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?
AIMA would not be supportive of removing the €5bn threshold and subjecting all investment firms that are part of a group to the expanded requirements. The DP notes that the purpose of the reporting is to monitor as firms approach the €15bn and €30bn thresholds. Given those policy goals, the significant delta between €5bn and €15bn and the significant additional burden created by this regulatory reporting, we do not think the costs outweigh the anticipated benefits. In addition, firms provide aspects of this data on an annual basis to their NCAs. Enhanced reporting from the NCAs to the EBA would be a more proportionate,
Q2: Would you suggest any further element to be considered regarding the thresholds used for the categorisation of Class 3 investment firms?
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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?
AIMA appreciates the DP’s aim of reducing burdens on investment firms moving between the “Class 3” and “Class 2” categories. However, we are concerned that the proposal to limit the number of times an investment firm must move between categories to once a year could have unintended consequences. An unrepeated transaction may push an investment firm from Class 3 to Class 2 before it then reverts to Class 3 in line with its normal business pattern. Under such circumstances an investment firm could find itself subject to inappropriate treatment for as much as eleven months. This would be disproportionate and burdensome for the firm and its national competent authority and may well be a result of factors outside the firm’s control. We request EBA maintains the existing rules. Alternatively, EBA could consider allowing a ‘grace’ period two or three months after which if a firm still fulfils the criteria for Class 2 it must remain as such for the rest of that year.
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?
Despite the length of the wind down period being the same for all business models, we believe the definition of fixed overheads is already sufficiently robust to ensure capital requirements are proportionate to the size and scope of individual firm activities. We do not, therefore, believe that extending the wind down timeframe for specific investment firms, beyond the existing three-month period, is necessary.
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?
The Investment Firms Regulation (“IFR”) Article 12, Small and non-interconnected firms, leads to a higher capital requirement than is necessary given the low level of risk small and non-interconnected firms present. We believe the factors in IFR Article 12 could be simplified in a way that would make the capital requirement more proportionate to their lower risk. We propose the following wording to do this:
“The own funds requirement of a non-SNI investment firm is the highest of:
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1. Its permanent minimum capital requirement;
2. Its fixed overheads requirement; or
3. Its K-factor requirement.”
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?
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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?
Limiting the calculation of FOR to expenses related to MIFID activities would not be prudent as it could amplify the risk of a disorderly wind down. This is because all payment obligations are treated equally in a wind down scenario, irrespective of whether they arise in the context of MIFID activity.
Other elements
We would be supportive of the EBA providing further clarification around what is meant by “material change” in a manner that does not inhibit its proportionate application. This should detail specific considerations when adjusting capital requirements to reflect changes in investment firm activities, as there may be instances where exceeding quantitative thresholds could be driven by business activity unrelated to the provision of investment services. Finally, we believe the size of the firm should also be taken into consideration; the same nominal increase in projected FOR that might be considered a material change for smaller firms may be deemed immaterial by larger organisations.
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?
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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?
The calculation of the K-AUM is based on “investment advice” rather than the assets under management. This can make it difficult for firms to assess the element of non-discretionary investment advice. We request this is clarified, but in such a way that does not increase the complexity of the calculation. We propose the following guidance is added to clarify the issuer:
“Where a financial entity (‘A’) provides investment advice of an on-going nature to an investment firm (‘B’) and B undertakes discretionary portfolio management, the arrangement does not fall within scope of the K-AUM calculation. This is because the arrangement is not a formal delegation of the management of assets by A to B, but involves 2 distinct activities: on-going investment advice provided by A and discretionary portfolio management undertaken by B. In this situation, if A is an investment firm, it must include any assets in relation to which it is providing the advice in its measurement of AUM. Where B undertakes discretionary portfolio management in relation to the same assets, B must also include those assets in its own measurement of AUM.”
Concentration risk in the trading book (K-CON) (section 4.8)
Concentration risks related to positions in the non-trading book are already assessed under the risk management requirements of the IFD, and investment firms have a monitoring obligation that extends to non-trading book exposures. Given this context, we would not be in favour of recommending the scope of K-CON application is extended to the non-trading book. Furthermore, when considering options, the precise nature of non-trading book exposures and/or financial instruments that are subject to the K-CON requirement should be detailed; the notion of client (as discussed in section 4.9) should therefore be clarified before any extension of K-CON is proposed. Finally, if K-CON is to be extended to the non-trading book, this should not apply to intra-group exposures or cash holdings with third-party banks. These exposure types do not carry the same risk as counterparty or client exposure arising from booking financial instruments in the non-trading book. Firms are best placed to conduct individual assessments of their own risk profiles.
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?
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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?
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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?
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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?
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Q14: Should crypto-assets be included into K-factor calculation, either as a new K-factor or as part of K-NPR?
No. Risks associated with crypto-assets should already be considered in the calculation of the K-AUM and K-ASA. Full account should be taken of other applicable EU rules such as the MiCA Regulation so there is no duplication of requirements.
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?
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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)?
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Q17: When addressing other activities an investment firm may perform, which elements, on top of the discussed ones, should be also taken in consideration?
For non-trading book exposures it is important to note that investment firms are already required to assess credit risk as part of the risk management requirements in the IFD, and that to some extent, introduction of a new K-factor requirement might result in transfer of risk capital from Pillar 2 to Pillar 1. As the EBA notes in paragraph 122, credit risk has been deliberately excluded from K-factor methodology to provide a more proportionate prudential regime specific to the nature of individual investment firms. It does not provide a convincing argument or evidence to support the introduction of a new K-factor requirement for credit risk. We are particularly concerned by the EBA’s reference to the standardised credit risk approach in the CRR. Given it was designed for banks, the standardised credit risk approach is not an appropriate method to capture the nature of credit risk exposures in the non-trading book of investment firms.
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?
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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?
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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?
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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?
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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?
Firms should have access to all appropriate sources of liquidity on the best terms available. This is explicitly recognised by the Treaty for the Functioning of the European Union, which in Article 63 prohibits all restrictions on the movement of capital between EU Member States and between Member States and non-EU countries, unless they are necessary for legitimate public interests.2 We do not believe there is a demonstrable public interest justification for differentiating between capital and liquidity raised within or outside the European Union.
Further, placing extra burdens or restrictions on access to liquidity and capital will act against the EU’s Capital Markets Union. This would be the case if barriers are put in place on accessing global liquidity pools. It would reduce access to capital and so reduce rather than increase the pool of capital available in the EU.
Q23: What other elements should be considered in removing the possibility of the exemption in Article 43 of the IFR?
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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?
We have yet to be presented with evidence that the difference in the requirements between MIFID and AIFMD and the UCITS Directive has led to any detriment or increase in risk to investors or counterparties. This was raised in our response to the Central Bank of Ireland 2023 consultation paper 152 on Own Fund Requirements for UCITS management companies and AIFMs authorised to perform discretionary portfolio management, which had no quantification of the number of firms that would be affected or the cost to them.3
Where the provision of the MIFID activity is ancillary to the collective portfolio management, proportionality should be further enhanced by not extending all the prudential requirements in IFR/IFD to those entities. For example, it would be unreasonable to enforce all the risk management requirements in the IFD, or the prudential consolidation requirements in the IFR, to AIFMs and UCITS management companies where MIFID activity only constitutes a small part of overall entity activity.
The European co-legislators also had the opportunity to revisit this issue as part of the AIFMD and UCITS Directive review but declined to do so. We are concerned that any attempt at aligning the requirements is in effect an indirect way of undermining the intention of the primary legislative text of AIFMD and the UCITS Directive and should be resisted.
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?
We do not have any concerns about regulatory regime asymmetry. Crypto asset services governed under the MiCA Regulation and investment services governed by IFR/IFD are both highly regulated; since both services differ in nature, attempts to level the playing field by introducing overlapping categories for the purposes of K-factor application could lead to operational challenges such as double counting.
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?
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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?
We note that remuneration restrictions are not an end in and of themselves and should be supported by clear evidence. We have not seen any evidence of systemic macroprudential risks arising at AIFMs and UCITS management companies that would justify enhanced remuneration requirements.
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?
We have no concerns regarding the different approach to classifying identified staff, however greater alignment on the identification criteria may increase consistency between investment firms.
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.
We believe variation in derogation thresholds set by different regimes and national competent authorities will impact the objective of creating a level playing field. General provisions on remuneration should always be proportionate to the size of the organisation, and to the nature, scope, and complexity of activities they undertake. The organisational structure of an investment firm, AIFM or UCITS management company, along with staff responsibilities and, in turn, the staff’s ability to impact a firm’s risk profile or that of a fund under management will vary between organisations. Remuneration requirements should therefore consider these differences by affording firms sufficient flexibility when implementing requirements.
The guidelines would benefit from recognising that at a group wide policy level, investment firms (including AIFMs or UCITS management companies) that have already complied with a specific regime such as the IFD should also be deemed compliant under other regimes rather than having to implement multiple requirements.
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.
As the DP acknowledges, the Framework’s intention to distinguish the characteristics of investment firms from those of credit institutions such as banks should remain a cornerstone for any changes to the Framework. Elements of the Framework address similar issues to those in both the AIFMD and the UCITS Directive, but the latter do so in a more proportionate way. Aligning some of the Framework’s requirements with those applying under AIFMD and the UCITS Directive would reduce burdens on investment firms without diluting the intention or effect of the Framework. We note that investment firms that are asset managers are not systemic and so how they remunerate staff should not reflect the CRD as it does in some places.
The AIFMD and the UCITS Directive have just been reviewed by the co-legislators and found to be fit for purpose in these areas. We believe this supports the need to align the Framework better to them with respect to asset managers. It would also align them more with non-EU asset management hubs, so reducing the opportunity for regulatory arbitrage.
Quantitative thresholds
Currently there are quantitative thresholds to classify some employees as “identified staff”. This threshold is currently €500,000 or paid more than the lowest paid material risk taker (“MRT”). Neither AIFMs nor UCITS and their management companies are subject to this threshold, and there is no evidence to show that it impedes the respective directives’ aim of better aligning incentives. We request the quantitative threshold is put into alignment with AIFMD and the UCITS Directive.
Other remuneration issues
There are other elements of the Framework in relation to remuneration which we believe can be aligned with AIFMD and the UCITS Directive with respect to asset managers without any increased risk:
• The requirement for investment firms to get regulatory approval to exclude staff earning above €750,000 from the scope of identified staff should be removed;
• The minimum retention period should also be removed for vested deferred remuneration. This requirement has been taken from CRD and for public companies that compensate staff with equity;
• The prohibition on dividends should be aligned to AIFMD and the UCITS Directive which allow dividends to accrue, even though they cannot pay out. This would not create any extra risk and would be operationally simpler; and
• In line with AIFM and the UCITS Directive remove the ratio of fixed to variable and instead require that firms ensure an appropriate balance of fixed and variable pay.
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?
Compliance with the Framework requires significant amounts of complex data reporting. Financial reporting such as firms’ annual reports and accounts are already provided to supervisors. We do not see a case for reporting the same data twice to a single supervisor. It would be burdensome, costly and would provide no extra information to supervisors. We also note this goes against the intention of the European Commission’s initiative to reduce administrative burdens on entities by rationalising reporting requirements.
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?
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