Commission Decision of 25 March 2020 on the asset management guidelines of the common provisioning fund 2020/C 131/03

1 Having regard to Article 211(4) and 212(1) of the Financial Regulation, the common provisioning fund shall hold in particular the provisions of the following contributing instruments provided for in the legislative acts establishing the following budgetary guarantees and financial assistance: (a) European Fund for Strategic Investment Guarantee; (b) European Fund for Sustainable Development Guarantee and the Guarantee Fund for external actions.

2 The common provisioning fund shall also hold the provisions of further contributing instruments, subject to entry into force of the relevant provisions of proposed legal acts establishing the related budgetary guarantees, financial instruments and financial assistance.

3 In addition and having regard to Article 279(3) of the Financial Regulation, provisions of additional contributing instruments may be transferred, in cash or as title to eligible financial assets, to the common provisioning fund, in particular: (a) existing financial instruments with large outstanding portfolio of assets having the same investment universe as the common provisioning fund, as provided for in Article 8 of this Regulation, where this is consistent with Article 279(3) of the Financial Regulation; (b) other Commission policy instruments which have acquired large outstanding portfolios of assets having the same investment universe as the common provisioning fund, as defined in Article 8; (c) Member States requesting the management of a possible contribution from Funds under shared management resources as provided for the purposes of the Member State compartment under the InvestEU Programme.

4 The transfer of additional provisions to the common provisioning fund referred to in paragraph 3 shall be notified to and agreed with the financial manager, in advance, by an authorising service.

5 For any existing commitments maintained outside of the common provisioning fund, by virtue of Article 279(3) of the Financial Regulation, the asset management guidelines and instructions already agreed stay in force.

1 The Common Provisioning Fund shall be managed so as to ensure the necessary liquidity to meet fully and promptly all required outflows and guarantee calls, and to deliver capital preservation over the investment horizon of the fund, with a high confidence level.

2 To attain the general objective laid down in paragraph 1, the financial manager of the common provisioning fund shall manage the assets in accordance with prudential rules and the principles of sound financial management and in accordance with the rules and procedures set out by the accounting officer of the Commission.

3 The common provisioning fund portfolio shall be constituted so as to ensure a high degree of diversification across eligible asset classes, geographical areas, issuers and maturities in order to manage fluctuations in portfolio value.

1 The resources of the common provisioning fund shall be allocated into compartments corresponding to each of the contributing instruments as outlined in Article 1.

2 The share of compartments shall be determined on a pro rata basis, reflecting the contributions to and withdrawals from the assets of the common provisioning fund by each contributing instrument.

3 Any liabilities incurred by the underlying contributing instruments shall be met by drawing on the assets of the common provisioning fund, up to the share corresponding to the relevant compartment. Any excess drawdown shall be exceptional, temporary, and re-paid by the contributing instrument at the nominal amount.

4 If the assets in the common provisioning fund corresponding to the share of the relevant compartment are exhausted, the Commission shall request to the budgetary authority the necessary appropriations to meet the commitments entered into.

5 The Commission may in exceptional cases, according to Article 30(1)(g) of the Financial Regulation, within its own section of the budget, transfer appropriations from the budgetary item of a budgetary guarantee to the budgetary item of another budgetary guarantee, in exceptional cases when the provisioned resources in the common provisioning fund of the latter are insufficient to pay a guarantee call and subject to the subsequent restoring of the amount transferred in accordance with the procedure set out in accordance to Article 30(1)(g) of the Financial Regulation and Article 212(4) of the Financial Regulation.

6 In accordance with Article 211(7) of the Financial Regulation the Commission shall, as expeditiously as possible, report to the Budgetary Authority when the value of the shares of any compartment falls below 50% of the amounts foreseen after application of the effective provisioning rate, and again if this value falls below 30% of that foreseen amounts.

1 The settlement of guarantee calls corresponding to the financial instruments, budgetary guarantees and financial assistance covered by the common provisioning fund (‘guarantee calls’) shall ensure the traceability and recording of those transfers within the accounting system of the Commission.

2 Guarantee calls and other relevant payment claims may be met by cash and/or by selling assets from the Common Provisioning Fund and/or by repurchase agreements, within the applicable risk limitations.

3 On receipt of a guarantee call or relevant payment claim from an implementing partner or in order to keep a minimum amount of resources in cash or cash equivalents within the liquidity buffer, according to Article 212 and the second subparagraph of Article 213(2) of the Financial Regulation, at the central treasury of the Commission, the authorising service responsible for the contributing instrument shall issue a replenishment order to restore the value of the corresponding line of the liquidity buffer. Based on those replenishment orders, the Commission Treasury shall request the transfer of amounts to a specially created account for handling these guarantee calls or payment claims, from where they shall be made available to the authorising services, which may use them to make payments to the Implementing Partners.

4 Authorising services shall communicate advance information about all guarantee calls or relevant payment claims as soon as it becomes available in order to allow the financial manager to prepare adequately to respond to these guarantee calls and payment claims. Authorising services for the contributing instruments shall actively monitor the financial liabilities under their responsibility to provide forecasts on revenues and early information to the extent available on expected guarantee calls.

5 The annual report on the functioning of common provisioning fund shall include information on the guarantee calls and relevant payment claims met by the common provisioning fund.

1 The financial manager shall prepare an investment strategy to guide the management of the assets of the common provisioning fund in order to achieve the investment objectives laid down in Article 2. This investment strategy shall be expressed in the form of a Strategic Asset Allocation, which sets the indicative target allocations to different categories of eligible financial assets in the portfolio.

2 The financial manager shall reflect the Strategic Asset Allocation in a strategic benchmark (‘benchmark’) against which the performance of the common provisioning fund shall be compared.

3 The investment strategy and the benchmark shall be proposed by the financial manager and agreed by the accounting officer, following consultation, and in liaison, with the authorising services.

4 The investment strategy and the benchmark may be modified in the event of a duly documented and motivated change in economic conditions, substantial change in the needs and situation of the contributing instruments or of a significant change in inflow and outflow estimates. The procedure for modification of the investment strategy shall be the same as for its initial adoption. The investment strategy shall be established taking into account the investment horizon and risk tolerance of the common provisioning fund.

5 The investment horizon of the common provisioning fund shall reflect the combined investment horizons of the different contributing instruments, taking into account time-profile of budget contributions and estimates of inflows and outflows provided by authorising services responsible for the contributing instruments prior to the establishment of the initial investment strategy and on an annual basis for the life of the contributing instrument or in case significant changes are expected.

6 The financial manager shall define risk tolerance of the common provisioning fund as the maximum amount of losses from its asset management activities that the common provisioning fund can accept. The risk tolerance shall be expressed through risk parameters such as the Value-at-Risk, established with a very high degree of confidence so that the probability actual losses exceed maximum expected losses is very low.

1 The financial manager shall implement the investment strategy taking into account the asset management guidelines and relevant regulations and procedures.

2 The financial manager shall oversee the functioning of the processes set out under this Decision.

3 The financial manager shall report in accordance with Article 11.

4 The risk management service of the financial manager shall report any significant concerns relating to the sound and prudent financial management of the assets to the accounting officer.

5 The financial manager shall oversee procurement of all relevant support services (accounting, analytics, trading solutions) needed to ensure efficient implementation of the investment strategy.

6 To ensure the effective and efficient implementation of the investment strategy the financial manager is empowered to delegate specific functions or processes to accredited service providers, which hold all required authorizations to perform the assigned services. The activities which may be delegated are: (a) valuation and accounting for the assets and shares of the compartments of the common provisioning fund; (b) safekeeping, custody and administration of the assets of the common provisioning fund; (c) construction, valuation and maintenance of benchmark indices, market data.

1 The financial manager shall produce at least a monthly Net Asset Value (NAV) for the common provisioning fund. Any transactions (in/out flows) shall be valued at the NAV at month-end.

2 Global profits or losses from the investment of the assets, as reflected by the NAV of the common provisioning fund shall be allocated proportionately to the share of the compartments of the respective financial instruments, budgetary guarantees and financial assistance.

3 The valuation of the portfolio shall be determined using the valuation methods and procedures proposed by the financial manager and approved by the accounting officer. Those methods and procedures may include market closing prices, externally evaluated prices, active market quoted prices and, where these are not available, internal or external valuation models. If assets have been purchased or sold, the transaction prices shall be used.

4 The performance of the portfolio shall be evaluated on fair value basis, taking into account the market prices of the instruments. The performance of the portfolio shall be calculated both on an absolute basis and relative to the benchmark as outlined in Article 5.

5 The direct asset management costs of the common provisioning fund shall be absorbed by the assets of the common provisioning fund. Those asset management costs shall include custody fees, external audit costs, trading and hedging costs, bank charges and costs related to securities lending transactions and other operations eligible according to Article 8.

6 The costs of trading infrastructure, including data service costs directly related to the asset management of the common provisioning fund may be deducted from the assets of the Fund.

1 The common provisioning fund shall invest only in: (a) euro-denominated money market assets; (b) fixed income securities; (c) regulated collective investments in debt and equity.

2 The common provisioning fund shall obtain exposure to those asset classes through investment in the following instruments or by engaging in the following operations: (a) deposits; (b) money market instruments and money market funds which offer daily liquidity, covered by Regulation (EU) 2017/1131 of the European Parliament and of the Council ; (c) debt instruments, such as bonds, bills and notes, and securitized instruments in line with the Simple, Transparent, and Standardised (STS) criteria set out in Regulation (EU) 2017/2402 of the European Parliament and of the Council ; (d) collective investment undertakings covered by Directive 2009/65/EC of the European Parliament and of the Council including exchange-traded funds which invest in equity or in debt instruments where maximum losses cannot exceed amounts invested; (e) repurchase agreements, in accordance with Article 212(2) of the Financial Regulation; (f) reverse repurchase agreements; (g) securities lending operations with recognised clearing systems such as Clearstream and Euroclear, or with leading financial institutions specialising in this type of operations.

3 Derivatives, in the form of forward and future contracts and swaps, shall be used solely for the purposes of efficient portfolio management and not for the purposes of speculation or leveraging of positions. The derivatives may be used for adjustment of duration, mitigation of credit or other relevant risk or changes in asset allocation consistent with the investment policy.

4 The assets of the common provisioning fund may be invested in hedged highly liquid bonds denominated in US dollars issued by sovereign and supranational entities solely for the purposes of diversification and exposure to another interest rate curve. Any currency risk shall be hedged making appropriate use of swaps or other instruments for foreign exchange hedging, as specified in paragraph 3.

5 The financial manager may, subject to the agreement of the accounting officer, enlarge the scope of eligible investments to include other asset classes and investment operations consistent with the investment strategy and objectives, as well as currencies of other advanced economies, as listed from time to time by the International Monetary Fund and where subject to hedging of currency risk. Any decision to include new asset classes, investment operations or currencies of advanced economies shall be supported by a substantiated justification per asset class, operation or currency, of how the expanded investment possibilities will enhance the risk-return performance of the common provisioning fund. This shall include an assessment of the operational capacities needed to support these new investment possibilities.

1 The financial manager shall not knowingly invest the assets of the common provisioning fund in the securities issued by undertakings that have been found, by a final judgement or a final administrative decision, to be engaged in activities: (a) deemed illegal or banned on ethical or moral grounds under the Union regulatory framework and international conventions and agreements; (b) related to the development, production and trade of ammunition or weaponry that are prohibited by the applicable international law.

2 The assets of the common provisioning fund shall not be invested in securities issued by undertakings that generate more than 25% of their overall annual revenues to the knowledge of the financial manager, from the activities listed below: (a) gambling activities (production, construction, distribution, processing, trade or software related activities); (b) tobacco related products and activities (production, distribution, processing, and trade); (c) sex trade and related infrastructure, services and media.

1 The investment strategy of the common provisioning fund shall be implemented in line with the Union’s policy objective to foster sustainable finance and social fairness to the fullest extent consistent with the preservation of the capital of the common provisioning fund.

2 The implementation of the common provisioning fund investment policy shall comply with all relevant legislation promoting environmental, social and governance (ESG) financial instruments and shall respect the relevant standards, systems, criteria and processes established in Union’s regulatory framework.

3 The financial manager shall consult the EU Technical Expert Group on Sustainable Finance, or its successor, on the implementation of ESG factors in the investment strategy for the common provisioning fund.

4 The financial manager shall monitor the ESG profile of the common provisioning fund and report on it on a regular basis, including through the annual report referred to in Article 11.

1 The annual report under Article 214(2) of the Financial Regulation shall include key information on general portfolio composition, numbers of calls, number of transactions and performance compared to benchmark.

2 The annual report shall comment the overall performance of the common provisioning fund and any salient developments relating to the results and operations of the common provisioning fund over the course of the year.

3 The accounting officer shall ensure the timely preparation of annual accounts for the assets held by the common provisioning fund and their consolidation in the Union’s Annual accounts.

4 The financial manager shall provide all information and assistance to the accounting officer upon request in furtherance of this requirement.

5 The financial manager shall prepare monthly risk and performance reports.

6 The financial manager shall provide information on the situation and performance of the common provisioning fund upon request of the accounting officer, European Parliament or Council, and European Court of Auditors.

Commission Decision C(2016)165 and Commission Decision C(2017)7693 are repealed.

The Commission delegates the responsibilities and tasks of financial manager to the Director General of the Directorate-General for Budget, with the exception of the reporting obligations referred to in Article 214(2) of the Financial Regulation. The Director General of the Directorate-General for Budget shall execute those responsibilities and tasks on an ongoing basis and submit all recommendations and reports on the functioning of the common provisioning fund to the College of Commissioners.

This Decision shall apply as from the date of application of the post-2020 multiannual financial framework.