Published: 30th November 2016

Of relevance to:
MiFID investment firms, UCITS management companies and AIFMs that conduct permissible MiFID activities, particularly those subject to CRD IV


In December 2015 a joint ESMA/EBA report was published on the suitability, or otherwise, of the prudential regime for investment firms.

The paper recommended a new categorisation of investment firm which distinguishes between systemic and ‘bank-like’ investment firms (to which the full CRD IV framework would apply) and those which are non-systemic for which there would be a more limited set of prudential requirements – see Regulatory Roundup 72 and “EBA: Report on Investment Firms and Prudential Requirements”.

The EBA backed-up this recommendation by declaring that it “stands ready to complete” the necessary data collection in order to calibrate this new regime.

One ‘Call for Advice’ later, the EBA has published a Discussion Paper (EBA/DP/2016/02) on the design of a new prudential regime for investment firms. Although the paper is aimed at MiFID investment firms it will also be relevant to UCITS management companies and AIFMs that conduct permissible MiFID activities.

Aside from the handful of investment firms that fall within the EBA’s earlier Opinion, and so would be subject to the full CRD (see below), the Discussion Paper proposes a prudential regime focussing on the risks to customers and markets and risks to the firm itself (what is referred to as the K-factor approach).

These K-factors can be attributed to ‘risk to customers’ (“RtC”) and ‘risk to market access, liquidity or integrity’ (“RtM”) which would need to be accompanied by appropriate scalars – with acknowledgement of the extent such risks are amplified by the risk to the firm itself (“RtF”).

Possible RtC and RtM K-factors identified so far include, but are not limited to, Assets under Management, Client Money held and (number of) Customer orders Handled. As an alternative to creating specific K-factors for RtF the use of an ‘uplift’ is considered i.e. a firm’s capital requirement would be the sum of the RtC and RtM K-factors as above multiplied by an appropriate ‘uplift factor’.

The Discussion Paper also gives consideration to a different prudential regime, based mainly upon the fixed overheads requirement for “very small and non-interconnected” firms (referred to as “Class 3” investment firms).

Whilst the paper effectively proposes designing a tailored regime for investment firms – and so reflects the EBA’s preferred approach – it also acknowledges that there is also the alternative option of applying the current prudential regime to such firms, but in a more proportionate and targeted manner.

The Discussion Paper follows on from a short (four page) EBA Opinion paper published in October which concentrated on the identification of those investment firms for which CRD IV is appropriate and which rules should apply. In brief, the recommendation was that the full CRD and CRR should apply to those investment firms that meet the identification standards and guidelines applicable to Global Systemically Important Institutions (“G-SIIs”) and Other Systemically Important Institutions (“O-SIIs”) – although the Opinion advises that there are only eight such firms in the EU.

Comments on the Discussion Paper are invited by 2 February 2017 with a view to the EBA submitting an Opinion to the European Commission by 30 June 2017.

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