- Question ID
-
2023_6925
- Legal act
- Regulation (EU) No 575/2013 (CRR)
- Topic
- Credit risk
- Article
-
178
- Paragraph
-
1
- COM Delegated or Implementing Acts/RTS/ITS/GLs/Recommendations
- Not applicable
- Article/Paragraph
-
none
- Name of institution / submitter
-
BaFin
- Country of incorporation / residence
-
Deutschland
- Type of submitter
-
Competent authority
- Subject matter
-
Definition of default for open-end investment funds
- Question
-
Should an open-end investment fund be considered an obligor under Art. 178 (1) CRR, irrespective of whether it has legal personality under a Member States’ regulations on investment funds?
- Background on the question
-
An open-end investment fund, such as a common fund under Art. 3 para 3 of Directive 2009/65/EC or open-ended alternative investment funds under Art. 2 para 2 letter a of Directive 2011/61/EU (for short: fund), contains a pool of assets that is managed by a management company, unit trust, investment company or a manager of an alternative investment fund (for short: fund manager) on behalf of investors.
The above Directives do not harmonise the legal structure for funds, nor the related insolvency proceedings. In particular, Directive 2009/65/EC does not prescribe for a fund to have “legal personality”, i.e. to be “in a position to act by itself”. (cf. recital (3) of Directive 2009/65/EC as of 13.07.2009) Nonetheless, as far as we are aware, for any fund offered in the EU, the fund manager must keep the assets in the fund separate from the assets in all other funds as well as the assets that it holds for its own account. This implies that the only obligations that a fund manager may pay from the assets in a fund are the obligations that the manager has taken out for the account of that fund.
The aim of the “Guidelines on the application of the definition of default under Article 178 of Regulation (EU) No 575/2013” (EBA/GL/2016/07) is “to ensure a consistent use of the definition of default and to ensure that a harmonised approach is taken across institutions and jurisdictions” (Executive Summary of the Final Report, 2nd paragraph). Given the separation of assets for open-end investment funds irrespective of the legal construct, a consistent application of the definition of default for open-end investment funds can only be achieved when a fund is regarded as obligor irrespective of whether it has legal personality, or not.
- Submission date
- Final publishing date
-
- Final answer
-
The sole consideration if an open-ended investment fund (in the following referred to as “fund”) has legal personality or not does not determine if such fund is to be considered as the obligor for the purposes of the definition of default. Rather, it depends on the specific legal and contractual set-up if an open-end investment fund without own legal personality may be considered an obligor under Article 178(1) CRR or not.
As a general criterion, the legal counterparty of a credit contract is to be considered as the obligor of the credit obligations arising from that credit contract for the purposes of the definition of default in accordance with Article 178 CRR. Notwithstanding this, where the sole assessment of the default risk of the asset management company acting as the legal counterparty of a credit contract on behalf of the fund does not reflect the actual default risk of a credit obligation, the fund may instead be considered as the obligor of such credit obligation, provided that the following conditions are met:
- The asset management company as legal counterparty that has entered into the credit contract on behalf of the fund is, by law or by contract, legally protected against a non-performance of the fund with regard to all payments arising from that credit contract. As a result, all such payments are solely related to the fund, and the management company that acts on behalf of the fund as legal counterparty is not liable for any payments related to credit obligations entered into for the account of the fund.
- The fund is, by law or by contract, legally protected against an insolvency of the asset management company, i.e. in case of an insolvency of the asset management company all due payments under the credit contract are legally protected from such insolvency and it is legally ensured that all those payments will be made without undue delay despite of the insolvency of the asset management company. Furthermore, an insolvency of the asset management company is unlikely to trigger any indications of unlikeliness to pay at fund level leading to the identification of a default according to Article 178 (1) (a) CRR pursuant to the definition of default applied by an institution to respective credit obligations.
Where the fund is considered as obligor according to the abovementioned conditions, the assignment of the exposure to a rating grade or pool should be carried out at fund level.
This Q&A concerns solely the interpretation of Article 178 of the CRR and the Guidelines on the application of the definition of default under Article 178 of Regulation (EU) No 575/2013” (EBA/GL/2016/07) and the assignment of IRB exposures to a rating grade or pool consistent with this interpretation. As such, it does not apply to exposures in the form of units or shares in a CIU, nor where the CRR requires a treatment as such exposures, in particular for minimum value commitments that meet all the conditions set out in Article 132c(3) CRR. Where an exposure to a CIU is assigned to the exposure class of items representing securitisation positions according to Article 112(m) or Article 147(1)(f) CRR, the securitisation framework applies. This Q&A does not interpret nor can be used for the purpose of interpreting or applying any regulations related to asset management companies and funds.
- Status
-
Final Q&A
- Answer prepared by
-
Answer prepared by the EBA.
Disclaimer
The Q&A refers to the provisions in force on the day of their publication. The EBA does not systematically review published Q&As following the amendment of legislative acts. Users of the Q&A tool should therefore check the date of publication of the Q&A and whether the provisions referred to in the answer remain the same.