeeping/internal control procedures, regulation, and strong financial position.

- Operational risk (Recommendation 8)
  - Risk management framework governed by policies and procedures at Eurex and DBG; DBG has a comprehensive BCM policy defining roles and guiding principles to ensure operational resilience.
  - Business continuity: two geographically separated IT processing sites; systems clustered between two data centers and load balanced with continuous full data synchronization (real-time data mirroring).
  - Contingency plan, IT infrastructure, and communication network testing with the majority of participants is carried out on an annual basis.

- Money settlements (Recommendation 9)
  - Eurex relies on a few banks for settlement of foreign exchange denominated transactions, exposing it to settlement risk.
  - Access to central bank account would enhance settlement integrity; Eurex applied for an account with the Federal Reserve Bank of New York in 2008 but no positive access decision has been taken since then.
  - Eurex uses central bank money for a broad range of products (collections of margins, settlement of German equities, settlement of bonds and repos).
  - Most banks hold fixed income portfolios in the ICSDs (Clearstream Luxembourg and Euroclear Bank Brussels); contracts based on these fixed income securities are settled in commercial bank money in those ICSDs (applies to Eurex Bonds and Eurex Repo).
  - Recommended action: Eurex may consider settling in central bank money and/or increasing the number of settlement agent banks for foreign exchange currencies.

- Physical deliveries (Recommendation 10)
  - Deliveries of securities are carried out in book-entry form (immobilized or dematerialized) and fulfilled via book transfer.
  - Eurex rules define responsibilities to deliver and receive securities.
  - Eurex settles on a DVP basis in the CSD or ICSD; risks affecting deliveries are assessed in real-time by risk management.

- Risks in links between CCPs (Recommendation 11)
  - Eurex has one link with the ECC and a clearing link agreement defines rights and obligations.
  - Specific rules and procedures for a linked CCP; risks are evaluated before entering into a link and evaluated daily once operational.

- Efficiency (Recommendation 12)
  - Procedures exist to control operational costs.
  - Periodic benchmarking with comparable CCPs in other European countries to assess costs and fees.
  - Eurex applies higher prices to clear OTC transactions compared to exchange-traded transactions to promote migration of OTC transactions to the exchange.
  - Assessment: this differentiated pricing may provide preferential treatment to exchange-traded transactions versus OTC clearing.
  - Recommended action: Eurex should make public its differentiated price policy with regard to clearing nontraded transactions as part of general policy to encourage movement of these transactions to the exchange.

- Governance (Recommendation 13)
  - Governance arrangements are clear, transparent, and publicly available via the Eurex website; they reflect public interest requirements and support owners’ and participants’ objectives.
  - Recommendations:
    - Increase number of independent board members taking into account small and medium-sized clearing members.
    - BaFin should explore possibility of defining an explicit public interest objective for Eurex (e.g., facilitate prompt, efficient, and sound clearing of securities transactions).

### Recommended Action Plan (selected items)
- Recommendation 1: Authorities to require Eurex to consult authorities in advance for any material changes of its clearing conditions to improve legal safety, public interest consideration, and impartiality.
- Recommendation 15: Regulatory and oversight actions for BaFin and Bundesbank:
  - BaFin should clearly define and disclose objectives and policies with regard to CCP activities.
  - BaFin should either issue a new regulatory regime dedicated to CCPs activities, or further develop, in the Banking Law, specific rules and requirements for CCPs activities.
  - BaFin should request Eurex to consult BaFin for any material changes of its clearing conditions.
  - The Bundesbank should be provided with the legal mandate to oversee Eurex as a CCP and its staff should participate in onsite inspections complementary to BaFin.
  - BaFin and the Bundesbank should recruit additional staff to carry out regulation and oversight of clearing activities more effectively.

- Further recommended actions (selected):
  - Recommendation 6 (Default procedures): Address legal basis for portability of customer collaterals; amendment of Article 104a of the insolvency law to eliminate potential portability risk is under discussion in Bundestag.
  - Recommendation 9 (Money settlements): Consider settling in central bank money and/or increasing number of settlement agent banks for FX currencies.
  - Recommendation 12 (Efficiency): Make public differentiated price policy for clearing nontraded transactions.
  - Recommendation 13 (Governance): Increase independent board members; BaFin to explore explicit public interest objective.

### Authorities’ response excerpt
- In Recommendation 13, the IMF suggests increasing the number of independent board members taking into account the interests of small and medium-sized members. Eurex notes that in Germany, members of the supervisory board are elected by the shareholders only and Eurex cannot influence their decision.

*IMF staff report content as provided in the source PDF.*

---


_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11170.pdf_