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?
NA
Q2: Would you suggest any further element to be considered regarding the thresholds used for the categorisation of Class 3 investment firms?
NA
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?
NA
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?
We do not consider it appropriate to differentiate the minimum level of the own funds requirements between individual investment firms. Minimum levels of own funds requirements set out in the IFR should be consistent and fair. An attempt to differentiate requirements according to the activities and/or business models of firms will likely lead to certain firms being burdened with excessive requirements. The orderly wind-down of a firm’s operations, and the capital required to sustain the firm throughout the wind-down period, should be appropriately captured in a detailed wind-down plan prepared by the firm. In addition, competent authorities have the ability to impose additional capital requirements for the wind-down through the SREP process according to the specific activities and risks of an individual firm.
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 deductibles in the FOR calculation are principles-based and not defined according to the activities or business model of the firm. We consider that this is the most appropriate approach and that consistency of application should be maintained. We do however consider that there is opportunity to revisit the current list of deductible items, as follows.
- Payments related to contract-based profit and loss transfer agreements according to which the investment firm is obliged to transfer, following the preparation of its annual financial statements, its annual result to the parent undertaking are currently deductible. Similarly, we consider that costs incurred by an investment firm which are reimbursed by another undertaking under a contractual arrangement should be deductible in the calculation of the FOR.
- As set out in our response to question 7, we consider that expenses incurred solely in relation to activities which are no longer undertaken by an investment firm should be eligible for deduction.
- As set out in our response to question 8, we consider foreign exchange losses to be variable costs which should be excluded from fixed expenditure in the FOR calculation.
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?
N/A
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 do not consider that the FOR should be calculated according to the costs related to MiFID activities alone. As the FOR is designed to ensure a minimum level of own funds when the firm is in wind-down, all costs of the firm are relevant. However, where a firm ceases to undertake such activities, we consider that associated fixed costs incurred in the prior year (and therefore included within the calculation of the FOR) should be eligible for deduction without requiring the express permission of the competent authority. We would propose requiring the distinction of the costs associated with MiFID and non-MiFID activities to be distinguished in the audited financial statements where non-MiFID activities are no longer undertaken and the associated costs are excluded from the calculation of the FOR.
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?
Foreign exchange losses are variable year on year (and could equally be a gain in any given period). We therefore consider foreign exchange losses to be variable costs that should be eligible for deduction in the calculation of the FOR as they are not representative of gains or losses a firm may incur in future periods.
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?
NA
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?
NA
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?
NA
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?
NA
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?
NA
Q14: Should crypto-assets be included into K-factor calculation, either as a new K-factor or as part of K-NPR?
NA
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?
NA
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)?
NA
Q17: When addressing other activities an investment firm may perform, which elements, on top of the discussed ones, should be also taken in consideration?
All activities undertaken by an investment firm should be considered in the internal assessment of material risks, mitigants and the associated capital requirements. A robust internal assessment is more effective in ensuring sufficient capital to address the potential risks posed to clients through these activities than additional K-factors. By their nature, K-factors are specific and require consistent application. Therefore, they are unlikely to determine an appropriate level of capital for those activities which expose clients to more nuanced firm-specific risks. For example, operational risk for an asset management firm will in some cases be a function of AUM or trade volumes, but the risk is also linked to other factors such as headcount or general complexity. K-AUM or K-COH will potentially misrepresent the operational risks versus a robust internal assessment. Separately, balance sheet market or counterparty risks for an asset management firm do not map to the K-factor structure and would only be captured by an internal assessment of all risks.
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?
NA
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?
NA
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?
NA
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?
NA
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?
NA
Q23: What other elements should be considered in removing the possibility of the exemption in Article 43 of the IFR?
NA
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 support the extension of the application of K-factors to UCITS Management Companies and AIFMs. This ensures that an appropriate level of capital is required to be held to cover potential risks arising from MiFID activities, and ensures a level playing field between firms providing such services. We note that it is imperative that any capital requirements extended to such firms under the IFR take into account regulation already implemented by competent authorities to bridge this gap. The duplication of, or conflict with, any locally-mandated requirements must be avoided.
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?
NA
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?
NA
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?
NA
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?
NA
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.
NA
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.
NA
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?
We believe that accounting and financial information is useful to competent authorities in their assessment of the financial health of investment firms. Competent authorities should be given discretion to decide the level of granularity and frequency of reporting required in order to meet their objectives, with certain competent authorities already requiring financial information to be submitted on a periodic basis. We consider it unlikely that providing additional financial information in a format mandated by the IFR would be useful to competent authorities. Additionally, the costs associated with duplicating this information are likely to outweigh any benefits.
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?
NA