Commission Implementing Decision (EU) 2023/1602 of 31 July 2023 on the primary dealer network and the definition of eligibility criteria for lead and co-lead mandates for syndicated transactions for the purposes of the borrowing activities by the Commission on behalf of the Union and of the European Atomic Energy Community

THE EUROPEAN COMMISSION,

Having regard to the Treaty on the Functioning of the European Union,

Having regard to the Treaty establishing the European Atomic Energy Community,

Having regard to Regulation (EU, Euratom) 2018/1046 of the European Parliament and of the Council of 18 July 2018 on the financial rules applicable to the general budget of the Union⁽¹⁾ and in particular Article 220a(2) thereof,

Whereas:

1. In the context of the actions adopted by the Union in the aftermath of the COVID-19 crisis a primary dealer network was established by Commission Decision (EU, Euratom) 2021/625⁽²⁾ to function as a qualified network of credit institutions and investment firms on which the Commission calls on for the primary placement of debt securities, for the promotion of such placements and, as the case may be, for the provision of relevant financial services, such as the provision of fair market advice and intelligence.

2. In accordance with Article 220a of Regulation (EU, Euratom) 2018/1046 as amended by Regulation (EU, Euratom) 2022/2434⁽³⁾, borrowings authorised under Article 5(1) of Council Decision (EU, Euratom) 2020/2053⁽⁴⁾ and, except in duly justified cases, borrowing and debt management operations to fund programmes of financial assistance should be done by the Commission under a diversified funding strategy. A diversified funding strategy is a general borrowing method allowing for flexibility regarding the timing and maturity of single funding transactions and for regular and steady disbursements to beneficiaries.

3. Following two years of functioning of the primary dealer network, some improvements are needed in particular in relation to the processes of notifications provided by the primary dealers, and in relation to the suspension or exclusion of a primary dealer from the network.

4. Recourse to the capital markets takes place on a large scale, and issuances are performed very frequently. As a consequence, the organisation of funding operations should be flexible.

5. Primary dealers admitted to the network are entitled to participate in auctions conducted by the Commission for borrowing on capital markets. The definition of the eligibility criteria builds on the Commission’s experience in selecting credit institutions and investment firms under existing financial assistance programmes. It also draws on best practice by sovereign and supranational issuers.

6. Credit institutions and investment firms should be entitled to membership of the primary dealer network if they fulfil the eligibility criteria. Such criteria aim to guarantee the efficient performance of the primary dealers’ function, in particular the proficient conduct of market operations and the compliance with underwriting commitments. In this regard, it is crucial that eligible primary dealers demonstrate a solid organisational structure, professional and management capacity, significant market activity in underwriting sovereign and supranational bond issuance, and compliance with the relevant regulatory framework, especially with regard to Union prudential requirements⁽⁵⁾ and supervision thereof⁽⁶⁾. In compliance with the principle of transparency, those criteria and the decisions admitting a credit institution or an investment firm as a primary dealer should be published in the Official Journal of the European Union.

7. Membership of primary dealer networks operated by a Member State or a supranational issuer entitles the credit institution or investment firm to participate in public debt auctions of that issuer. Regular and active involvement in sovereign or supranational auction procedures is a reliable demonstration of experience in public debt management operations. Eligibility for membership of the Union primary dealer network should therefore be conditional on membership of at least one Member State or European supranational issuer’s primary dealer network or primary dealership mechanism.

8. Once admitted to the primary dealer network, primary dealers should be permitted to carry the title of ‘Member of the European Union Primary Dealer Network’ and to participate in all auctions of debt securities of the Union and the Euratom. These dealers should buy a minimum weighted average of auctioned volumes and should comply with certain reporting obligations.

9. The primary dealers should also adhere to the general terms and conditions governing participation in the primary dealer network, in particular the rights, commitments and obligations of the members of the primary dealer network, annual review, reporting obligations, as well as rules on controls, on suspension of membership, on the exclusion and on the possibility to withdraw from the primary dealer network.

10. In addition to auctions, the issuance of debt securities under borrowing programmes is carried out through syndication or private placements. To this end, credit institutions or investment firms fulfilling established eligibility requirements for syndicated transactions and private placements are appointed by the Commission for the purpose of each borrowing transaction.

11. Members of the primary dealer network which buy a higher weighted average percentage of auctioned volumes than that required to be a member of the primary dealer network, who maintain a sufficient secondary market share in debt securities of the Union and the Euratom and who fulfil the minimum requirements of the quoting arrangements should be eligible to serve as lead managers in syndicated transactions. This group of dealers should also undertake to promote liquidity of debt securities of the Union and the Euratom through an additional market-making activity, to provide fair advice and market intelligence to the Commission and to promote the Union and the Euratom issuances with investors.

12. The tasks connected with the roles of lead manager and co-lead manager should be considered financial services as referred to in Chapter 1, Section 2, point 11.1, point (j), of Annex I to Regulation (EU, Euratom) 2018/1046. The appointment of eligible primary dealers as members of the syndicate for a specific issuance transaction should therefore be based on a negotiated procedure without prior publication of a contract notice. The procedure for appointment of lead managers should include the sending of a request for proposals to eligible dealers and the evaluation of proposals received by the Commission.

13. Taking into account the expected high frequency of the Commission’s recourse to the capital markets, it is necessary to establish a smooth, swift and efficient mechanism to appoint banks as lead managers for syndicated transactions. It is therefore necessary to provide a fair and transparent basis for limiting the request for proposals to a subset of the primary dealers eligible to participate in syndicates. This additional selection is necessary to balance the need for competition in the procurement procedure for the services of supporting the syndicate with the need for efficient preparation of time-sensitive transactions, and to avoid duplication of effort by primary dealers in bidding for syndicate mandates. This selection of banks should be based on qualitative and quantitative criteria, relating to the proven capacity of eligible primary dealers in supporting sovereign and supranational issuance in primary and secondary markets, and their ability to distribute debt securities to investors. This process should also provide a rotation mechanism ensuring an equal chance for participation across all eligible primary dealers.

14. Primary dealers should notify the Commission of any instances of non-compliance with market practices and ethics, including notifying the Commission of any proceedings, judgements, decisions or sanctions concerning the relevant provisions of Regulation (EU, Euratom) 2018/1046 related to the early-detection and exclusion system, in particular Articles 135 to 142 thereof. These notifications should relate solely to primary dealers themselves and their parent entities. Such notification should be without prejudice to the obligation of primary dealers to immediately inform the Commission of any changes in the situations as declared during the application process.

15. In order to provide for greater secondary market liquidity of the Union and the Euratom debt securities, and to improve price discovery and transparency, it is appropriate to introduce a quoting arrangement which should encourage primary dealers to act as market makers and quote the Union and the Euratom debt securities on recognised electronic platforms. Members of the primary dealer network should be provided with appropriate incentives to engage in such market making activities. To this effect it is appropriate to set the criteria for the fulfilment of the quoting arrangement.

16. In order to provide additional incentives for all primary dealers to engage in market making activities, it is appropriate to provide simpler access to the co-lead mandates for syndicated transactions also to those primary dealers that support the secondary market liquidity in the Union and the Euratom debt securities and fulfil the minimum criteria of the quoting arrangement, but do not fulfil the eligibility criteria to serve as lead managers for syndicated transactions. Such access to co-lead mandates would allow the Commission to provide additional incentives to a broader range of primary dealer network members, which take steps to support the Union and the Euratom debt issuance. The eligibility criteria for co-lead mandates for syndicated transactions should therefore be established. The Commission should consider co-lead mandates for at least one transaction within the period covered by a funding plan established in accordance with Article 4 of Commission Implementing Decision (EU, Euratom) 2022/2544⁽⁷⁾.

17. It is appropriate to clearly define and distinguish commitments concerning lead and co-lead mandates and to make the co-lead eligibility criteria proportionate to the benefits of the role. To that effect, co-lead mandates may also be awarded to primary dealers which meet the relevant eligibility criteria but may not carry out all additional commitments that are required to receive a lead mandate. All primary dealers fulfilling the co-lead eligibility criteria should be invited to participate as co-leads in a syndicated transaction, except in cases where operational efficiency would be better ensured by a sub-set of eligible co-leads. In such cases the eligible co-leads should be chosen on the basis of an alphabetical order with a rotation mechanism.

18. In order to further enhance the protection of the Union’s financial interests, suspension and exclusion processes of primary dealers should be clear and efficient. It is important to ensure that in cases of need a suspension of a primary dealer could be done without undue delay. In cases where an exclusion process is initiated, such a process should allow for sufficient time for primary dealers to respond to a notice of non-compliance communicated by the Commission, and, where applicable, to take corrective measures in cases where such non-compliance can be corrected.

19. Taking into account the need to protect the financial interests of the Union, monitoring rules should be established in order to ensure compliance by the members of the primary dealer network with the obligations set forth under this Decision and other relevant applicable provisions, in particular the general terms and conditions. The European Anti-Fraud Office (OLAF) should be involved, where appropriate, in that supervision.

20. Decision (EU, Euratom) 2021/625 established the primary dealer network and defined in particular eligibility criteria for the selection of its members. Commission Decision (EU) 2021/857⁽⁸⁾ amended Decision (EU, Euratom) 2021/625 and expanded the eligibility criteria by including certain investment firms authorised to carry out the activities of underwriting financial instruments and/or placing financial instruments on a firm commitment basis under Directive 2014/65/EU⁽⁹⁾. This Decision builds upon the principles established by the aforementioned decisions. This Decision should therefore replace Decision (EU, Euratom) 2021/625, which should accordingly be repealed,

HAS ADOPTED THIS DECISION: