Investment firms that offer or recommend to clients financial instruments not manufactured by them should also
have appropriate arrangements in place to obtain and understand the relevant information concerning the product
approval process, including the identified target market and the characteristics of the product they offer or
recommend. That obligation should apply without prejudice to any assessment of appropriateness or suitability
to be subsequently carried out by the investment firm in the provision of investment services to each client, on the
basis of their personal needs, characteristics and objectives. In order to ensure that financial instruments will be offered or recommended only when in the interest of the
client, investment firms offering or recommending the product manufactured by firms which are not subject to the
product governance requirements set out in this Directive or manufactured by third-country firms should also have
appropriate arrangements to obtain sufficient information about the financial instruments. (72) In order to give all relevant information to investors, it is appropriate to require investment firms providing
investment advice to disclose the cost of the advice, to clarify the basis of the advice they provide, in particular the
range of products they consider in providing personal recommendations to clients, whether they provide
investment advice on an independent basis and whether they provide the clients with the periodic assessment
of the suitability of the financial instruments recommended to them.

Article 25
Assessment of suitability and appropriateness and reporting to clients
1. Member States shall require investment firms to ensure and demonstrate to competent authorities on request that
natural persons giving investment advice or information about financial instruments, investment services or ancillary
services to clients on behalf of the investment firm possess the necessary knowledge and competence to fulfil their
obligations under Article 24 and this Article. Member States shall publish the criteria to be used for assessing such
knowledge and competence. 12.6.2014 EN Official Journal of the European Union L 173/409
2. When providing investment advice or portfolio management the investment firm shall obtain the necessary
information regarding the client's or potential client's knowledge and experience in the investment field relevant to
the specific type of product or service, that person's financial situation including his ability to bear losses, and his
investment objectives including his risk tolerance so as to enable the investment firm to recommend to the client or
potential client the investment services and financial instruments that are suitable for him and, in particular, are in
accordance with his risk tolerance and ability to bear losses.

Such a warning may be
provided in a standardised format;
(d) the investment firm complies with its obligations under Article 23.
5. The investment firm shall establish a record that includes the document or documents agreed between the
investment firm and the client that set out the rights and obligations of the parties, and the other terms on which
the investment firm will provide services to the client. The rights and duties of the parties to the contract may be
incorporated by reference to other documents or legal texts.
6. The investment firm shall provide the client with adequate reports on the service provided in a durable medium. Those reports shall include periodic communications to clients, taking into account the type and the complexity of
financial instruments involved and the nature of the service provided to the client and shall include, where applicable, the
costs associated with the transactions and services undertaken on behalf of the client. When providing investment advice, the investment firm shall, before the transaction is made, provide the client with a
statement on suitability in a durable medium specifying the advice given and how that advice meets the preferences,
objectives and other characteristics of the retail client.

Article 24
General principles and information to clients
1. Member States shall require that, when providing investment services or, where appropriate, ancillary services to
clients, an investment firm act honestly, fairly and professionally in accordance with the best interests of its clients and
comply, in particular, with the principles set out in this Article and in Article 25.
2. Investment firms which manufacture financial instruments for sale to clients shall ensure that those financial
instruments are designed to meet the needs of an identified target market of end clients within the relevant category
of clients, the strategy for distribution of the financial instruments is compatible with the identified target market, and the
investment firm takes reasonable steps to ensure that the financial instrument is distributed to the identified target
market. An investment firm shall understand the financial instruments they offer or recommend, assess the compatibility of the
financial instruments with the needs of the clients to whom it provides investment services, also taking account of the
identified target market of end clients as referred to in Article 16(3), and ensure that financial instruments are offered or
recommended only when this is in the interest of the client.
3.

All information, including marketing communications, addressed by the investment firm to clients or potential
clients shall be fair, clear and not misleading. Marketing communications shall be clearly identifiable as such.
4. Appropriate information shall be provided in good time to clients or potential clients with regard to the investment
firm and its services, the financial instruments and proposed investment strategies, execution venues and all costs and
related charges. That information shall include the following:
(a) when investment advice is provided, the investment firm must, in good time before it provides investment advice,
inform the client:
(i) whether or not the advice is provided on an independent basis;
(ii) whether the advice is based on a broad or on a more restricted analysis of different types of financial instruments
and, in particular, whether the range is limited to financial instruments issued or provided by entities having close
links with the investment firm or any other legal or economic relationships, such as contractual relationships, so
close as to pose a risk of impairing the independent basis of the advice provided;
(iii) whether the investment firm will provide the client with a periodic assessment of the suitability of the financial
instruments recommended to that client;

11 Where a bank according to its operative accounting framework recognises fiduciary assets on the balance sheet, these assets
can be excluded from the leverage ratio exposure measure provided that the assets meet the IFRS 9 criteria for derecognition
and, where applicable, IFRS 10 for deconsolidation.

12 Although paragraph 60 of the Basel III framework specifies the treatment of general provisions/general loan-loss reserves for
banks using the standardised approach for credit risk, for the purposes of the leverage ratio exposure measure the definition
of general provisions/general loan-loss reserves specified in paragraph 60 of the Basel III framework applies to all banks
regardless of whether they use the standardised approach or the internal ratings-based (IRB) approach for credit risk for their
risk-based capital calculations.

1. General remarks
The Basel III framework is a central element of the Basel Committee's response to the global financial crisis.
It addresses a number of shortcomings with the pre-crisis regulatory framework and provides a regulatory
foundation for a resilient banking system that supports the real economy.
The Committee's finalisation of the Basel III reforms1 complements the improvements made to
the global regulatory framework from the initial phase of the Basel III framework. The revisions seek to
restore credibility in the calculation of risk-weighted assets (RWA) and therefore also capital ratios by:
• enhancing the robustness and risk sensitivity of the standardised approaches for credit risk and
operational risk, which will help facilitate the comparability of banks' capital ratios;
• constraining the use of internally modelled approaches, by placing limits on certain inputs used
to calculate RWA under the internal ratings-based (IRB) approach for credit risk and by removing
the use of the modelled approach for operational risk;
• finalising the leverage ratio, which now includes a buffer to further limit the leverage of global
systemically important banks (G-SIBs); and
• replacing the existing Basel I-based floor with a robust aggregate 72.5% output floor based on
the Committee's revised standardised approaches.
In order to analyse the impact of the revised standards, the Committee conducted an ad hoc
Basel III monitoring exercise with the data collection starting in April 2016, in addition to its regular Basel III
monitoring exercise2 and the data collection exercise from regulatory reporting systems. This report
summarises the aggregate cumulative quantitative impact study results using data jointly from all three
exercises. The Committee believes that the information contained in the report will provide relevant
stakeholders with a useful benchmark for analysis as well as provide an estimated impact of the recently
agreed upon reforms.

141. Section G discusses the method by which the difference between provisions (eg specific
provisions, portfolio-specific general provisions such as country risk provisions or general provisions) and
expected losses may be included in or must be deducted from regulatory capital, as outlined in the
definition of capital section of the Basel III framework (June 2011).

1. Calculation of expected losses

142. A bank must sum the EL amount (defined as EL multiplied by EAD) associated with its exposures
to which the IRB approach is applied (excluding the EL amount associated with securitisation exposures)
to obtain a total EL amount. The treatment of EL for securitisation exposures is described in paragraph 37
of the securitisation framework.
(i) Expected loss for exposures other than exposures subject to the supervisory slotting
criteria

150. At national supervisory discretion, banks using both the standardised and IRB approaches may
rely on their internal methods for allocating general provisions for recognition in capital under either the
standardised or IRB approach, subject to the following conditions. Where the internal allocation method
Basel III: Finalising post-crisis reforms 81

is made available, the national supervisor will establish the standards surrounding their use. Banks will
need to obtain prior approval from their supervisors to use an internal allocation method for this purpose.

3. Treatment of EL and provisions

40.32 The derivatives should be converted into positions in the relevant underlying and become subject
to specific and general market risk charges as described above. In order to calculate the standard
formula described above, the amounts reported should be the market value of the principal
amount of the underlying or of the notional underlying resulting from the prudent valuation
guidance set out in paragraphs 690 to 701 in Basel II.[8]
Footnote
[8] For instruments where the apparent notional amount differs from the effective notional
amount, banks must use the effective notional amount.

Explanation: The EU_MIFID2 passages regulate the conduct of investment firms, focusing on product governance, suitability assessments, and client information disclosure (e.g., Article 24 and 25). In contrast, the INT_BASEL_GENERAL passages regulate banking capital adequacy, leverage ratios, and risk-weighted assets (e.g., Basel III framework). The obligations in MIFID2 regarding client suitability and product information do not impose conflicting requirements on the capital treatment or leverage ratio calculations described in the Basel passages. The regimes govern distinct operational domains—conduct of business versus prudential regulation—resulting in no friction between the specific obligations cited.


(27) Directive (EU) 2022/2556 of the European Parliament and of the Council of 14 December 2022 amending Directives 2009/65/EC,
2009/138/EC, 2011/61/EU, 2013/36/EU, 2014/59/EU, 2014/65/EU, (EU) 2015/2366 and (EU) 2016/2341 as regards digital
operational resilience for the financial sector (see page 153 of this Official Journal).

2 Regulation (EU) 2022/2554 of the European Parliament and of the Council of 14 December 2022 on digital operational
resilience for the financial sector and amending Regulations (EC) No 1060/2009, (EU) No 648/2012, (EU) No 600/2014, (EU)
No 909/2014 and (EU) 2016/1011 (OJ L 333, 27.12.2022, p. 1).

3. Guidelines

EBA/GL/2024/07
13June 2024
Guidelines
on recovery plans under Articles 46 and 55 of the Regulation (EU)

1. Compliance and reporting
obligations
Status of these guidelines

45. The purpose of adding the new definitions of VA and VASP to the FATF Glossary was
to broaden the applicability of the FATF Standards to encompass new types of
digital assets and providers of certain services in those assets. It was not intended
to subtract from the existing definitions of "funds", "funds or other assets", or from
the scope of the various financial services included under the definition of a
"financial institution" in the FATF Standards.

80. Despite the many and frequently changing marketing terms and innovative
business models developed in this sector, the FATF envisions very few VA
arrangements without VASPs involved at some stage if countries apply the
definition correctly. Countries should take particular care to assess any claims that
businesses may make as to models of decentralization or distributed services, and
conduct their own assessment of the business model in line with its risk and their
ability to mitigate these risks.

81. As previously stated, the FATF Standards are technology neutral. As such, the FATF
does not seek to regulate the technology that underlies VAs or VASP activities.
Rather the FATF seeks to regulate natural or legal persons behind such technologies

32  UPDATED GUIDANCE: A RISK-BASED APPROACH TO VIRTUAL ASSETS AND VIRTUAL ASSET SERVICE PROVIDERS
that conduct as a business the aforementioned VASP activities on behalf of another
natural or legal person.

Explanation: The EU_EMD2 passages discuss the 'digital operational resilience for the financial sector' and financial rules for the Authority, which are distinct from the operational conduct of Virtual Asset Service Providers (VASPs). The INT_FATF_VASP passages focus on the definition of VASPs, the FATF's technology-neutral approach to regulating the natural persons behind the technology, and the application of AML/CFT standards. There is no evidence in the provided passages of an obligation in EU_EMD2 that conflicts with an obligation in INT_FATF_VASP. The regimes regulate different domains (financial sector resilience vs. AML/CFT for VASPs).