Opinion of the European Central Bank on the designation of Banco de Portugal as resolution authority for central counterparties (CON/2024/31)

OPINION OF THE EUROPEAN CENTRAL BANK of 13 September 2024 on the designation of Banco de Portugal as resolution authority for central counterparties (CON/2024/31) Introduction and legal basis

On 5 August 2024, the European Central Bank (ECB) received a request from the Portuguese Ministry of Finance for an opinion on a draft law designating the Banco de Portugal as resolution authority for the purposes of Regulation (EU) 2021/23 of the European Parliament and of the Council on a framework for the recovery and resolution of central counterparties (hereinafter the ‘draft law’). The ECB’s competence to deliver an opinion is based on Articles 127(4) and 282(5) of the Treaty on the Functioning of the European Union and Article 2(1), third indent, of Council Decision 98/415/EC , as the draft law relates to the Banco de Portugal (BdP). In accordance with the first sentence of Article 17.5 of the Rules of Procedure of the European Central Bank, the Governing Council has adopted this opinion.

1. Purpose of the draft law

1.1 The purpose of the draft law is to execute in the national framework several Union regulations related to financial services and activities and market infrastructures for financial instruments, by means of introducing some legislative adjustments in order to fully ensure the direct applicability of those regulations in the Portuguese legal framework. In particular, the draft law implements in the national framework Regulation (EU) 2021/23 of the European Parliament and of the Council (hereinafter the ‘CCP Recovery and Resolution Regulation’). 1.2 The draft law implements the requirement under the CCP Recovery and Resolution Regulation that each Member State must designate one or more resolution authorities for central counterparties , which are empowered to apply the resolution tools and exercise the resolution powers as set out in the CCP Recovery and Resolution Regulation. The draft law appoints the BdP as resolution authority for the purposes of the CCP Recovery and Resolution Regulation .

1.3 The draft law provides that the Comissão do Mercado de Valores Mobiliários (CMVM, Portuguese Securities Market Commission) will be the competent authority for the supervision of central counterparties . 1.4 The explanatory memorandum accompanying the draft law (hereinafter the ‘explanatory memorandum’) notes that the division of tasks between the BdP and the CMVM takes into account the fact that the BdP is already the resolution authority in relation to financial institutions other than central counterparties (credit institutions and investment firms) and has the necessary resources and operational capacity needed for the planning and execution of resolution measures for central counterparties. 1.5 The explanatory memorandum also notes that the exercise of the tasks as resolution authority for central counterparties respects the BdP’s financial independence, and that, in the event that resolution measures are applied to central counterparties in Portugal, it is necessary to safeguard the financial dimension of the principle of central bank independence, as provided under Article 130 of the Treaty. Therefore (the explanatory memorandum continues) in the face of the possibility of applying resolution measures to a central counterparty, the BdP’s ability to build up and maintain financial resources so as to be able to carry out its tasks effectively and independently in the context of the European System of Central Banks (ESCB) should not be prevented.

2 Liability as resolution authority for central counterparties

2.1 The draft law does not provide for a specific liability regime for the resolution of central counterparties by the BdP. In this respect, the ECB understands that the applicable liability regime is the regime that already exists in relation to other tasks of the BdP, including the resolution of credit institutions and investment firms. 2.2 In accordance with Article 22 of the Portuguese Constitution, the State and all public entities are liable for actions or omissions that are committed in or because of the exercise of their functions and that result in a breach of rights, freedoms and guarantees or create damages to another party. Although formulated as a rule of strict liability where the BdP would be legally responsible for the damage caused when exercising the function of resolution authority for central counterparties even in the absence of fault, the competent Portuguese administrative courts have interpreted Article 22 of the Constitution under the same terms as established for civil liability, as laid down in Article 483(1) of the Portuguese Civil Code , as a rule of fault. Under this rule, the BdP is legally responsible for the damage caused by the unlawful violation of the right of another person, or any legal provision intended to protect the interests of another person only in case of negligence or intent .

2.3 In addition, when assessing whether there has been such unlawful violation on the part of the BdP, the ECB understands that the competent Portuguese administrative courts have granted the BdP a large margin of discretion when exercising the function of resolution authority for credit institutions . The relevant case-law highlights that a resolution measure has, inter alia, the purpose of avoiding possible negative impacts on financial stability, against the backdrop of an alternative scenario of liquidation of a credit institution, and of minimising costs to the public treasury. This implies that the BdP has the necessary powers to act in this regard in order to achieve the resolution purposes provided for in the legislation. The complexity and multipolarity of the interests existing in a resolution measure were too great for the legislator to anticipate, despite the desire to regulate every aspect of such measures. The BdP was therefore designated as the public authority responsible for judiciously balancing the theoretical aims of resolution as defined by the legislator against the specificities and needs of individual cases. The choices made by the BdP in this process necessarily vary according to the specific situation of the entity under resolution . In view of these considerations and the urgency characterising resolution measures, the BdP is afforded a large margin of discretion when exercising the function of resolution authority. Consequently, the Portuguese courts limit the assessment of an unlawful violation of the right of another party or any legal provision intended to protect the interests of another party to specific duties of the administrative authority to act (limiting the judicial assessment to aspects such as competence, purpose, form, procedure, and constitutional principles that condition the exercise of discretion) . This means, for instance, that third parties need to demonstrate that the BdP acted arbitrarily or breached its basic duties of care when exercising its function as resolution authority, for example without motivation or in a way not reasonably adequate in order to achieve the resolution objectives.

3. Specific observations

3.1 In accordance with Article 14.4 of the Statute of the European System of Central Banks and of the European Central Bank, the national central banks (NCBs) may perform functions other than those specified in that Statute, unless the Governing Council finds that those functions interfere with the objectives and tasks of the ESCB. Where a Member State assigns such a function to its NCB, that NCB is responsible and liable for the performance of that function. Nevertheless, when defining the responsibility and liability of an NCB in relation to that function, Member States are required to comply with their obligations deriving from Union law and, in particular, Article 123(1) and Article 130 of the Treaty . 3.2 Monetary financing prohibition 3.2.1 Article 123(1) of the Treaty prohibits the NCBs from granting overdraft facilities or any other type of credit facility to public authorities and bodies of the Member States. Article 1(1), point (b), of Council

Regulation No 3603/93 defines the term ‘other type of credit facility’ for the purposes of Article 123 of the Treaty as, inter alia, any financing of the public sector’s obligations vis-à-vis third parties. Accordingly, the NCB concerned must not assume obligations vis-a-vis third parties that could potentially be incumbent on the public sector. Consequently, the NCB concerned must not finance pre-existing obligations vis-à-vis third parties that are incumbent on other public authorities or bodies and the effective financing of the obligations vis-à-vis third parties by the NCB concerned must not result directly from the measures adopted by, or from the policy choices made by, other public authorities or bodies . 3.2.2 While the draft law does not as such impose any financing obligations on the BdP, the designation of the BdP as resolution authority for central counterparties according to the CCP Recovery and Resolution Regulation requires that the conditions under which the BdP is to exercise this function are in line with the above limitations deriving from Article 123(1) of the Treaty. In particular, the liability of the BdP when exercising the function of resolution authority for central counterparties must be limited to infringements of a serious nature of the rules imposed on the BdP in that context . 3.2.3 The Court of Justice has not yet elaborated on what the limitations to infringements of a serious nature of the rules imposed on an NCB exactly consist of. In view of the different traditions for the liability of NCBs in the Member States’ national legal orders, such limitations may therefore take different forms provided that they exclude the effective financing of the obligations of the public sector vis-à-vis third parties by the NCB concerned when exercising the function of resolution authority for central counterparties. This is the case if national law addresses the condition of fault and limits liability of the NCB concerned to gross negligence in view of the urgency and complexity characterised by resolution measures . The effective financing of the obligations of the public sector vis-à-vis third parties by the NCB concerned when exercising the function of resolution authorities for central counterparties is also excluded if national law addresses the condition of unlawful conduct instead of fault and limits judicial review of resolution measures by granting a large margin of discretion to the NCB concerned in view of the urgency and complexity characterised by the latter . 3.2.4 Against this backdrop, the applicable liability regime addresses the requirement that the liability of the BdP when exercising the function of resolution authority for central counterparties should be, in

practice, limited to infringements of a serious nature. Although the granting of a large margin of discretion to the BdP and the corresponding limitation of judicial review to specific duties of the BdP to act appear to be motivated by the constitutional principle of distribution of power and not by the monetary financing prohibition, the effective financing of the obligations of the public sector vis-à-vis third parties by the NCB concerned when exercising the function of resolution authority for central counterparties is de facto excluded. That said, the ECB understands that the Portuguese courts would, in line with the case-law of the Court of Justice, also make reference to the requirements that Article 123(1) of the Treaty imposes on the interpretation of the liability regime of the BdP in the future . 3.3 Financial dimension of the principle of independence 3.3.1 Article 130 of the Treaty prohibits Member States from placing their NCBs in a situation which in any way undermines their ability to carry out independently a task falling within the scope of the ESCB . This would be the case if, for example, an NCB were prevented from building up adequate financial resources in the form of reserves or buffers to offset losses, particularly those resulting from monetary policy operations, and the Member State concerned did not ensure in advance that the NCB had the necessary funds to bear the financial burden resulting from exercising a function outside the scope of the ESCB (such as the funds necessary to be able to pay the compensation resulting from the liability regime for that function), while retaining its ability to carry out its ESCB tasks effectively and independently . An NCB constrained in its ability to create and/or restore its reserves or buffers may need to seek the consent of political authorities to obtain funding or recapitalisation. This places the NCB in a situation of dependence on those political authorities of the Member State . 3.3.2 The ECB considers that the BdP’s risk of exposure to liability in the context of the exercise of its function as resolution authority for central counterparties is remote due to: (1) the fact that only one central counterparty, solely dedicated to power derivatives contracts and natural gas derivatives contracts, is currently established in Portugal; (2) the exceptional nature of a situation leading to the resolution of a central counterparty; and (3) the fact that the Portuguese courts grant the BdP a wide margin of discretion when assessing the legality of resolution measures. However, the possibility cannot be entirely excluded that extreme and exceptional situations might arise at some point in the future and result in the exposure of the BdP to such liability. In this respect, a significant amount of the financial risk of the Union financial system is processed by and concentrated in central counterparties on behalf of clearing members and their clients . The possibility cannot be entirely excluded that the BdP’s exercise of its function as a resolution authority of central counterparties might lead to substantial losses and that the magnitude of such losses might constrain the BdP’s ability to build up adequate financial resources to carry out its ESCB tasks. To address such

situations, adequate mechanisms should be considered in order to ensure that the BdP is not prevented from building up adequate financial resources in the form of reserves or buffers so as to be able to carry out its ESCB tasks effectively and independently . 3.3.3 The ECB therefore welcomes that the Portuguese legislative authorities are willing to comply with the financial dimension of the principle of independence in the event that resolution measures are applied to central counterparties in Portugal, as evidenced by the explanatory memorandum as referred to in paragraph 1.5. Nevertheless, it would be important for the abovementioned mechanisms to be effectively implemented in the national framework.

This opinion will be published on EUR-Lex.

Done at Frankfurt am Main, 13 September 2024.

[signed]

The President of the ECB Christine LAGARDE