Response to discussion on the potential review of the investment firms’ prudential framework
Q1: What would be the operational constraints of potentially removing the threshold?
Non-Applicable
Q2: Would you suggest any further element to be considered regarding the thresholds used for the categorisation of Class 3 investment firms?
Non-Applicable
Q3: Do you have any views on the possible ways forward discussed above regarding the transition of investment firms between Class 2 and Class 3 should be introduced?
Non-Applicable
Q4: Should the minimum level of the own funds requirements be different depending on the activities performed by investment firms or on firms’ business model? If yes, which elements should be considered in setting such minimum?
Non-Applicable
Q5: Is it necessary to differentiate the deductibles by activity or by business model for the purpose of calculating the FOR? If yes, which items should then be considered and for what reasons?
Non-Applicable
Q6: Are expenses related to tied agents material for the calculation of the FOR to the extent to require a dedicated treatment for their calculation? If yes, are the considerations provided above sufficient to cover all the relevant aspects?
Non-Applicable
Q7: Should the FOR be calculated distinguishing the costs related to non-MiFID activities, which criteria should be considered? What kind of advantages or disadvantages would this have in practice?
The Fixed Overheads Requirement (“FOR”) should be calculated by distinguishing costs related to non-MiFID activities considering the option of allocating costs based on the ratio of income from different activities. This distinction should be made on a flat-rate basis, focusing on income levels, to simplify the process, save time and resources, and provide a reasonable estimate of how costs should be allocated between MiFID and non-MiFID activities.
Introducing an option to distinguish between costs related to non-MiFID and MiFID activities is particularly valuable for investment firms with a substantial volume of non-MiFID activities, where the distinction could yield real benefits that outweigh the operational costs of making such a distinction. This should however not be mandatory, as in practice, differentiating between MiFID and non-MiFID costs can be highly challenging and time-consuming. Investment firms often have integrated operations where resources, such as personnel, technology, and infrastructure, are shared across various activities. Accurately allocating costs to MiFID and non-MiFID activities would require detailed tracking in accounting systems, which could be complex and resource-intensive to implement.
Q8: Should expenses related to fluctuation of exchange rates be included in the list of deductions for the calculation of the FOR? If yes, which criteria should be considered in addition to the ones suggested above?
Non-Applicable
Q9: Should the concept of ‘ongoing advice’ be further specified for the purpose of calculating the K-AUM? If yes, which elements should be taken into account in distinguishing a recurring provision of investment advice from a one-off or non-recurring one?
Non-Applicable
Q10: Does the K-DTF provide a proper level of capital requirements for the provision of the services Trading on own account and execution of order on behalf of clients on account of the investment firm? If not, what elements of the calculation of the K-DTF present most challenges?
Non-Applicable
Q11: Would you have any examples where the calculation of the K-DTF based on comparable activities or portfolios results in very different or counterintuitive outcomes? If yes, how could the calculation of the K-DTF be improved?
Non-Applicable
Q12: What are the elements of the current methodology for the calculation of the K-ASA that raise most concerns? Taking into account the need to avoid complexifying excessively the methodology, how could the calculation of the K-ASA be improved to assess those elements?
The application of an arbitrary and inflexible coefficient for calculating the K-ASA is the element that raises the most issues, as it is abstract and does not take into account the real risk of non-return of safeguarded assets, which may be a theoretical and remote risk that may already have been mitigated by national legislation.
The current methodology severely affects the viability of ifsam, an investment firm established in Luxembourg and subject to the prudential supervision of the Commission de Surveillance du Secteur Financier. Indeed, the current calculation of the K-ASA creates an uneven playing field, by creating a capital requirement that is substantially higher than a credit institution subject to Regulation No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms, as amended (“Capital Requirement Regulation” or “CRR”), to which ifsam was previously subject to, without taking into account that the risk underlying the safekeeping of securities is, in Luxembourg, a remote risk.
ifsam has only institutional clients and in most cases acts, as part of its ancillary activities, as custodian of the clients’ financial instruments. The application of the K-ASA factor is only triggered due to ifsam’s ancillary activity of safekeeping and administration of financial instruments for the account of clients. ifsam considers that the Luxembourg Law of 1 August 2001 on the circulation of securities, as amended (“2001 Law”), already provides sufficient safeguards against the risk of non-return by setting-up a system under which the safeguarded securities do no integrate the assets of the custodian and the client shall, at all times, retain a right in rem on the securities. In an insolvency scenario, a right in rem on the securities allows the clients individually to claim the restitution of securities.
In view of the ancillary nature of the safekeeping activity and the more stringent and very client protective national regime set out in the 2001 Law and establishing robust safeguards against the risk of non-return, ifsam believes that the risk of non-return should be seen as a residual risk and, in application of the principle of proportionality, justify the application of a reduced coefficient of 0.01%, as opposed to the current 0.04%. Alternatively, a revised K-ASA factor provision should allow the national prudential authorities to reduce the basic coefficient after having duly considered the business model of the investment firm and on its national safeguarding regime. Although ifsam is receptive to the argument for the uniform application of prudential rules to protect assets and prevent the risk of non-return, ifsam believes that the disproportionality of the situation it is confronted with goes against the objective of the IFR, which is to create a more appropriate, relevant, and proportionate framework than the one established by the CRR.
Q13: Clients’ asset protection may be implemented differently in different Member States. Should this aspect be considered in the calculation of the K-ASA? If so, how should that be taken into account in the calculation?
The Luxembourg Law of 1 August 2001 on the circulation of securities, as amended (“2001 Law”), has created a legal regime, which, in our view, merits consideration.
ifsam is of the opinion that the Luxembourg safeguards against the risk of non-return as set out in the 2001 Law go beyond the concept of capital requirement and are more protective in nature, while also accommodating different types of business models without, as opposed to the current K-ASA factor calculation, impeding ifsam’s ability to operate in a commercially viable manner. The Luxembourg safeguards are guided by the general principle of segregation, pursuant to which the securities are not integrated in the assets of the investment firm, and the fundamental principle that the client retains an absolute in rem proprietary right on the securities.
In the event of a winding down or insolvency of an investment firm, the clients’ securities would not be part of the bankruptcy estate, and can be returned to the clients directly through the enforcement of their in rem proprietary right on the securities. In essence, the claim on the number of securities which the investment firm owes is filed with the liquidator who will restitute the securities out of the aggregate amount of the securities of the same description held by or for the account of the account keepers and if the investment firm itself owns securities of the same type as those held on behalf of its clients, these securities will also be added to the pool of securities available for distribution to the clients. In the unlikely scenario that the pool of securities of the same description is not sufficient, the client can file a claim as an unsecured creditor for an amount which is equivalent to the value of the securities which could not be returned.
In view of the existence of such regime, which is aligned with the objectives of IFR, it would be appropriate to reduce the K-ASA factor coefficient from 0.04% to 0.01%, which would guarantee that the risk of non-return of clients’ assets is properly mitigated on all levels, while maintaining the balance between providing adequate prudential safeguards and allowing investment firms to operate in a commercially viable manner.
Alternatively, a revised K-ASA factor provision should allow the national prudential authorities to establish a reduced coefficient after having duly considered the business model of the investment firm and its national safeguarding regime. ifsam believes that the national prudential authorities are best equipped to evaluate the risk of non-return of clients’ assets while adequately considering the legal client protection regime within its national market.
Q14: Should crypto-assets be included into K-factor calculation, either as a new K-factor or as part of K-NPR?
Non-Applicable
Q15: In the context of addressing operational risk for investment firm trading on own account, is there any further element to be considered to ensure that the requirements are proportionate to their trading activities?
Non-Applicable
Q16: The discussion paper envisages the possibility to rely on alternative methodologies with respect to the K-DTF. If the respondents suggest an alternative approach, how would this refer to the two activities addressed under the K-DTF (trading on own account and execution on own account on behalf of the clients)?
Non-Applicable
Q17: When addressing other activities an investment firm may perform, which elements, on top of the discussed ones, should be also taken in consideration?
Non-Applicable
Q18: Investment firms performing MiFID activities 3 and 6 (trading on own account and underwriting on a firm commitment basis) are more exposed to unexpected liquidity needs because of market volatility. What would be the best way to measure and include liquidity needs arising from these activities as a liquidity requirement?
Non-Applicable
Q19: Investment firms performing the activities of providing loans and credit to clients as an ancillary service in a non-negligeable scale would be more exposed to liquidity risks. What would be the best way to measure such risk in order to take them into account for the purposes of the liquidity requirements?
Non-Applicable
Q20: Investment firms, providing any of the MiFID services, but exposed to substantial exchange foreign exchange risk may be exposed to liquidity risks. What would be the best way to measure such risk in order to take them into account for the purposes of the liquidity requirements?
Non-Applicable
Q21: Are there scenarios where the dependency on service providers, especially in third countries, if disrupted, may lead to unexpected liquidity needs? What type of services such providers perform?
Non-Applicable
Q22: Are there scenarios where the dependency on liquidity providers, especially in third countries, would lead to unexpected liquidity needs? Could you provide some examples?
Non-Applicable
Q23: What other elements should be considered in removing the possibility of the exemption in Article 43 of the IFR?
Non-Applicable
Q24: Do you have any views on the possible ways forward discussed above concerning the provision of MiFID ancillary services by UCITS management companies and AIFMs?
Non-Applicable
Q25: Are differences in the regulatory regimes between MICAR and IFR/IFD a concern to market participants regarding a level playing field between CASPs and Investment firms providing crypto-asset related services? In particular, are there concerns on the capital and liquidity requirement regimes?
Non-Applicable
Q26: Sections 5.2, 5.4 as well as this Section 9.1 all touch upon how crypto-assets (exposures and services) may influence the IFD and the IFR. Is there any other related element that should be considered in the review of the investment firms’ prudential framework?
Non-Applicable
Q27: Is the different scope of application of remuneration requirements a concern for firms regarding the level playing field between different investment firms (class 1 minus and class 2), UCITS management companies and AIFMs, e.g., in terms of the application of the remuneration provisions, the ability to recruit and retain talent or with regard to the costs for the application of the requirements?
Non-Applicable
Q28: Are the different provisions on remuneration policies, related to governance requirements and the different approach to identify the staff to whom they apply a concern for firms regarding the level playing field between different investment firms (class 1 minus under CRD or class 2 under IFD), UCITS management companies and AIFMs, e.g. in terms of the application of the remuneration provisions, the ability to recruit and retain talent or with regard to the costs for the application of the requirements?
Non-Applicable
Q29: Are the different provisions, criteria and thresholds regarding the application of derogations to the provisions on variable remuneration, and that they apply to all investment firms equally without consideration of their specific business model, a concern to firms regarding the level playing field between different investment firms (class 1 minus under CRD and class 2 under IFD), UCITS management companies and AIFMs, e.g., in terms of the application of the remuneration provisions, the ability to recruit and retain talent or with regard to the costs for applying the deferral and pay out in instruments requirements? Please provide a reasoning for your position and if possible, quantify the impact on costs and numbers of identified staff to whom remuneration provisions regarding deferral and pay out in instruments need to be applied.
Non-Applicable
Q30: Are the different provisions regarding the oversight on remuneration policies, disclosure and transparency a concern for firms regarding the level playing field between different investment firm, UCITS management companies and AIFMs, e.g., with regard to the costs for the application of the requirements or the need to align these underlying provisions? Please provide a reasoning for your position.
Non-Applicable
Q31: What would be costs or benefits of extending existing reporting requirement to financial information? Which other elements should be considered before introducing such requirement?
Non-Applicable
Q32: Should there be the need to introduce prudential requirement for firms active in commodity markets and that are not currently subject to prudential requirements? How could the existing framework for investment firms be adapted for those cases? If a different prudential framework needs to be developed, what are the main elements that should be considered?
Non-Applicable