On 16 December 2020, the European Banking Authority (“EBA”) has published a package of seven (7) final draft Regulatory Technical Standards (“RTS”) on the prudential treatment of investment firms pursuant to Regulation (EU) 2019/2033 (“IFR”), Directive (EU) 2019/2034 (“IFD”) and Directive 2013/36/EU (“CRD”).
These draft RTS as part of the phase 1 of the EBA Roadmap of Investment Firms, particularly related to the computation of the regulatory capital requirements under the new prudential framework for investment firms. The seven final draft RTS are summarized in the table below:
|
No. |
Draft RTS |
Details |
|
1. |
On the information to be provided for the authorization of Investment Firms as credit institutions |
Large investment firms classified as Class 1 investment firms (as per the new classification system – see here further relevant details) will be required to apply for a credit institution authorisation. The RTS provide specifications with respect to the information needed for the application for such authorization. Please note that the requirements are much more simplified and reduced as to what is expected from bank holding deposits or providing loans. |
|
2. |
To specify the calculation of the fixed overheads requirement and to specify the notion of a material change |
The RTS provide further clarifications with respect to the information which are eligible to be deducted as variable expenses as per the Article 13 of the IFR. Moreover, EBA provides additional expenses that are also eligible to be deducted from the total expenses for the purpose of calculation of the fixed overheads requirement (only if those expenses are included under the total expenses in accordance with the relevant accounting framework). Furthermore, RTS report specifies the definition of material change referred in Article 13(2) of the IFR for the purpose of recalculation of the fixed overheads requirement if needed. |
|
3. |
To specify the methods for measuring the K-factors requirement |
The RTS provide details with respect to the methods to be used for the measuring of the K-factors. Specifically, EBA provides additional information regarding the data process and the methodologies to be followed for the purpose of calculation of the Risk to Firm and Risk to Client K-factor. |
|
4. |
To specify the notion of segregated accounts |
EBA specifies the definition of segregate accounts in terms of clients’ money protection in the event of an Investment Firm failure. Also, the RTS report provides additional requirements to be followed at all times in order to ensure the segregation of the clients’ money from the corporate funds. |
|
5. |
To specify adjustments to the K-DTF coefficients |
EBA specifies the adjustment to be taken to the K-DTF coefficient in the event of a stressed market condition since the K-DTF requirements are overly restrictive and detrimental to financial stability. Moreover, EBA defines the ‘Period of Stressed Market Condition’ for the purpose of calculation of the adjusted coefficient. |
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6. |
To specify the calculation of the amount of the total margin for the calculation of the K-CMG |
EBA specifies the calculation of the total margin requirement and the methodology to be followed for the calculation of the K-CMG as well as information with respect to the calculation of K-CMG on a portfolio basis in case of multiple clearing members. |
|
7. |
On the criteria for subjecting certain investment firms to the CRR |
EBA specifies the criteria that competent authorities shall use to decide on a discretionary basis which Investment Firms fall under the Class 1 definition and will remain subject to the capital adequacy requirements set by the Regulation (EU) No. 575/2013 (“CRR”). |
The elaboration of these draft RTS was necessary with the entry into force of the IFR and IFD, which provide that investment firms will be subject to a new prudential regime, different from the CRR applicable today, in order to ensure smooth introduction of the IFR/IFD which will be applicable on 26 June 2021.
The EBA will deliver a broad range of mandates related to the new prudential treatment of investment firms under IFR and IF. These include 18 RTS, 3 implementing technical standards (ITS), 6 sets of guidelines, 2 reports, and the requirement that the EBA must meet of maintaining a list of capital instruments, a database of administrative sanctions and a number of notifications in various areas.
Overall, the mandates are divided into four phases based on the legal deadlines according to EBA Roadmap on Investment Firms arising from IFR/IFD which details the delivery structure of those mandates as follows:
Finally, with respect to Phase 1 of the EBA Roadmap of Investment Firms, EBA is expected to draft RTS and guidelines in the areas of a) reporting and disclosure and b) remuneration and governance and c) thresholds and criteria, by the end of December 2020.