REPORT
on Activities of the Hungarian Banking Association
2nd Quarter 2004
Budapest, August 2004.
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CONTENTS
I. PROFESSIONAL ACTIVITIES .............................................................................................. 3
1.1 Companies Act ................................................................................................................... 3
1.2 Insolvency Act .................................................................................................................... 4
1.3 Supplementary supervision of financial conglomerates ..................................................... 4
1.4 Data protection ................................................................................................................... 5
1.5 Ombudsman's criticism of mortgage lending practices; consequent regulatory measures 5
1.5.1 Ombudsman's report .................................................................................................... 5
1.5.2 Amendment to the Credit Institutions Act. ................................................................ 6
1.6 Proposed amendment to the Decree on housing subsidies ................................................. 7
1.7 Proposed modifications to currency exchange regulations ................................................ 7
1.8 Customs bank guarantees ................................................................................................... 8
1.9 Bank security ...................................................................................................................... 9
1.10 Fight against terrorism and money laundering ............................................................... 10
1.11 National Qualifications Register (OKJ) certified training courses ................................ 10
1.12 Local trade tax ................................................................................................................ 11
1.13 Hungarian version of the European Master Agreement ................................................. 11
1.14 Income certificates for taxpayers subject to Simplified Corporate Tax ........................ 11
II. LOAN SCHEMES ................................................................................................................. 12
1. Public Private Partnership .................................................................................................. 12
2. Agricultural loan schemes .................................................................................................. 13
3. SME loan schemes ............................................................................................................. 13
III. INTERNATIONAL COOPERATION ................................................................................ 15
European Banking Federation ................................................................................................ 15
1. Banking Supervision Committee - Capital Adequacy Working Group ............................. 15
2. Accounts Committee .......................................................................................................... 22
3. European Payment Council ................................................................................................ 26
4. ECBS (European Committee for Banking Standards) ....................................................... 28
5. FBE Financial Markets Committee ................................................................................... 28
6. ISO TC68 plenary meeting ................................................................................................ 29
IV. ASSOCIATION EVENTS ................................................................................................... 30
1. Payment System Forum ..................................................................................................... 30
2. Information Society Inter-Ministerial Coordination Committee ....................................... 31
3. Smart Card Forum Open Day............................................................................................. 32
4. Information Security Working Group ................................................................................ 32
5. Conference at the Budapest Municipal Court .................................................................... 32
6. Presentation on EU capital market legislation ................................................................... 33
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I. PROFESSIONAL ACTIVITIES
1.1 Companies Act
The codification committee appointed by the Minister of Finance has finalised the concept for
the review of the Companies Act (Act CXLIV of 1997) and the Company Registration Act (Act
CXLV of 1997) scheduled to be presented to Parliament following a review process in the
autumn.
The new Companies Act will maintain the current mandatory forms of association. Invariably,
general and limited partnerships will have no legal entity. As a main rule, the nature of
legislation will be permissive for limited liability companies, cogent for joint stock companies.
Both forms of company may be operated as a one-man company. The institution of quotas in
limited liability companies will remain; the memorandum of association of limited liability
companies may not be terminated; for quitting the company, the quota must be transferred. For
joint stock companies, the regulations on both public and private founding will be retained, given
that public foundation is allowed under the Capital Market Act. Here, however the separation of
open vs. closed forms of operation will be more consistent: only those joint stock companies that
are stock exchange members will be recognised as public joint-stock companies.
The conclusion of memorandums of association will be simplified: lawyer's countersignature or
incorporation of the memorandum in a deed will not be compulsory if the memorandum is
concluded based on the sample provided in the Schedule to the Companies Act; notwithstanding,
legal representation will continue to be required for company registration.
The regulations on scope of activities will be simplified: activities will no longer have to be listed
by TEÁOR number (Statistical Classification of Activities) companies may undertake any
activities that are not prohibited or restricted by law. The rules for in-kind contribution for the
various forms of companies will be standardised.
As for the various bodies of a company, the general meeting will continue to be the supreme
body of a company. Under the concept of corporate governance, the conditions for exercising
shareholder rights would be improved and activities of the Board of Directors would be regulated
in more details. The regulations on joint stock companies founded from public funds would be
revised (this, however, within the framework of the Public Finance Act, not the Companies Act).
The minimum capital requirements for joint stock companies and limited liability companies will
not be increased.
Under the proposed revision to the Company Registration Act, the legal supervisory role of
Courts of Registration would be increased through stronger sanctions. To ensure the authenticity
of the Companies Register, a company will be deemed as formed upon registration in the
Companies Register and terminated upon cancellation from the Companies Register. Where a
sample Memorandum of Association have been used for foundation, registration will be carried
out under a simplified process.
In our comments on the concept and answers to the Justice Ministry's questionnaire we indicated
our agreement with the concept of a separate law and more permissive legislation. We agreed
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with the concept that public joint stock companies should be introduced on the stock exchange or
regulated capital market; at the same time, the shareholders of private limited companies should
be charged with the obligation to report their acquisition of shares in the company. We also
supported relaxing the regulations in respect of the operation of private limited companies and
proposed that general meeting resolutions be allowed to adopted by using telecommunication
means. In relation to the rules for representation we pointed out that the relation between
company representation and representation provided under the Civil Code and should be clarified
in the Companies Act.
In our comments we also indicated that it would be desirable to reconcile the provisions of other
laws interrelated with the Companies Act: the Capital Market Act, the Credit Institutions Act and
the Accounting Act. Our detailed comments were copied to our member banks.
1.2 Insolvency Act
The codification committee drafting the new insolvency law held two meetings in the second
quarter, on April 29 and June 24.
On the April 29 meeting, three new sub-working groups were set up: the financial sub-group will
draft special rules to be applied to credit institutions, investment firms and insurance companies
under the Insolvency Act. At it's first meeting on May 26, 2004, the group identified the types of
financial organisation where special rules will be required. The group revealed that special
attention should be given to those organisations whose members are also customers of the
organisation, for example: voluntary and private pension funds.
The sub-working groups on self-employed entrepreneurs and social organisations are charged
with studying whether these personal entities can be involved in the scope of the Insolvency Act.
A number of studies were prepared by the sub-working groups: the sub-group on civil laws and
civil procedural laws compiled a document on the relation between the insolvency law and the
civil procedural law, the challenging of contracts and legal transactions and contracts resulting in
the deprival of collateral. The Taxation sub-working group prepared a report on the possibility to
include certain taxation provisions in the Insolvency Act. The Criminal Law sub-working group
developed a report on bankruptcy crimes, adjudication practices and the fraudulent alienation of
companies with unpaid public dues, and drafted a proposal for a reform of the penal norm.
The sub-working groups on agricultural issues and archiving also submitted their own
professional concepts. The general working group presented the codification committee with a
discussion paper on the concept of the proposed new legislation. The paper was reviewed by the
committee's meeting of June 24. The revised discussion paper and reports of the sub-working
groups are available on the Prime Minister's Office's website.
(http://www.meh.hu/szolgaltatasok/kodifikacio/fizeteskeptelenseg).
The concept for the new legislation is expected to be completed by the autumn at the earliest.
1.3 Supplementary supervision of financial conglomerates
The Ministry of Finance submitted for professional review and subsequent administrative review
the proposed law amendments related to financial conglomerates. These amendments are
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primarily required for law harmonisation. In addition to consolidated supervision, EU Directive
2002/87/EC on the supplementary supervision of credit institutions, insurance undertakings and
investment firms in financial conglomerates provides for the supplementary supervision of such
groups which are headed by a credit institution, insurance company or investment firm and at
least one of the entities of the group is in the insurance sector and the aggregated activities of
such entities within the group and the aggregated activities of the entities within the banking and
investment services sectors are both significant. Cross-sectoral activities are presumed to be
significant if the balance sheet total of the smallest financial sector in the group exceeds HUF
1,600 billion. Credit institutions, insurance undertakings and investment firms must meet the
capital adequacy requirements at the financial conglomerate level and have adequate capital
adequacy policies in place at the conglomerate level. Entities in a financial conglomerate are
required to have special risk management processes and internal control mechanisms in place at
the conglomerate level.
The proposed amendment will affect the Credit Institutions Act, the Capital Market Act and the
Insurance Act. Although all those banks which have ownership in any insurance company were
invited to participate in the reviews, OTP Bank will probably be the only bank that will be
affected by the regulation. In our comments, sent to the Ministry of Finance, we proposed that
the regulation on capital adequacy requirements be issued simultaneously with the regulation on
financial conglomerates and a detailed explanation be provided to give guidance in the
application of the regulations. In our detailed comments we drew attention to the importance of
ensuring consistency with the various secrecy and data protection rules and providing detailed
procedures for the provision of information. Further, we submitted specific wording proposals
and requested that the provisions concerning the Hungarian Financial Supervisory Authority be
made more specific.
1.4 Data protection
A consultation on the implementation of the data protection Act and other issues was held at the
beginning of May with the participation of legal counsels and compliance and data protection
officers from member banks. Dr András Jóri, data protection expert, gave a presentation on
general issues related to data protection regulations, difficulties in implementing the latest data
protection articles and problems related to the transfer of data to third countries. The presenter
confirmed banks' opinion that the sanctions related to the Data protection Act are inadequate; the
procedures launched by the Data Protection Ombudsman are not accompanied by any guarantees
and the regulations on the Ombudsman's powers are rather superficial.
The Association's representative attended the meeting held by the legal section of the Association
of Hungarian Insurance Companies in May, where common data protection issues affecting
banks and insurance companies were reviewed. Participants showed particular interest in the
operation and regulation of the inter-bank information system.
1.5 Ombudsman's criticism of mortgage lending practices; consequent regulatory
measures
1.5.1 Ombudsman's report
Upon citizen complaints, the Ombudsman for Citizen Rights compiled a report on banks'
mortgage lending practices. The Ombudsman's Office informed the press first on their findings,
which were seriously detrimental to banks. The Ombudsman's report along with his
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recommendations for actions were subsequently sent to the competent authorities (the Ministry
of Finance, the Hungarian Financial Supervisory Authority, the Competition Office) and the
Banking Association. While the Ombudsman may only recommend actions to state organs, not to
the business sphere (and thus, neither to banks), his recommendations clearly expected actions
from banks and their regulatory authorities.
The Association did not wish to engage in a public dispute with the Ombudsman over his
findings and criticism. Instead, it informed the Ombudsman in writing on banks' opinion,
disproving his critical statements.
We expressed our objection to the way the report was compiled and made public as well to the
contents of the report, based on the following:
- a responsible organisation should not draw general conclusions for the entire banking
profession based a few complaints (five in number!),
- banks and the competent authorities first learned about the report from the press: under the
principles of professional correctness the report should have been furnished to the parties
affected, to enable them to comment on the report before making going public with it (whereby
several professional mistakes could have also been avoided),
- the report accused banks of unconstitutional, unilateral and customer-unfriendly conduct
pursued in a cartel, thereby fundamentally questioning the operations performed by banks up
until now.
As for the specific statements:



We refused the criticism that banks are artificially underrating the real estate collateral
provided: the methods for collateral rating are provided for by statute; consequently, the
fact that banks follow similar practices is not due to a cartel but to a law abiding
behaviour;
Contrary to the report, on the one hand: the stipulation of a buying option is not
unconstitutional, as also pronounced by the Supreme Court; on the other hand, not all
banks require this type of collateral, so, there is no grounds for claiming a cartel in this
case, either. We drew attention to the fact that the reason for some banks using this
instrument (tough, but fully legal) is rooted in the extremely low efficiency of execution
procedures (that would be the normal way of enforcing claims);
We agreed with the Ombudsman that the stipulation of a buying option for undervalued
collateral is customer-unfriendly; however, banks confirmed that before using a buying
option, the collateral is re-rated by an independent appraiser and then sold at a new and
fair price.
Parallel with this letter, the Association's President and Secretary met with the Ombudsman
and presented him also in person the profession's views and position. While several questions
were clarified during the meeting, the parties decided to set up a joint committee to review
those issues that are still found problematic and to develop proposals for appropriate
solutions.
1.5.2 Amendment to the Credit Institutions Act.
In compliance with the Ombudsman's recommendation, the Ministry of Finance drafted an
amendment to the Credit Institutions Act, aimed at better customer information.
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According to the proposal, in case of mortgage loans with a buying option the bank would be
obliged to provide a risk statement, which should be countersigned by the customer. Also, in
contracts with a buying option the bank should give the customer 90 days to try to sell the real
estate collateral on his own (to avoid the - in the legislator's opinion - imposed and undervalued
prices).
In our opinion, provided based on banks' comments, we acknowledged that in their comments to
the Ombudsman banks did find customer information inadequate and were not against the idea
of a risk statement; however, they found it problematic due to the unspecified contents and
unclear relation of the statement to the loan contract. We emphatically objected to adding to the
provisions on a buying option the right of the customer to sell the collateral on his own, on the
grounds that this is alien to the legal instrument in question.
Some of our comments were accepted: the risk statement will only be applied to retail loan
contracts; it will not be mandatory to provide for the option for the customer to sell the collateral
in case of buying options; the Ministry did not insist on providing for additional obligations in
respect of collateral in the banks' business terms and conditions, and agreed to provide sufficient
time for banks to prepare themselves for implementing the new provisions. Nevertheless, the risk
statement itself was retained in the proposal and despite our request, the requirement that the risk
statements should be provided with uniform contents was not included in the proposal.
1.6 Proposed amendment to the Decree on housing subsidies
During the drafting and review process of the proposed amendment to the Decree on housing
subsidies, the bad practice of sending the various versions of the draft unexpectedly and at an
unrealistically short notice (sometimes just hours), with inconsistent contents and changes
continued.
In some versions, the tenement reform programme was highlighted, EU law harmonisation in
some others, new construction and engineering definitions in the third version and the latest
modifications to bank financing in some other versions: it was impossible to follow why certain
topics appear in some versions and then disappear in others and whether our comments had been
taken into account (some provisions challenged were not included at all in the next version).
Due to technical reasons and the extremely short notice given, we were only able to review the
versions briefly with a few colleagues. The draft versions and our comments were passed on to
member banks for their information.
Naturally we indicated this problems several times to the Housing Department at the Ministry of
Interior (one of the main parties in responsible for the topic) .
1.7 Proposed modifications to currency exchange regulations
The Association of Hungarian Travel Agents and Tour Operators (MUISZ) requested the
Association to provide assistance in easing the regulations on currency exchange operations.
Namely: pursuant to the anti-money laundering laws, currency exchange operations may only be
performed by bank agents; however, banks refuse to conclude agency agreements with many of
their members. Being aware of the Association's support of existing regulations, in their letter
they presented the arguments they felt could convince banks on the need to change the
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regulation. MUISZ requested us to solicit our member banks' opinion and to also inform the
Ministry of Finance, as the regulating authority.
Banks took quite different positions depending on whether they do work with exchange agents or
do not.
Those working with agents were against changing the regulation, for the following reasons:
- in their opinion there are no uncovered areas in the currency exchange market,
- a more permissive legislation would compromise the quality of services,
- they pointed out the fact that the supervisory authority relies on banks' control (the
authority does not have the resources to check on hundreds of exchange agents).
- it would be unfair and damaging to those banks, who have put in substantial investments
and efforts in developing their agency networks over the past two years based on the new
and tightened regulations.
Banks who currently do not work with no agents did support easing the regulation (allowing
currency exchange to also be performed by businesses other than bank agents) arguing that that
would:
- allow more players to engage in the market,
- stimulate business,
- make services cheaper for the customer
- allow banks to work with exchange agents without any administrative constraints (banks
in this group admitted that it was the extra administrative burdens and responsibility
imposed by the tightened regulations why they stopped operations with currency
exchange agents and they would be happy to be engage in this area once again).
Notwithstanding the differences in opinions all banks agreed that the current achievements of the
regulation should be preserved and the strict personal and material requirements and anti-moneylaundering measures should not be relaxed.
The Association did not want to take sides in this debate between member banks; therefore, it
forwarded both arguments to the Ministry of Finance. The Ministry informed the Association on
the fact that in the meantime, the Ministry of Economy has, primarily for tourism considerations,
taken up the matter and proposed the Ministry of Finance to modify (relax) the regulation.
(According to our information, the decision was postponed to the autumn, as the Ministry would
like to wait until the end of the tourist season and then analyse the situation before it decides on
the issue).
1.8 Customs bank guarantees
Although the regulation on bank guarantees serving as customs guarantees had been finalised
(with a slight delay) by the time of Hungary's accession to the EU, problems in the application of
the regulation could be expected at the Customs Authority, which had to cope with serious
administrative problems in the immediate period after Hungary's accession to the EU.
a.) First, the Customs Director of the National Customs and Excise Guard (VPOP) wrote a letter
to the Association, practically trying to override the expiry provisions of the effective regulation
on bank guarantees. In the wake of this letter we turned to the Customs Department of the
Ministry of Finance asking for urgent action to ensure that bank guarantees, as effective customs
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guarantees, can be retained. The Head of the Ministry's Customs Department sent a strong letter
to the Commander of the Customs and Excise Guard, calling his attention to observing and
implementing the effective regulations.
b.) Although the Customs Act stipulates that upon Hungary's accession to the EU as of May 1,
2004, all previously issued customs licences are null and void and all guarantees provided as
collateral should be accounted for and released within one month, problems were encountered in
the application of the law in practice. During the discussion held with the heads of VPOP to
resolve the problems, preliminary agreement was reached on documentation requirements and on
a mutually acceptable schedule of proceeding. To have this agreement confirmed, we requested
the approval of the Ministry of Finance, as the supervisory authority of VPOP. This has not been
received to date.
c.) Banks' clients became entangled in disputes with the Customs Authority, as their bank
guarantees, issued in accordance with the relevant regulations, were refused by the Authority for
the varied reasons. This was rather embarrassing for banks, as it might have suggested that banks
did not understand the regulation. In our letter to the Ministry of Finance we repeated our,
previously ignored, proposal that the parties involved (the Ministry of Finance, VPOP and banks)
jointly draft a sample bank guarantee to be published at soon as possible. The Ministry requested
the Association to draft the guarantee. After a broad review with member banks the sample
guarantee was sent to the Ministry and was published within a week time on VPOP's website as a
recommended sample guarantee. The sample guarantee contains a specific expiry date and
allows bank to set up successive guarantees to provide for continuous backing for regular
customs transactions. Thereby, the issue was practically resolved.
d.) To resolve a set of issues that have arisen since Hungary's accession to the EU, the Ministry
of Finance drafted a proposal aimed at modifying the Ministry's implementation decrees for
customs procedures. The proposal was acceptable from banking points of view; however, banks
raised two issues, which were forwarded later to the drafters of the regulation.
One of the issues was that the regulation extended the definition of "customs debt" to include
"non-community taxes and fees" (thus practically overriding the definition provided in the EU
Customs Code). Bank guarantees serve as a security for customs debts and therefore, no
requirement can be imposed on them to cover other items (the sample guarantee on the VPOP
website will also have to be adjusted accordingly).
Also, we proposed that in accordance with international practice, the law of Hungary as the
governing law and the exclusive jurisdiction of Hungarian Courts should be stipulated in the
sample guarantee.
1.9 Bank security
The FBE's annual statistical report on physical bank robberies was published in the second
quarter. According to the report, the number robberies against banks in Hungary decreased by
20% and damages halved over the previous year. 22 out of a total 2,760 branches were attacked,
with total damages accounting for HUF 22 million. Bank robberies and the damages incurred
have decreased for the third consecutive year now. The rate of decrease in 2003 was in
accordance with the European trend.
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A phenomenon that deserves special mention though is the outstandingly high, and increasing,
number of attacks on cash delivery vans in Hungary, which primarily affects cash delivery
companies but its effects will obviously appear in delivery fees. The number of attacks on ATMs
is also increasing.
Notwithstanding the favourable statistics, to further strengthen prevention the Bank Security
Working Group initiated with the National Police Headquarters to intensify the cooperation
between banks and the Police. The National Police Headquarters responded positively to the
proposal. The main areas of cooperation were specified as alarms to the police, prevention and
training. A working group was scheduled to be set up at the end of August to identify the
possible ways and further areas of cooperation. The Association is represented in the working
group through the bank security officers of OTP Bank, K&H Bank, Erste Bank and Budapest
Bank.
1.10 Fight against terrorism and money laundering
Tasks related to the fight against terrorism and money laundering continue to be given special
attention in the banks' operations. Most legal questions and uncertainties encountered last year
have been resolved in the meantime in the relevant legislation.
An unresolved issue yet is the item of "careless involvement in money laundering" and its
sanction. As far as we know, the Ministry of Finance, the Ministry of Interior and the National
Police Headquarters all agree with the need to modify this item, especially in view of the fact that
the vast volume of reports filed by bank employees out of fear makes it impossible to identify
and investigate the actually dangerous cases. The Ministry of Justice and the Hungarian Financial
Supervisory Authority are at present opposed to modifying the law.
Most anti-terrrorism and money laundering regulations have been in conformance with the
relevant EU regulations since Hungary's accession to the EU. The Third Money-Laundering
Directive is currently under drafting. The Ministry of Finance and the FBE have both asked for
our contributions. However, not all of our members have the awareness that these are the forums
where we can express our opinions on legislation and it is much more difficult to change the
legislation once adopted. The new Directive will extend to cash payment orders in excess of EU
15,000 and issues related to terrorist financing and would provide for a reporting obligation for
banks on customers denying identification.
A favourable development is that from June this year the FBE has published a Terrorist List on
its home page, including names and organisation details. Banks should monitor this list. A
presentation on how the system is used was provided by the Association in June.
1.11 National Qualifications Register (OKJ) certified training courses
The Association provided its comments on the proposed Decree on certification and examination
requirements for persons acting as salespersons, sales representatives and investment advisors
within investment firms (see detailed comments in our first quarter report).
The proposed decree would provide unreasonably strict conditions for obtaining the required
certificates, which would pose extremely difficult requirements for those employees engaged in
the sale of banking, investment and insurance products and would imply substantial extra costs
for employers as well. Given that the proposed new training and certification system would affect
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all employees engaged in sales within banks and savings cooperatives, the Association and the
National Association of Savings Cooperatives (OTSZ) jointly turned to the Minister of Finance
to seek compromise. In our reasons we pointed out that the proposed vocational training system
would be much more stringent than those in other EU member states and would therefore lead to
a competitive disadvantage, especially in relation to the new member states. Accordingly, it
might happen that if the registration of agents is easier in a neighbouring country, then some
providers may decide to transfer operations to that country.
1.12 Local trade tax
Discussions aimed at achieving that expenses are recognised in the trade tax base continued with
the competent staff at the Ministry of Finance. To assess our request, the Ministry requested a
voluntary data supply from member banks on two occasions, based on which the magnitude of
the loss (difference) in tax revenues at the municipalities can be established.
The proposal for amendments to the laws on taxes, contributions and other fiscal dues provides
the following definition for net revenues:
„b) for credit institutions and financial enterprises: interest and interest-type revenues
received, as reduced by interest and interest-type expenses paid, and increased by revenues from
other financial services, revenues from investment services and net revenues from non-financial
and non-investment services. For hedging transactions, net revenues shall include the profit
obtained as the difference between the gain/loss on the basic transaction (the hedged item) and
the gain/loss on the hedging transaction.”
Although this proposal is a significant improvement compared to the current regulation and also
allows the recognition of a certain portion of trade tax in corporate tax, the Association and banks
continue to consistently argue for the reasonable solution that net revenues are computed on a
real net basis for all investment and other financial services.
1.13 Hungarian version of the European Master Agreement
After a review with member banks, the Hungarian version of the European Master Agreement
(EMA) providing a standard framework for repo and securities lending transaction was sent the
Hungarian Financial Supervisory Authority with a request for the Authority's comments. The
Supervisory Authority asked for some modifications. Once these are carried out the Authority is
expected to give a positive opinion on the Master Agreement.
1.14 Income certificates for taxpayers subject to Simplified Corporate Tax
The income certificates provided by the Tax Office for private entrepreneurs subject to
Simplified Corporate Tax had only contained a statement to the effect that the taxpayer was
subject to Simplified Corporate Tax (EVA), in accordance with the relevant Act. Banks
indicated that this caused a problem in credit rating. We proposed the Ministry of Finance to add
a provision to the Act on Simplified Corporate Tax within the framework of the proposed law
package on amendments to the laws on taxes, contributions and other fiscal dues for 2005, to say
that in the income certificates the tax authority shall state the fact that the taxpayer is subject to
Simplified Corporate Tax and indicate the taxpayer's annual income and tax liability for the
taxation year. Certificates on income acquired by private individuals (not subject to Simplified
Corporate Tax) will be issued in accordance with the rules otherwise applicable.
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II. LOAN SCHEMES
1. Public Private Partnership
The Minister of Education invited bank leaders to discuss the question why banks have
reservations about providing finance for companies seeking to participate in new types of public
development project schemes.
Bank leaders indicated that PPP project are new in Hungary and thus, it is quite understandable
that financing is an issue that should be addressed. Namely, under PPP projects, bidders are not
only expected to implement the project but to also run the facilities in question (e.g.,:
dormitories, prisons, etc.), against a reimbursement fee (to be paid by the state) that is not exactly
known in advance; this is a major uncertainty in terms of a 15 to 20-year bank finance. Bank
leaders promised to give their answers to the Minister's questions and to provide banks'
requirements in connection with PPP projects through the Association.
Based on this, the Association invited a consultations with the involvement of specialists from
the banks involved. During this consultation, the main elements of a common position were
agreed on. After a second consultation, our answer was sent in a letter to the Minister of
Finance.
In the letter, banks provided the following requirements:

Banks consider the repayment of the loans as a first priority. Therefore, they must insist
that the contracts be signed by the field ministry (in the present case, the Ministry of
Education) and countersigned by the Ministry of Finance.

The reimbursement/rental fees to be paid by the state should be carefully planned as must
cover operating and maintenance costs, debt services and a fair profit.
The investor (and through it, the bank) assumes implementation and operation risks,
given that the state's payment obligations are conditional and will onset only in case the
investor delivers according to the contract.
Since neither the state nor the business community has experience in PPP projects, the
involvement of internationally experienced financial/legal consultants to assist the tender
inviter during the preparatory stage and the entire public procurement period would
largely contribute to the success of the projects.
The tender invitation should not provide any requirement for banks to assume irrevocable
and unconditional payment obligations: determining the full set of conditions between the
public institution and the private investor is a long and meticulous process and banks
should be involved in this process from the very beginning, as they are the ones who take
the highest risk. Only when all conditions are known may banks be expected to undertake
irrevocable obligations.



Upon receipt of our letter, the Ministry's associates requested a meeting where they expressed
their opinion that most of the points made by banks were legitimate and promised that the
proposal for the regulation of PPP projects, to be drafted jointly by the Ministry of Education and
the Ministry of Finance, will contain the banking requirements indicated in our letter.
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2. Agricultural loan schemes
The disbursement of loans under the Europe Plan Agricultural Loan Scheme was concluded at
the end of April. Close to HUF 240 billion in loans were placed under this scheme, mostly from
bank resources.
Under a government decision, registered agricultural producers were given access to a part of the
2005 development subsidies already this year. Bank specialists had been involved in developing
the facility for the HUF 46 million advance subsidies. The facility basically implies the
factoring by banks and factoring companies of the subsidy deed.
With the high number of producers expected to participate in the scheme over a short time
(150,000 to 250,000), setting up a fast, simple and secure management procedure was a key
priority.
As regards secure lending, after consultation with bank specialists the Association took the
position that, in view of the factoring scheme, the subsidy should be transmitted from the
Hungarian State Treasury to the managing bank rather than to the client, and any fiscal dues
incurred after submission of the loan application should be ignored. Taking note of the fact that
this is an important condition for the fast and smooth management of the scheme, the Ministry of
Finance submitted an amendment to the tax laws, which was promptly passed by Parliament.
Ultimately, four banks have decided to undertake the conditions of the advance loan scheme and
are currently managing scheme.
In 2003, agricultural producers in adverse areas we given the opportunity to convert their
previous loan debts into a three-year loan under a government subsidy scheme. If the applicant
meets the business plan, the annual loan instalment is paid from government subsidies by the Tax
and financial Control Administration (APEH).
Self assessments on meeting the business plan were due this year for the first time. Financing
banks had to comment on the self-assessments by June 30 (banker's opinion on meeting the
business plan is an important condition for granting the subsidy).
At the request of the Ministry of Agriculture and Regional Development, the Association assisted
in the disbursement of a HUF 2.8 billion credit line through an application scheme aimed at
bridging liquidity problems due to the winding up and unpaid debts of Hajdú-Bét Rt. and
Parmalat Hungária Rt.
3. SME loan schemes
The Ministry of Economy and Transport plans to modify the Government Decree providing for
SME loan reporting requirements.
Upon the Ministry's request the Association submitted a proposal for improving and simplifying
the loan reporting requirements. Consultations on the proposal are now underway.
Since, under an authorisation from the Government, the reporting obligation is ordered by the
President of the Hungarian Financial Supervisory Authority, we initiated consultations with the
Supervisory Authority to review the proposal and acquire their support.
14
15
III. INTERNATIONAL COOPERATION
European Banking Federation
1. Banking Supervision Committee - Capital Adequacy Working Group
The Committee and the Working Group made all efforts in the past quarter to ensure that a
capital accord meeting the interests of the European banking industry is adopted. With the
regulatory process drawing to conclusion, events have sped up. Here is a brief summary:
The FBE's April letter to the European Commission
This letter touches upon those key issues whose treatment is not acceptable for the FBE under the
current information available. Accordingly, the letter addresses issues related securitisation,
consolidation requirements and approval of the use of the AMA in the home and host countries.
The FBE disagrees with the proposed method for determining home and host country capital
requirements for operational risk under the AMA, as it contradicts the business line approach to
operational risk and the setting up of common data bases and would generate substantial extra
costs. The FBE's standpoint is that capital requirements for operational risk in the AMA, should
be determined on group level and the use of the model should only be approved by the
supervisory college headed by the home country supervisor (single validation).1 Should the
European Commission adopt the Basel Committee's approach, European banks will consider
whether at all to use the AMA.
According to the FBE, the supervisory formula for securitisation is still too conservative. The
proposed rules do not reflect the nature of securitisation business and would set back the
development of the market. The objective of the regulation should be to ensure correlation
between risk and capital, without intervening into market processes and penalising operations.
As to the levels of consolidation, the FBE is of the opinion that capital requirements should be
applied to the highest group level, the highest group levels in member states and individually.
Exemption from an individual application should be given if capital allocation within the group
is adequate, risks are controlled and managed within the group in an integrated manner, the
parent company has a financial intervention policy in place for helping out the group members
and the parent company and its subsidiary are subject to the same national/consolidated
supervision.2
1
The European Commission's response to the FBEs proposal that the AMA approach is only used at group level was
basically positive. However, according to its May statement the Basle Committee maintains the hybrid approach
proposed earlier on.
2
The European Commission wants to allow member states to give a waiver from the individual application but does
not want to make such exemption compulsory once certain conditions are met.
16
PriceWaterhouseCoopers report on the financial and macroeconomic impacts of the new
capital accord
At the request of the European Commission, PriceWaterhouseCoopers made a study on the
financial and macroeconomic impacts of the new capital requirements on the European market.
The findings of the study were published in April. (In respect of quantitative impacts
PriceWaterhouseCoopers relied on the results of QIS3). The report envisages a slightly positive
overall impact. Capital requirement is expected to decrease by 5% across Europe, while the
impact of the accord on the GDP will be negligible even in the long-term, around 0.07 per cent.
The capital requirements for retail and SME portfolios are expected to decrease, with a minimum
change for corporate portfolios. The new capital directive will only have a limited impact on
pricing practices - and not necessarily in those lines where capital is freed up.
The most fundamental impact is observable in the behaviour of the institutions. Basel II will
change banks' risk management practices, with a substantial improvement in rating and
information systems and databases. Banks' risk awareness and risk sensitivity will increase,
which, however, does not imply that the risk appetite of EU banks will be diminished but rather,
a better orientation. Banks will have access to better and more frequent customer information.
PriceWaterhouseCoopers do not confirm the fears concerning the negative impact on
competition. The consultants see no evidence for the claims that the new regulation will favour
large banks and will result in the exclusion and merging of small banks. A large size and
international-scale operations will be make the use of advanced approaches difficult, while
smaller institution may cooperate and use the advanced approaches, although at higher unit costs.
According to PriceWaterhouseCoopers the fact that the new capital accord will be applied to all
banks and investment firms in Europe will not cause any significant competitive disadvantage.
(Neither advantage for US banks, given that the Directive will be mandatory for all banks active
in Europe). At the same time, concerns over allowing too wide national discretions and the nonuniform application of Pillar 2 may be legitimate.
Capital requirements for large investment service providers (E730k firms) may increase
substantially; for them, capital requirements for operational risk will clearly be a competitive
disadvantage. Although their current capital requirements may well be below the necessary level,
envisaged sudden regulatory measures are not necessarily desirable, and probably not risk-rated.
For a level playing field regulation, the capital requirements for trading book items will have to
be revised.
PriceWaterhouseCoopers do not expect any major procyclical impact of the new capital directive
(in its opinion, such impact would be lower than in the case of Basel I); however, the regulation's
potential impact of deepening the cycles should be minded. The introduction of stress tests and
flattening of the risk weight curves have reduced the procyclical nature of the regulation
substantially.
The report estimates the implementation costs of Basel II to be EUR 20 billion to 30 billion
(EUR 80 million to 150 million per large bank) between 2002 and 2006. To be added to this are
the costs arising at the supervisors. However, the report also emphasises that part of these costs
would arise anyway, irrespective of the new capital directive and the new Basel capital accord
will only speed up the application of advanced measurement approaches.
17
Interestingly: banks think the supervisory authorities will not be able to live up to the
requirements set for them, while supervisors think banks are not as much prepared as they
believe to be. All in all, through enforcing a risk sensitive behaviour, the new directive is
expected to contribute to increased financial stability. Of course, on the individual level the
change will be difficult and existing uncertainties will not make the preparations any easier,
either.
CEBS3 April 29 document on consultative process
According to the document CEBS has the following responsibilities:

advising the European Commission on banking regulation issues,

promoting the consistent application of EU directives and the convergence of supervisory
practices,

strengthening cooperation between supervisors.
To be able to efficiently perform its duties, the CEBS is organising a broad consultation with
market players, consumers and end-users of banking services. The CEBS would like to conduct
the consultation in an open and transparent manner and seeking consensus. Decisions adopted
during the consultations will be published.
The CEBS will publish its annual work programme, indicating whom it would like to consult
with for each topic. Additional requests for consultation, if found legitimate and where possible,
will be accommodated in the programme.
The CEBS will:
 familiarise the parties interested with its assignments and authorisations from the
European Commission,
 prepare consultative proposals,
 where possible, indicate in the proposals the expected impacts,
 prepare working documents in the various stages of the consultation, if so required,
 set up specialist groups, where necessary,
 use a wide variety of consultation tools (Internet, written consultation, open hearings,
roundtables, bilateral discussions, etc.)
The CEBS will share all information as available and will allow sufficient consultative time for
forming an opinion. For key issues, the CEBS proposes a three-month consultative period. The
comments will be duly considered answered and published. Further consultations will be invited
where essential issues are revealed from the comments or if the new proposal to be developed
based on the comments received substantially differs from the original. Final proposals will be
published.
The CEBS will give the reasons should it depart from the above practice. If necessary, the CEBS
may revise its position concerning consultations.
Comments on the proposed consultation practice were to be provided latest by July 31.
In its response, the FBE welcomed the proposal, pointing out that it has always supported the
extension of the Lámfalussy process to banking. In the FBE's opinion, rulemaking at Level 2 and
3
Committee of European Banking Supervisors
18
Level 3 may only begin after the rules have been set with sufficient certainty at Level 1. The FBE
finds it desirable to explicitly state that the professional associations affected will be involved by
the CEBS in the consultation process. The FBE thinks a minimum three-month consultative
period is necessary for key issues; also, after agreeing on the principles, a second round of
consultations would be necessary (except where the proposal has received a stable support in the
first round or where the topic is not of major importance).
May Decisions of the Basel Committee
In its May 11 press release, the Basel Committee on Banking Supervision announced that it has
achieved consensus on the remaining issues regarding the proposals for a new international
capital standard and the text of the new framework will be published at the end of June 2004
(www.bis.org). The standardised and the foundation IRB approaches will be implemented from
year-end 2006, the advanced IRB approach from year-end 2007.
Parallel running for banks adopting the foundation IRB approach will apply for one year, during
2006. Banks adopting the advanced approaches will have two years of parallel running (2006 and
2007). The floors on both foundation and advanced approaches in 2008 and 2009 would be 90%
and 80%, respectively. The floor on the foundation IRB approach will be 95% in 2007.
Agreement was reached that the required capital charges for qualifying revolving retail exposures
(QRRE) will be aligned to the results of recent empirical studies. The asset correlation for
revolving retail exposures will be fixed at 4%. With regard to securitised portfolios of QRRE,
the capital framework will reflect more closely the economics of such transactions. Undrawn
credit lines related to securitised exposures will be allocated between the seller’s and investor’s
interests.
The Committee has given guidance on assessing loss-given-default (LGD) for "economic
downturns" but has for the time being not provided for the calculation of LGD for stress
situations. The Committee believes that the framework should retain the concept of a single
assigned LGD that should reflect "economic downturn" conditions where necessary to capture
the relevant risk. The Committee considers one possibility would be for banks' internal LGD
processes to focus on assessing an expected LGD. Meanwhile, the Committee seeks to develop a
broad consensus on how to achieve appropriate "economic downturn" LGDs for the various
exposure categories. The Committee is looking forward to receiving further industry input and is
open to further dialogue on the issue.
The Committee believes it is important to maintain the overall level of minimum capital
requirements, while also providing incentives to adopt the more advanced risk-sensitive
approaches of the new framework. The Committee will further review the calibration of the new
framework prior to its implementation. Should such review reveal that the objectives on overall
capital would not be achieved, the Committee will take actions necessary to address the situation.
(In practice, this would entail the application of a single scaling factor - which could be either
greater than or less than one - to the results of the new framework. The current best estimate of
the scaling factor using QIS 3 data adjusted for the EL-UL decisions is 1.06. The final
determination of any scaling factor will be based on the parallel running results).
The Committee emphasises the importance of closer coordination between supervisors. It has
provided further high-level principles for the cross-border implementation of the new framework,
19
in addition to those published in August 20034. According these home and host supervisors
should consider practical ways to coordinate requests for information. Host supervisors needing
detailed information about Basel II implementation and roll-out plans from foreign subsidiaries
operating in their jurisdictions will have to ask for the information from the home country
supervisors before addressing the bank. (This will not preclude host countries from discussing
prudential matters with their banks directly, but will strengthen and rationalise the
communication efforts among supervisory authorities). The Committee reiterates the principle
that, wherever possible, supervisors should avoid performing redundant and uncoordinated
approval and validation work for Basel II in order to reduce the implementation burden on the
banks and to conserve supervisory resources. The home jurisdiction should play a leading role in
the approval and validation of advanced techniques with appropriate input from the host country
supervisor and material reliance by host countries on the work of the home country supervisor.
The Committee has received informal comments and questions from various industry participants
on its recent publication of a paper on home-host supervisory principles5 for the advanced
measurement approaches (AMA) for operational risk (AMA home-host paper). The Committee
chose not to define “significance” in determining which internationally active banking
subsidiaries are ineligible to make use of an approved allocation mechanism (according to that
proposal, in that case stand alone AMAs should also be used). However, the Committee made it
clear that in its proposal only internationally active banking subsidiaries would be deemed as
significant.
Setting stand alone capital requirements for banking subsidiaries not active
internationally will be the discretion of the host country. Home and host supervisors should work
together in determining which subsidiaries can be deemed as significant. In those cases where the
AMA is to be used at both group and subsidiary levels, the supervisory assessment of the AMA
models should be coordinated by the home country supervisor.
While a banking group may choose to adopt a group-wide AMA, significant internationally
active banking subsidiaries of such banking groups will not be required to adopt an AMA for
determining its capital requirement for operational risk. Likewise, a significant internationally
active banking subsidiary may choose to adopt a stand-alone AMA, while the parent adopts a
simpler approach on a group-wide basis. The parent of such a subsidiary would not be in
violation of the partial use rules if it chose to adopt a simpler approach on a group-wide basis,
even if it did so permanently. The Basel Committee expects that supervisors will have some
flexibility in applying the partial use provisions of the New Accord, providing incentives for the
adoption of advanced approaches but not allowing "cherry-picking" for favourable capital
treatment.
Subsidiaries implementing a stand-alone AMA will be permitted to leverage the resources of the
group in determining their operational risk capital requirements. The subsidiary’s process for
leveraging group resources within its stand-alone AMA would have to be transparent to its board
and host supervisor. The Committee does not share the view that banks that manage themselves
on a business line basis will be unable to satisfy the use test at the level of a significant
internationally active subsidiary that implements a stand-alone AMA.
The Committee will be working to ensure that the New Accord is implemented in a consistent
manner and to identify key implementation issues and concerns. The Committee is committed to
maintaining a dialogue with banking organisations in order to identify and address
implementation-related issues.
4
5
High-level principles for the cross-border implementation of the New Accord, August 2003.
Principles for home-host recognition of AMA operational risk capital, January 2004.
20
CEBS consultation paper on Pillar 2 and on outsourcing
On 24 May 2004 the CEBS released a consultation paper on the application of the supervisory
review process under Pillar 2. A key element of the new framework is the Internal Capital
Adequacy Assessment Process (ICAAP) with the relevant approaches to be developed by the
institutions themselves. The consultation paper sets out 11 High Level Principles for the
assessment process:
 Every institution must have a process for assessing its capital adequacy in relation to its
risk profile.
 The ICAAP is the responsibility of the institution, to fit its circumstances and needs, and
using its own inputs and definitions.
 The ICAAP should be proportionate to the nature, size, risk profile and complexity of the
institution.
 The ICAAP should be formal, the capital policy fully documented and the management
body's responsibility.
 The ICAAP should form an integral part of the management process and decision-making
culture of the institution.
 The ICAAP should be reviewed regularly
 The ICAAP should be risk-based.
 The ICAAP should be comprehensive and should consider all risks.
 The ICAAP should be forward-looking.
 The ICAAP should be based on adequate measurement and assessment processes. There
is no one "correct" process.
 The ICAAP should produce a reasonable outcome.
Another key element of the new framework is the Supervisory Review and Evaluation Process
(SREP), with the following 11 High Level Principles:
 The SREP should be an integrated part of the authority's overall risk-based approach to
supervision.
 The SREP should apply to all authorised institutions (and thus, all credit institutions).
 The SREP should cover all activities of the institution or group.
 The SREP should cover all material risks and risk management/internal controls.
 The SREP shall assess and review the institution's ICAAP.
 The SREP shall assess and review the institution's compliance with minimum standards
laid down in the Directive.
 The SREP should result in the identification of existing or potential problems and key
risks faced by the institution; deficiencies in the control and risk management
frameworks; and assess the degree of reliance that can be placed on the outputs of the
institution's ICAAP.
 The SREP should lead to prompt measures to address any deficiencies identified.
 The results of the SREP will be communicated to the institution at the appropriate level
(usually senior executive/management body), together with the action that is required of
the institution and any significant action planned by the authority.
 The supervisory evaluation should be formally reviewed at least on an annual basis, in
order to ensure that it is up to date and remains accurate.
 The depth of the SREP can be varied according to the systemic importance and either the
nature and scale (size, risk profile and complexity) of the institution or the overall
assessment of the quality of governance, management and systems and controls, or both.
21
The CEBS document on supervisory review process in several points refers to the consultation
paper on outsourcing released in April. In relation to outsourcing the CEBS has set the following
11 high-level supervisory principles:
 Strategic and core management responsibility and functions cannot be outsourced.
 The ultimate responsibility for proper management of the risks associated with
outsourcing lies with an outsourcing institution's senior executive management.
 The institution should take particular care when outsourcing material activities, i.e.
activities of such importance that any weakness or failure in the provision of these
activities could have a significant affect on its ability to meet its regulatory
responsibilities and/or to continue in business.
 There should be no restrictions on the outsourcing of non-material activities of an
outsourcing institution.
 The outsourcing institution should have a policy on its approach to outsourcing, including
contingency plans and exit strategies.
 An outsourcing institution's policies should require it to manage the risks associated with
its outsourcing arrangements.
 All outsourcing arrangements should be subject to a formal (written) and comprehensive
contract, clearly defining the operational area to be outsourced, performance requirements
in both quantitative and qualitative and the respective responsibilities.
 In managing its relationship with an outsourcing service provider an outsourcing
institution should ensure that a service level agreement (SLA) is put in place.
 Supervisory authorities should aim to establish a right to information, and to conduct, or
order, on-site inspections in an outsourcing service provider's premises.
 Supervisory authorities should take account of concentration risk, where one outsourcing
service provider provides outsourcing services to several authorised outsourcing
institutions.
 Supervisory authorities should take account of the risks associated with "chain"
outsourcing (whereby the outsourcing service provider sub-contracts elements of the
service to other providers).
(Comments on the consultation papers were invited to be received latest by July 31, 2004).
Review of capital requirements for trading book items
A review of the regulatory framework on trading book items before implementation of the new
capital accord is a must. To ensure this, the Basel Committee and IOSCO set up a joint working
group. The group met with industry representatives, including the FBE, for the first time in May.
The FBE recommended that the working group complete the review and publish the results by
March 2005 so that they can be taken into account in the new capital adequacy directive. The
working group did not commit to this deadline overall but accepted it for some of the topics. The
industry considers the appropriate management of counterparty credit risk and the credit risk
mitigation as the most important issues to be addressed. It was emphasised that the various topics
should be reviewed in correlation with each other. Each of the broad headings of “counterparty
risk” and “credit risk mitigation” included a number of sub-issues. The counterparty risk for
instance encompassed the counterparty risk treatment of OTC derivatives and repos, short term
credit risk and the suitability of applying a capital charge to unsettled transactions. Credit risk
mitigation included the treatment of double default risk, as well as the need for improved
recognition of commodity collateral in the trading book.
22
June paper of the Basel Committee and July paper of the European Commission
The final text of the new capital accord was published in June as planned, under the title
"International Convergence of Capital Measurement and Capital Standards: a Revised
Framework". The accord was revised compared to CP3 in accordance with the Committee's
announcements of October 2003 and January and May 2004.
The Committee expressed that additional work of a long-term nature will be needed in the
definition of eligible capital and this work will not be finished before the introduction of the new
capital accord. The Committee also made clear that it would continue to monitor the performance
of the credit risk models of banks and their comparability across banks. The advanced IRB
approach is regarded as a transition between a purely regulatory measurement of credit risk and
an approach that builds more fully on internal credit risk models.
With the new capital accord adopted, the European Commission also met its own schedule and
released the draft of the new Capital Adequacy Directive in July. The Directive will be enacted in
the form of amendments to the Banking Consolidation Directive (Directive 2000/12/EC) and the
Directive on the Capital Adequacy of Credit Institutions and Investment Firms (Directive
93/6/EC)
2. Accounts Committee
IAS 396- Interest rate hedging
Dissatisfied with the Exposure Draft titled "Fair Value Hedge Accounting for a Portfolio Hedge
of Interest Rate Risk", the FBE developed an alternative proposal to address the issue. The
Interest Rate Margin Hedge (IRMH) Proposal is a significant step forward in that it
 is in full conformity with banks' risk management practices,
 provides satisfactory solutions for the treatment of core deposits,
 would reduced capital volatility.
Although not rejecting it in principle, the IASB does not support the proposal and purely regards
it as a version of cash-flow hedging, rather than a third hedging model. The IASB would only be
prepared to consider the proposal if gains or losses entail capital adjustment. It is unclear whether
the IASB accepts the recognition of core deposits and there is concern that the efficiency criteria
would be set incorrectly, as was the case with macro hedging. In summary, the IASB's objections
could offset the advantages of IRMH.
At their June 8 meeting the FBE and the IASB expressed willingness to engage in a dialogue on
the IRMH proposal and decided to set up a working party to address the issue. The following
schedule was envisaged:
June - September
October
November/December
Mid-2005
6
Working party meetings
Board discussion
Exposure Draft
Revised standard
IAS 39 Financial Instruments: Recognition and Measurement
23
A comprehensive review of IAS 39 should be completed in the medium-term. Also, it should be
assessed whether the different approaches to hedging have become institutionalised and whether
rationalisation could be achieved. 7
IAS 39 - Fair value option
Under revisions to IAS 39 the IASB proposed the introduction of an option that permits any
financial instrument to be measuredat fair value (Fair Value Option - FVO). The majority of the
respondents who commented on the proposed fair value option agreed with it. However, some,
mainly authorities and supervisors expressed concerns that the fair value option might be used
inappropriately, arguing that entities might apply the fair value option to financial assets or
financial liabilities whose fair value is not verifiable, their valuation is subjective, and may
therefore inappropriately affect profit and loss. The option might increase, rather than decrease,
volatility in profit and loss. If an entity applied the fair value option to financial liabilities, it
might result in the entity recognising gains or losses in profit and loss for changes in its own
creditworthiness.
In light of the above, the IASB decided to propose that the fair value option be amended so as to
limit its use whilst preserving the key benefits of the option. This proposal is to be achieved by
requiring that the option may be applied only to financial assets and financial liabilities whose
fair value is verifiable.
The IASB issued a new Exposure Draft for the use of FVO under IAS 39 in April, with six
questions concerning the revised proposal. Comments had to be received until July 21.
In their comments to the Exposure Draft, FBE and EFRAG8 pointed out that contrary to
regulators' opinion, European banks have always supported the wide application of the Fair
Value Option, for both theoretical and practical reasons. The concerns raised by regulators can be
addressed in other ways rather than by restricting the option. The Exposure draft is not effective
in meeting the stated objectives. It does not address the legitimate requirement that the
devaluation of an institution's debt (deterioration of creditworthiness) should not lead to reporting
a profit. For instance, where a debt instrument contains an embedded derivative, it would still be
possible to apply the fair value option (and thus, report a profit). Restricting the fair value option
will in fact contribute to the volatility in profit and loss in certain cases and maintain the
asymmetry where some financial assets are measured at fair value and the related financial
liabilities at amortised cost. The introduction of "verifiability" as a condition for the FVO is
difficult to interpret and is not consistent with other IAS standards. It is unclear how it would
result in a stricter test than "reliability" notion. The introduction of the "verifiability" requirement
will substantially reduce the scope of those instruments eligible for the fair value option. The
basic principle should be that the fair value option can be applied to those components of a
financial instrument that result in inconsistency within the profit and loss account or equity due
to the mixed accounting model approach of IAS 39 or to those that, according to the risk
management policies of the entity, are managed on a fair value basis.
The current option to use fair value accounting for all financial instruments that meet the
conditions is useful for banks, as it helps measure hedging transactions according to their
economic contents. Therefore, contrary to the IASB's revision proposal the FBE supports
7
Early June the IASB announced three minor modifications to IAS 39 that will not affect the debated issues and will
contribute to the easier application of the standards. Comments are invited by October 8 at the latest.
8
European Financial Reporting Advisory Group
24
retaining the current regulation and is opposed to any further restricting of the FVO compared to
the current proposal.
Application of IAS 39 in Europe
Despite serious reservations about IAS 39, in its initial comments EFRAG recommended the
adoption by the European Commission of both IAS 329 and IAS 39. In case of IAS 39, six out of
eleven members of the Technical Experts Committee voted against adopting the standard, a ratio
less than a two-thirds majority that would have been required for rejecting the proposal. Thus,
EFRAG finally did not make a recommendation for the adoption of IAS 39. Those rejecting the
proposal agreed with the urgent need to adopt a European standard for the reporting and
valuation of financial instruments. However, they think the current IAS 39 is not satisfactory, as
it would lead to a significant deterioration of the financial statements of those banks with major
hedging volumes. The standard fails to meet the criteria of understandability, relevance and
comparability, and doesn’t satisfy the “true and fair view principle”.
The FBE's position is that IAS 39 should be revised before it is adopted in Europe. In its letter to
EU Commissioner Frits Bolkenstein the FBE stressed its commitment to the application of IAS
to listed companies in Europe. However, it should be ensured that the standards developed by the
IASB are suited to European market conditions. The hedging rules in IAS 39 are unnecessarily
complex and fail to provide a model that is consistent with the underlying objectives of risk
management (constituting the basis for hedging transactions). The revising of hedging rules is a
prerequisite for the endorsement of IAS 39, the model proposed by FBE could serve as a basis in
this regard. Improvements to the hedging rules would also ease the concerns about the limitations
of the Fair Value Option. Other issues identified by banks should also be considered during the
review of the standard. A last concerted effort on IAS 39 is needed to improve the standard and
the understanding of its consequences. This implies the redefinition of the relationship between
the IASB and the European banking industry.
A letter with similar contents was sent by the FBE to the Chairmen of IASB, the Basel
Committee, the European Central Bank, EFRAG and CESR-Fin. The FBE made its position on
the need for revising IAS 39 public under its press release of June 11.
Based on the comments received, the European Commission is inclined to making a proposal for
the partial endorsement of IAS 39 in Europe. Accordingly, the hedge accounting rules and the
Fair Value Option (both expected to be revised) has been carved out from the standard. The
Commission expects that agreement will be reached on the revised rules and the new standards
can be adopted during 2005.
The FBE does not support the application of the standard in its present form. The lack of
resolution to the hedge accounting rules and the limitation of the use of the FVO is not
acceptable for the industry. Member states are divided on the risks and benefits of a
postponement and partial endorsement; however, there is consensus that both solutions can
contribute to achieving that the concerns raised are properly addressed by the IASB.
9
IAS 32 Financial Instruments: Disclosure and Presentation
25
The Basel Committee on the relationship of the IFRS10 and regulatory capital
In its June and July press releases the Basel Committee called upon national supervisors not to
allow certain changes, ensuing from the application of the IFRS, to be recognised in regulatory
capital. Accordingly, the cumulative fair value gains and losses on cash flow hedges of financial
instruments and gains and losses arising from changes in an institution’s own credit risk should
not be recognised in regulatory capital. The Committee for the time being does not encourage
supervisors to make adjustments to the current capital adequacy framework due to the IFRS
treatment of trading book items, equity/liability classification, intangible assets, including
goodwill, deferred tax assets, pension costs, stock option costs and leasing.
IASC Foundation11 Constitution Review
In the context of the IASC Foundation Constitution Review Process, the FBE wrote a criticising
letter to the Foundation's Chairman on the ineffective consultation process of IAS 39. The
following are seen by the FBE as the most critical issues:
 The definition of a shared vision and agreed objectives is missing before the drafting of
IASB technical proposals. Other than compatibility with the IAS framework, the
economic and business implications of the proposed standards are not assessed and
efforts are missing to ensure consistency between accounting and regulatory aspects.
Coherence between accounting and regulatory aspects is of fundamental importance
and ideally, their information needs should be satisfied from a single database and a
single integrated information system. The FBE would like projects to start with a broad
open discussion, where business impacts and comprehension of the standards are given
more attention.
 The consultative process of IASB proposals is not satisfactory. There should be more
room for public consultations that would help IASB to better understand the aspects of
the respondents. It would be important to ensure that legitimate and well-founded
arguments are duly taken into account in the revised proposals.
 The IASB places convergence to the US GAAP before the quality of standards. Starting
out from US conditions it assumes deep and liquid markets, where financial assets can
be easily sold or securitised, whereas this is not the case.
Responding to the specific questions related to the IASC Constitution12 the FBE emphasised
that the current geographical composition of the IASB is not satisfactory: those supporting the
application of IFRS are under-represented, the U.K. and U.S. are over-represented. The IASB
should be more balanced in terms of its auditor, standard-setter and user background. It would
be important for the IASB to have some members who return to the business and apply their
own standards in practice. The consultation principles laid down in the Constitution are
satisfactory but it should be achieved that they are actually applied in practice. The IASB
should not ignore the critical comments of those opposed to its proposal and compromises
acceptable for the majority of the respondents should be found. The FBE proposes that the use
of advisory bodies become a general practice and initiates the setting up of a bank accounting
standing advisory body. It also proposes that all draft standards have to be subject to a field test
and results of the test be published together with the draft standard.
10
International Financial Reporting Standards
International Accounting Standards Committee Foundation
12
See our 3rd Quarter 2003 Report
11
26
Revision to IAS 3013
The Exposure Draft on a revision to IAS 30 is expected to be completed soon. The revised
standard will only be applied to the disclosure of financial risks, other disclosure criteria will be
transferred to IAS 32. IAS 30 allows institutions to explain what items they treat as capital.
3. European Payment Council
The largest pan-European banking organisation, the European Payment Council (EPC), held its
general meeting in June. The event included a series of formal acts (finalisation of the
Constitution, elections, organisational changes) that will basically affect the pan-European
payment system. In this context, the adoption of the new working group structure and the
definition of their tasks and the EPC's annual work plan were of particular importance from the
point of view of setting priorities.
In the future, activities will resume in six working groups:




A main task for the Electronic Payments Working Group is to maintain and enhance
CREDEURO and ICP (EPC's two main standards, ensuring fast and automated crossborder payments). Enhancing mobile payments is a new task for the group.
A separate working group has been set up to implement a pan-European direct debit
system. The most important decisions required have been adopted; accordingly, the
system, called the Pan-European Direct Debit scheme (PEDD), should be operable within
two years. Initially, PEDD would run parallel with the domestic systems. Then, it would
gradually take over their functions, according to the decisions of the national banking
communities.
The Cards Working Group has the task to gradually phase out domestic card system and
to represent European aspects vis-á-vis Europay and VISA.
The Cash Working Group has the task to oversee and coordinate the developing of
national cash management strategies, including the reduction of cash payments.
The above four main groups will be assisted by two support groups:
 The Infrastructure Working Group, tasked to develop pan-European standards for the
main groups (here, important contribution will be provided by the ECBS, which will be
integrated into the EPC).
 The Legal Working Group, to address legal issues raised in the other working groups.
With the exceptional importance of the EPC and in view of Hungary's EU membership, the
Association sought to use its right to represented itself through a delegate in the EPC.
The Hungarian representative was duly elected by the EPC's Hungarian "mirror organisation",
the Payment System Forum. The nomination was sent by the Association to the competent unit
of the EPC with a request for the Hungarian delegate to be allowed to attend the EPC's general
meeting as a full-fledged member. Probably due to an administrative error, the admission
process did not take place. Our president protested to this fact in a letter to the EPC's President.
In his prompt response the EPC's President offered apologies and promised to rectify the
situation during the EPC's next general meeting in the autumn.
13
IAS 30 Disclosures in the Financial Statements of Banks and Similar Financial Institutions
27
Our Austrian colleagues also took keen interest in membership in the EPC. Under the ECP's
Constitution, every four members may nominate one representative to the EPC's second most
important body, the Coordination Committee. Our Austrian colleagues invited the Hungarian
representative to a meeting in Vienna to agree on a cooperation framework and to nominate
Austria to represent Hungary, the Czech Republic, Slovakia and of course, itself, in the EPC's
Coordination Committee.
The meeting took place before the June general meeting of the EPC, that is, before our failed
admission. The participants approved that Austria represent the four countries during the next 2year election cycle and agreed on the cooperation and information procedures.
The Austrian party (otherwise a founding member of the EPC and chairing one of the working
groups) provided an extensive briefing on the internal mechanisms of the EPC and roles of the
various stakeholders. He pointed out that the EPC is working closely with the European Central
Bank and the ECB's experts may attend all professional forums of the EPC as observers.;
notwithstanding, the Coordination Committee is the one forum where commercial banks can
decide on key issues by themselves. The Austrian colleague promised to duly inform us and
solicit our opinions before taking decisions.
The Austrian colleague drew attention to the fact that although we are not yet members of the the
Euro-Zone, all important projects of the ECP (Pan-European Automated Clearing House, PanEuropean Direct Debit Scheme) will materially affect us: although these systems are about Euro
payments, every country will have to develop at least one entry point to receive and forward
these payments to the designated account. Also, it would not be wise for an EU member state to
opt out of the review process of the new legal framework for European payments. He
emphasised the importance of preparations for handling euro money on account and euro cash, a
major planning, development, IT and logistics effort that, in his opinion, will require at least four
years of preparations.
Although nominated by member states, working group members are not country-representatives;
they are highly qualified, hard-working professionals, who often spend thirty to forty per cent of
their working time on these areas. There is no observer status in the working groups. Countries
not represented in the working groups may obtain information through their banking association.
With the high importance of the work, members of the working group are selected by the
chairman of the working group based on strict professional requirements. The chairman may also
reject nominations on professional grounds.
Although at present we are not members of the EPC, the FBE, as our interest representation
organisation provides us with regular information on work performed in the EPC. What is new
for us here is that the EPC encourages national banking communities to try to represent the
industry's positions (sought to be enforced on EU level) on the national level by convincing their
national authorities (in our case the National Bank of Hungary, the Ministry of Finance and the
Hungarian Financial Supervisory Authority) to take similar positions in the various EU
Committees where the relevant proposals are reviewed.
This approach was tested at the meeting invited by the Ministry of Finance to review the
proposed EU payments directive, where the Association, after consultations with banking
experts, sought to convince the participants on the standpoint of the pan-European banking
industry. The current Hungarian payment regulations are basically in conformance with the
relevant EU legislation, and the problems raised by the European banking community are shared
28
by the Hungarian banking community (e.g., banks' excessive liability in electronic payments,
and particularly, in card payments; lack of clarity on definitions and therefore on the rules for
certain payments).
Participants in the meeting found the consultation useful and promised to consider the proposal
that in the future the EU draft regulations are reviewed by the parties review jointly, possibly
within the framework of the Payment System Forum.
4. ECBS (European Committee for Banking Standards)
In light of the close cooperation between the EPC (European Payment Council) the ECBS it
became necessary to adjust the ECBS's organisation to the organisation of the EPC. The planned
restructuring will result in significant changes in the ECBS's mechanisms. The ECBS Technical
Steering Committee (TSC) would be replaced by the Operation Infrastructure & Technology
Standards Support Group (OITS), this plan is still to be elaborated. This change will require the
definition of the relationship between the OITS and ECBS. The working relationship between the
EPC's working committees and the ECBS's technical committees will also have to be defined.
The ECBS will resume its work under the current rules until year-end. The Secretaries General of
the EPC and the ECBS shall submit proposals for their respective organisational structures and
operations. The proposals will be discussed by the TSC meeting of September 16. The Secretary
General of the ECBS sent his proposal for the organisational structure and operation of the ECBS
to all TSC member on July 15. The proposal will be reviewed at the TSC's September meeting.
5. FBE Financial Markets Committee
The FBE Financial Markets Committee (FMC) held its plenary meeting on April 23 in Brussels,
with the following agenda:


The FMC addressed the European Commission's work plan for the review of the
Financial Services Action Plan (FSAP).
The FBE's opinion concerning the review of FSAP was published in March 2004. An
important organisational change will be that in preparing its relevant proposals the
Commission will consult with and rely on the support of specialist groups in four areas:
banking, insurance, securities and asset management.
In connection with the FSAP review and an assessment of experiences of the Lámfalussy
process, at the request of the FBE the Dutch-based Rabobank compiled a report outlining still
existing legal obstacles and constraints to cross-border and direct banking services. The report
was shared with the FMC.
The FMC reviewed the status of proposed regulations: the Prospectus Directive, the
Transparency Directive, the regulation on accounting for securities transactions, the new
regulations on market abuse, implementation rules for the Investment Services Directive, the
standardisation of investment and pension fund regulations, and a standard corporate governance
legislation.
The next plenary meeting, where the new member states will also be introduced, is scheduled for
October.
29
6. ISO TC68 plenary meeting
The ISO Financial Services Technical Committee 68 (ISO TC68) held its two-day plenary
meeting on July 15, 2004 at the SWIFT Headquarters in La Hulpe.
The meeting was attended by delegates of the standardisation organisation of countries with full
voting rights (P members) and representatives of observer organisations (O members).
The Hungarian Standardisation Board requested the Association to delegate a representative to
this important event, given that the ECBS invited a meeting for July 14 (a day before the plenary)
for European ISO members with a full voting right to obtain support for its proposal for the
restructuring of ISO TC68.
The plenary meeting took place duly according to the agenda planned, 17 unanimous resolutions
were adopted. One of the most important of these was the decision (endorsed with the vote of
five P members) on the restructuring of TC 68. Accordingly, in addition to the current
SC2 - Financial Services - Security and Operations,
SC4 - Securities and Related Finantial Instruments and
SC6 - Financial Services - Retail sub-committees,
a new sub-committee, the SC7 - Financial Services - Core Banking Sub-Committee will be set
up.
The new sub-committee will address standardisation issues related to the management of core
banking functions: deposit taking, lending, account keeping and payment transactions. Lending
functions related to credit cards and securities lending will continue to be addressed subcommittees SC4 and SC6.
SC6 will also address standardisation issues related to cards and new payment techniques.
Hungary is currently not involved in the work of SC6. However, both areas, cards and smallvalue payments, are growth areas and valuable information could be obtained through
participation in the standardisation work in these areas.
Certain new standardisation works will be transferred to the newly set up SC7 sub-committee.
Participants adopted the proposal for the TC68 Secretariat to take action to revoke the following
standards, if no indication is received during the next five years on any problem envisaged upon
such revocation:
1) ISO 10043, Banking and related financial services – information interchange – collection
form
2) ISO 10044, Documentary credit form
3) ISO 6234, Authorized Signature Lists and their representation on Microfiche
4) ISO 6260, Mail payment orders
5) ISO 7746, Banking – Telex formats for inter-bank messages
6) ISO 7982, Bank telecommunication – Funds Transfer Messages Part 1- Vocabulary and
universal set of data elements for electronic funds transfer messages
7) ISO 9778, Banking – Forms for confirming loan contracts
30
In its contribution, the Belgian delegate indicated that IBAN and BIC are now generally used in
customer orders. Customer orders are received centrally: customers send their orders to a central
location (not to their principal bank), from where the orders are directly forwarded to the
beneficiary's bank. This is a customer-friendly solution (account holders only need to remember
one address to send the order), and a cost-saving solution for banks. All system enhancements
are carried out centrally, sparing banks any development procedures.
Among the reports of committee heads, Mr. Michael Versace gave a presentation on a new and
spreading type of fraud: getting hold of the account holder's details from different sources
(Phishing), the fraudster starts acting on behalf of the account holder: opens accounts, borrows,
concludes deals, etc. Mr Versace pointed out the need for joining forces in combating this type of
fraud internationally.
IV. ASSOCIATION EVENTS
1. Payment System Forum
The supreme body of Payment System Forum, the Payment System Council held its first
ordinary meeting on May 5, 2004.
Following the opening addresses by the Co-Chairs Henrik Auth and Tamás Erdei, István Prágay
gave a presentation on the European Payment Council (EPC), followed by the election of a
delegate to the EPC. The Council discussed the proposal for a revision to the Forum's
Organisational and Operational Rules and voted on the representation of small banks and on the
launching of projects through remote voting. Finally, "Recommendations" prepared by the
working groups were presented by heads of groups, followed by respective decisions.
In accordance with the resolutions adopted by the Payment System Council, the following issues
wee addressed by Payment System Forum's technical committees and working groups in the
recent period:
At the RTGS/VIBER and KELER Technical Committee's first meeting, held on July 9, 2004,
participants received an update on the following issues:
- The EU Commission's Communication on the Commission’s Strategy and Priorities for
Clearing and Settlement, adopted on April 28, with comments expected by July 30, 2004,
- Announcement of Second Hearing ESCB-CESR standards for Securities Clearing and
Settlement Systems in the European Union,
- TARGET2 progress.
Representatives from the Ministry of Finance, the Hungarian Financial Supervisory Authority,
and the Budapest Stock and Commodity Exchanges are to be involved in the working groups to
be formed within the framework of the RTGS/VIBER and KELER Technical Committee.
The Council unanimously adopted the Guide for the migration of chip cards, prepared by the
Cards Technical Committee's Chip Cards Working Group. With this, accomplishing its
objective, the Chip Cards working group concluded its work and dissolved. The Council
approved the setting up of two new working groups under the Cards Technical Committee: the
Statistics Working Group and the Card Holders Working Groups. The Statistics Working
Group will address modifications to statistical reports requested by the National Bank of
31
Hungary. The Card Holders Working Group will draft recommendations for the safe use of bank
cards and make proposals for the financing and dissemination of the relevant information
documents.
A Mobile Payments Working Group was set up, as the third active group of the Cashless
Payment Methods Development Technical Committee. (Active groups are: the OCR, Direct
Debit and Mobile Working Groups). The work of the fourth group, the Report Payments
Working Group, has been suspended until enactment of the relevant regulations.
The Payment System Council, at the Association's initiative, endorsed the setting up of a Legal
Working Group to analyse current liability and remedy obligations and to compile a report on its
findings. The Association undertook the task of organising the group. The Legal Working Group
held its first meeting on June 25, 2004. A short-term objective of the group is to adjust the
definitions in current payment regulations and in their proposed amendments so that the
definitions provided in Hungarian legislation are in conformance with the definitions provided in
EU legislation and international standards. As a long-term objective, the group shall study the
New Legal Framework (NLF) and Pan-European Automated Clearing House (PE-ACH)
documents and, in the knowledge of the definitions provided in these documents, provide
assistance in the drafting of legislation on payments. Members of the Working Group supported
the proposal to involve in the work a representative from the Ministry of Finance.
The Standardisation Technical Committee of the Payment System Forum has still not been
set up, while documents continue to arrive from the ECBS for review. On May 28 the
Association held a meeting with those banks who have indicated their intention to participate in
the working group and requested their assistance in developing an opinion on the proposal for
setting up a working group to develop a standard for devices ensuring the secure issue of PIN
codes and the „DEBS 100: Keyboard Layout for ATM and POS PIN Entry Services” standard.
Issues related to standardisation work were also addressed at this meeting.
The Association became a member of the Hungarian Standardisation Board in 2004. It is our
objective to familiarise banks with the financial standards developed by the ECBS and European
and international organisations (CEN, CENELEC, ISO, IEC). The Association is going to take
up contact with bank specialists seeking to participate in the work of the four technical
committees of the ECBS (TC1-Plastic Cards & Related Devices, TC2-automated Cross Border
Payments, TC4-Security, TC6-Electronic Services).
2. Information Society Inter-Ministerial Coordination Committee
The Electronic Administration Sub-Committee of the Information Society Inter-Ministerial
Coordination Committee (ITKTB) held a meeting on June 14, with the participation of members
of the IT Security Committee, including the Association. The opening presentation was offered
by István Piróth on eMunicipality. In the contributions following the presentation it was
proposed that a centralised solution should be developed for the payment of eAdministration
service charges. In connection with the working document on the Hungarian eAdministration
Interoperability Framework, Zsolt Sikolya offered a presentation about a project set up to
identify interoperability requirements. Dr Márton Csapody presented a project for developing
the requirements for the use of electronic identification, electronic signatures and smart cards in
public administrations. The document summarising achievements was sharply criticised by
participants contributing to the topic, including representatives from the Smart Card Forum, who
32
said the document was a good summary of the tasks but did not answer the questions concerning
the feasibility of the objectives set in the tender.
At the IT Security Sub-Committee's meeting of July 6, Lajos Muha presented the ITKTB draft
recommendation for the Hungarian IT Security and Evaluation Scheme prepared based on ISO
17799/BS and 7799. This was followed by presentations by István Szabó and Imre Szeberényi
on the MIBÉTS training system and on information and IT security education within the
Ministry of Defence and the Budapest University of Technology.
3. Smart Card Forum Open Day
A presentations day, organised under a cooperation between the Association and the John von
Neumann Computer Sciences Society Smart Card Forum was held for commercial banks in the
Farkas Kempelen Student Information Center on July 24. During the open day Oberthur Card
Systems presented Omex, a smart card and biometry-based security solution developed for the
Swedish Ministry of Defence. László Ágos and András Vilmos of Bull Hungary presented
SEMOPS (Secure Mobile Payment Service), a system model developed within the framework of
a European project.
ST Microelectronics SA provided a presentation on electronic identification solutions used in
Italy. Márton Hegyi and Péter Szőke of Diákbónusz Kht, Compuworx Rt. gave account of
integrated applications and results of the student certificate system implemented at the Student
Information Center and results of the higher education program. Jan Mooijweer (Business
Manager, EMEA) of ACI Worldwide spoke about the main features and operation of the
government electronic ID card system implemented in Hong Kong.
4. Information Security Working Group
The Information Security Working group, set up on March 26, held its second meeting on June 2.
The meeting addressed the Integrated Hungarian Labour Data Base (EMMA), set up by HP
Hungary, as a main contractor at the Employment Office. The organisational setup and plans of
the Smart Card Forum and potential areas of cooperation were presented by Gabriella Beliszky.
Zoltán Lengyel of MKB reviewed the obligations imposed by information security regulations.
Participants agreed that solutions and alternatives meeting the requirements and should be
identified and developed jointly.
5. Conference at the Budapest Municipal Court
At the initiative of the Chairman of the Budapest Municipal Court, a conference programme was
launched in cooperation with the Hungarian Banking Association. The first event under this
program was on May 3 and 4 in the Jury Hall of the Budapest Municipality Court. The objective
of the conference is for judges to know more about certain money and capital market transactions
through acquiring first-hand information from financial specialists. Capital market institutions
and transactions we the main topics of the two-day conference, with presentations offered by
prominent banking and stock exchange specialists. The objectives and contents of the initiative
were presented at a news conference held for business journalists after the event.
The following presentations were provided at the event: following the opening address offered
by Dr László Gatter, Chairman of the Budapest Municipal Court, Tamás Erdei, President of the
Hungarian Banking Association and President and CEO of the Hungarian Foreign Trade Bank
33
(MKB) spoke gave an overview of economic outlooks, interest rates, and the economic
environment affecting banks. Gábor Bataki, Director of MKB and Dr Attila Tajthy, Chief Legal
Counsel of Raiffeisen Bank gave a joint presentation on portfolio management, investment fund
management and pension fund asset management. Investment fund operations were presented by
Sándor Vízkeleti, CEO of a CA IB Securities Investment Fund Management Ltd. and Dr János
Krizsai, Legal Director of K&H Securities Investment Ltd.
On the second day, a presentation on the stock exchange and its future was offered by György
Jaksity, President of the Budapest Stock Exchange (BSE), followed by a presentation by Zolt
Horváth, CEO of the BSE, on stock exchange transactions and settlement processes.
Concluding the program, dr. Adrienne Kraudi, Chief Legal Counsel and Managing Director of
MKB, gave a summary of the regulatory framework on insider trade and the unfair manipulation
of prices. Here, four criminal cases were presented by Dr Erzsébet Diósi, Judge of the Budapest
Municipal Court.
6. Presentation on EU capital market legislation
Within the framework of a technical consultation held at the Association, competent senior
associates from the Ministry of Finance and the Hungarian Financial Supervisory Authority gave
an overview of those European Institutions and legislative processes where Hungarian authorities
are represented. In turn, the Association presented the role of the European Banking Federation
in the European lawmaking process, its review role and interest enforcing ability. (The
Association has been a full-fledged member of the FBE since January 2004).
The creation of a single European financial market and the criteria of effective movement of
capital prompted European lawmakers to review the EU's slow, inefficient and untransparent
decision-making mechanisms.
The Lámfalussy Process, currently applied to capital market legislation and planned to be
extended to banking, insurance and investment funds, is aimed at speeding up the legislative
process, allowing the drafting of efficient and practicable legislation that can keep pace with
market developments.
The Lámfalussy process is a four level legislative process. A key principle is that market
players should be consulted with right at the start of the legislative process. This should take
place on two scenes: one, when Hungarian regulatory authorities present their views in the
various institutions based consultations with players in the Hungarian market and, second, when
the position of the Hungarian banking industry (not necessarily the same as that of the
authorities) is represented on the FBE's committees and working groups.
The Lámfalussy process is a four-level legislative and control process:
Level 1: Framework principles: setting the basic principles and framework

The European Commission (the Commission) presents the regulation or directive to the
Council and Parliament after broad consultation with market players.
Level 2: Implementation measures:
34





The Commission consults with the European Securities Committee (ESC) and
orders CESR (Committee of European Securities Regulators) to draft the technical
implementation measures.
CESR consults with market players and submits its legislative proposals to the
Commission.
the Commission drafts the legislation and sends it to ESC. ESC has three months
to endorse or reject the proposal.
In function of ESC's decision, the Commission adopts the implementation
measures.
Parliament is kept informed; there are two formal opportunities to adopt
resolutions.
Level 3


CESR recommendations, guides and standards,
Assessing national supervisory practices
Level 4
 Commission checks on conformance of national legislation with EU legislation; as an
ultimate resort may turn to the Court of Justice.
The FBE's legislative work is adjusted to this process, the consultative committee for capital
market issues is the Financial Markets Committee /FMC/, which has various sub-committees and
working groups. The FMC's position is solicited on all subsequent issues belonging to other
consultative committees (for example, payments and securities settlements).
Currently, the following legislative work is in process (all forums open are for the Association to
join and participate):
National Implementation
The Directive on Market Abuse was adopted in December 2002. Its two implementation
directives were adopted by the Commission on April 30, 2004 and should be transposed into
national legislation by October 2004. (Directive 2003/6/EC; Implementation Directive:
2004/72/EC)
Subject of the Directive: the Directive updates the regulations on insider trade and market
manipulation (together: market abuse).
The Prospectus Directive
Subject of the Directive: issuers to have a Single European Passport ensuring that if the issue
has been authorised in one member state, the issuer does not need to apply for authorisation in
another member state once certain conditions are met.
Directive 2003/71/EC, promulgated in the OJ on December 31, 2003.
Secondary legislation adopted by the Commission on April 30, 2004. (Commission Regulation
809/2004).
The deadline for transposition of the Directive into Hungarian legislation is July 1, 2005 (being
also the effective date for the direct application of the Regulation).
35
Regular reporting obligation of companies listed in regulated markets
The proposed Directive is aimed to ensure that investors have access to detailed information and
the information asymmetry between member states is eliminated. The Directive provides for
quarterly reporting obligations for issuers (to a limited scope relative to the original version).
The drafting of the relevant implementation decrees is underway.
Directive on Financial Instruments (ISD2)
The directive is aimed at removing the remaining barriers to a single investment services market
in order to ensure efficient capital markets and increased investor protection. (This Directive
annuls Directive 93/22 EC)
The Directive was adopted under No. 2004/39/EC on April 27, 20004. Implementation deadline:
April 30, 2006.
Drafting of implementation measures: the Commission would like to either reduce the
preparatory period or to issue the implementation measures under a Regulation, contrary to
CESR, who envisages a preparatory period of at least one year. The FBE is expected to be
actively involved in the drafting process, working groups commence work in July.
Pension and investment funds
Tasks provided by the FSAP for the next two years include the creation of consistency between
operations and capital, the implementation of transparency requirements for better investor
information, preserving the value of concentrated assets, determining custodian liabilities, etc.
The Companies Act and regulations on acquisitions
Economic concentration, mergers, acquisitions, holding companies. Promoting shareholder
interests, limiting the right of target company managements to take protective measures,
employee protection.
Clearing and settlements
The Commission's communication on clearing and settlement was published on April 28. This
may serve as a basis for a legislative proposal.
Objective: to remove the remaining barriers to cross-border individual payments and settlements.
In consultation with banks, the European Banking Federation challenged the proposal developed
by a joint ESCB/CESR working group. The relevant position paper is available on the FBE's
website.
Financial analysts
Developing recommendations aimed to set out the best regulatory and market practice
framework for financial analysts. The Commission set up a working group of financial analysts
to develop a preferred code of conduct. An FBE specialist is a member of this group. The group
is charged with analysing and evaluating business activities, behaviours and the current
36
regulatory framework. The recommendations put forward by the group were well-received by the
financial industry. CESR is to draft a regulatory proposal within the ISD implementation
measures.
Monitoring the legislative process and its implementation (Inter-Institutional Monitoring
Group). The European Commission, Council and Parliament set up an independent expert group
to monitor, analyse and identify potential weaknesses of the Lámfalussy process. Results are
published semi-annually. The report on processes closing the final phase will be concluded at the
end of 2004.