Groups of connected clients based on control
When applying Article 4(1)(39)(a) of Regulation (EU) No 575/2013, institutions are required to assume that two or more clients constitute a single risk when there is a control relationship between them.
In exceptional cases, where institutions are able to demonstrate that no single risk exists despite the existence of a control relationship among clients, institutions should document the relevant circumstances that justify this case in a detailed and comprehensible manner. For example, in specific cases where a special purpose entity that is controlled by another client (e.g. an originator) is fully ring-fenced and bankruptcy remote – so that there is no possible channel of contagion, and hence no single risk, between the special purpose entity and the controlling entity
it may be possible to demonstrate that no single risk exists (see scenario C 1 in the annex).
Institutions should apply the concept of control as defined in Article 4(1)(37) of Regulation (EU) No 575/2013 as follows:
In relation to clients that prepare their consolidated financial statements in conformity with the national rules transposing Directive 2013/34/EU (opens EUR-Lex in a new tab),(13) institutions should rely on the control relationship between a parent undertaking and its subsidiaries within the meaning of Article 22(1) (opens EUR-Lex in a new tab) and (2) (opens EUR-Lex in a new tab) of Directive 2013/34/EU (opens EUR-Lex in a new tab). For this purpose, institutions should group clients accordingly on the basis of their clients’ consolidated financial statements. To this end, references to Directive 2013/34/EU (opens EUR-Lex in a new tab) should be understood as references to the national rules that transposed Directive 2013/34/EU (opens EUR-Lex in a new tab) in the Member State where the institutions’ clients are required to prepare their consolidated financial statements.
In relation to clients that prepare their consolidated financial statements in conformity with the international accounting standards adopted by the Commission in accordance with Regulation (EC) No 1606/2002 (opens EUR-Lex in a new tab), institutions should rely on the control relationship between a parent undertaking and its subsidiaries within the meaning of those accounting standards. For this purpose, institutions should group clients accordingly on the basis of their clients’ consolidated financial statements.
In relation to clients to which point (a) or point (b) of this paragraph do not apply (e.g. natural persons, central governments, and clients that prepare consolidated financial statements in accordance with the accounting rules of a third country), institutions should deem to be control relationships those between any natural or legal person and an undertaking that are similar to the parent undertaking/subsidiary relationships mentioned in points (a) and (b) of this paragraph.
When conducting this assessment, institutions should deem any of the following criteria to constitute a control relationship:
holding the majority of the shareholders’ or members’ voting rights in another entity;
right or ability to appoint or remove a majority of the members of the administrative, management or supervisory body of another entity;
right or ability to exercise a dominant influence over another entity pursuant to a contract, or provisions in memoranda or articles of association.
Other possible indicators of control that institutions should consider in their assessment include the following:
iv. power to decide on the strategy or direct the activities of an entity;
v. power to decide on crucial transactions, such as the transfer of profit or loss;
vi. right or ability to coordinate the management of an entity with that of other entities in pursuit of a common objective (e.g. where the same natural persons are involved in the management or board of two or more entities);
vii. holding more than 50% of the shares of capital of another entity.
Given that the decisive factor for the assessment of the existence of a control relationship is the accounting criteria or indicators of control set out in paragraph 13(a), (b) and (c), institutions should group two or more clients on account of a relationship of control, as described in this section, even where these clients are not included in the same consolidated financial statements because exemptions apply to them under the relevant accounting rules, for example under Article 23 (opens EUR-Lex in a new tab) of Directive 2013/34/EU (opens EUR-Lex in a new tab).
Institutions should group two or more clients into a group of connected clients on account of a relationship of control among these clients regardless of whether or not the exposures to these clients are exempted from the application of the large exposures limit under Article 400(1) and (2) of Regulation (EU) No 575/2013 or in accordance with exemptions under national rules implementing Article 493(3) of that Regulation.