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?
We believe that the threshold of 5 billion assets under management or advice for categorizing investment services firms is appropriate.
Q2: Would you suggest any further element to be considered regarding the thresholds used for the categorisation of Class 3 investment firms?
For categorizing a Class 3 investment firm in the case of entities that provide investment advice only, we believe that it would be more appropriate for the volume of assets advised to be less than EUR 3 billion rather than the current EUR 1.2 billion.
Sometimes, It is complicated to delimit the volume of assets advised, as well as the type of assets, (it may include non-MIFID assets) so increasing the threshold would give more flexibility to the entities.
If the requirements of letter i) are maintained, i.e. the total gross annual income from investment services and activities of less than EUR 30 million, the assets advised on financial investment instruments should be at least EUR 3 billion for consistency.
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?
In our opinion, the change from class 2 to class 3 and vice versa should be made taking into account the information at the end of the fiscal year to avoid a company being reclassified several times in the same fiscal year. However, the supervisor could request a follow-up in those cases in which the thresholds are exceeded repeatedly during the fiscal year.
As for establishing a transition period for the change from category 3 to 2 due to thresholds being exceeded, it seems that it would not be necessary to establish a transition period.
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?
Yes. The minimum level of own funds requirements should be different depending on the activities carried out by investment firms.
The purpose of this requirement is to have sufficient capital for an orderly winding down of the firm's operations within a period of three months.
In the case of Financial Advisory Firms, which only make investment recommendations and in no case are proxied by their clients and much less have the deposit of assets, the cancellation of relations with clients, suppliers, supervisor, ... can be done in 1 month or at most 2 months.
That is why it is proposed that for entities that only provide financial advice, the own funds requirement should be 1/12 or 1/6 of the fixed costs.
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?
In the case of financial advisory firms, we consider that it is not necessary to differentiate deductible expenses by activity or business model.
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?
If the expenses incurred by the related agent are not transferable to the entity, these expenses should not be included.
Likewise, the expenses incurred by the agent on behalf of the entity, as well as its own remuneration, would not be fixed expenses, since its remuneration is generally variable and therefore if there is no activity there is no remuneration, unless other conditions have been agreed between the agent and the entity.
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?
We consider that FOR should not be calculated distinguishing costs related to non-MIFID activities. It is complicated in some expense items, to distinguish from which part of the business they come from and it would entail a great effort to ESI, unless the expenses of non-MIFID activities are relevant and could distort the capital requirement.
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?
Yes, expenses related to exchange rate fluctuations should be included in the list of deductions since it is not a recurring expense, and therefore is not considered a fixed expense.
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?
It would be advisable to define what is meant by non-recurring advice: depending on the nature of the asset, previous existence of a recommendation on the asset, frequency of recommendations on that asset or others to the same client.
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?
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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?
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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?
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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?
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Q23: What other elements should be considered in removing the possibility of the exemption in Article 43 of the IFR?
We believe that Small and non-interconnected investment firms should continue to have the possibility of exemption.
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