When can group entities support each other financially, and when does CySEC approve it?

Group members often want to help one that is in trouble. Law 20(I)/2016 lets a parent institution or holding company and its subsidiaries, in other Member States or in third countries, conclude an intra-group financial support agreement, provided at least one party is a CIF or a financial institution covered by the parent's consolidated supervision. For how groups are supervised, see Which prudential rules apply to a Cypriot investment firm, and how are groups supervised?

The agreement works like standby cover. Support may be given under it only when the recipient meets the conditions for early intervention at the time the support is provided (see When can CySEC step in early at a weakening CIF, and what can it require?). The agreement may cover one or more subsidiaries and any combination of group entities: parent to subsidiary, subsidiary to parent, subsidiary to subsidiary, or a mix. Support may take the form of a loan, a guarantee, or assets provided as collateral, or several of these, and the agreement may be reciprocal.

An agreement is optional. A group entity may also support another without one, provided the decision is taken case by case, in line with group policies, and creates no risk for the group as a whole. Having an agreement is not a condition for operating in Cyprus either.

The agreement sets the principles for calculating the consideration for any support; the consideration itself is fixed when support is actually given. Five principles apply. Each party enters the agreement freely. Each acts in its own best interest, which may include a direct or indirect benefit from the support. Before the consideration is set and before any decision to give support, the provider receives full disclosure of relevant information from the recipient. The consideration may reflect information that the provider holds because it belongs to the same group and that is not available to the market. And the principles for the consideration need not take account of any expected temporary effect on market prices caused by events outside the group.

The exam material turns that last principle into a ban: the calculation does not take anticipated temporary price effects into account. Since 18 March 2016, Law 20(I)/2016 has made it optional instead: the parties are not obliged to factor in such effects, and only effects of events external to the group are concerned. The exam material also calls the non-public group information 'inside information'; the law describes it as information not available to the market that the provider holds as a group member.

CySEC approves an agreement only if, in its opinion, none of the parties meets the early intervention conditions when the agreement is concluded. The two tests point in opposite directions: approval comes while every party is healthy, and support comes later, to a party that has run into trouble. The Union parent applies to its consolidating supervisor, and the authorities concerned aim for a joint decision within four months. Each party's shareholders must then approve the agreement, and its management body reports to them every year on how the agreement is working. CySEC passes approved agreements to the resolution authorities.

Support is not automatic once trouble starts. The law sets nine conditions for providing it: for example, it must reasonably be expected to redress the recipient's financial difficulties significantly, and must not jeopardise the provider's liquidity, solvency or resolvability. The provider's management body takes a reasoned decision and, before giving support, notifies CySEC, the consolidating supervisor, the recipient's competent authority and the EBA. Within five working days CySEC may agree, or prohibit or restrict the support. Each entity publicly discloses whether it is party to an agreement and its general terms, and updates this at least once a year.