Review of Investment Firms’ Prudential Framework: EBA Discussion Paper 2024/01

By Panayiotis Antoniou,
CEO, MAP Risk Management Services Ltd (MAP RMS)


Three years since the implementation of the Regulation (EU) 2019/2033 (IFR) and Directive (EU) 2019/2034 (IFD) (26 June 2021), the European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA) issued a discussion paper following the European Commission’s call for advice on the prudential framework for investment firms. The IFR/IFD regime is aimed at introducing a prudential framework which is tailored to the size, activities and complexity of investment firms as well as at ensuring that a simplified approach to calculation and reporting methodologies is established and maintained.

Through the discussion paper, the EBA portrays its opinion that the current framework reaches the general objectives mentioned above. However, it has identified a number of weaknesses and areas of improvements of the prudential framework highlighted by market participants and supervisors, that may lead to changes to the IFR, IFD or the relevant delegated regulations. In particular, this paper addresses elements highlighted by competent authorities as priorities for improvement as well as various other technical elements which are brought forward.

Objectives of the Discussion Paper

The main objective is to assess the current prudential framework, identify its strengths and weaknesses, and propose improvements. Key focus areas include the categorisation of investment firms, capital and liquidity requirements, K-factors, remuneration, prudential consolidation, the interactions with other financial regulations and other reporting requirements.

Key Areas of Focus

  1. Categorisation of Investment Firms
    • Effectiveness and Consistency: The discussion paper reviews the current categorisation criteria, evaluating their effectiveness and consistency. It scrutinises the thresholds that determine the classification of investment firms and considers the conditions under which firms qualify as credit institutions under CRR3.
    • Additional Issues: Various other aspects related to the categorisation are examined to ensure that the system remains relevant and efficient in the evolving financial landscape.
  2. Conditions for Small and Non-Interconnected Firms
    • Class 3 Investment Firms: The paper discusses the conditions for firms to qualify as Class 3 (small and non-interconnected) and the criteria for transitioning between Class 3 and Class 2 categories. This is crucial for maintaining a proportional approach to regulation based on the size and risk profile of the firms.
    • Transition Between Categories: It also addresses the procedural and substantive aspects of firms moving between different categories, ensuring a smooth and clear transition process.
  3. Fixed Overheads Requirements (FOR)
    • Background and Wind-Down Period: The fixed overheads requirement, essential for calculating capital needs is discussed in detail. This includes examining the three-month wind-down period and the applicability of deductibles related to specific business models.
    • Expenses Considerations: The paper also delves into various types of expenses, such as those related to tied agents, non-MiFID activities, and foreign exchange rate differences, providing a nuanced approach to calculating fixed overheads.
  4. Review of Existing K-Factors
    • Client Orders Handled (COH): The definitions and calculations of K-factors, such as Client Orders Handled are reviewed. This includes different aspects of COH, like placing financial instruments without firm commitment and name give-up operations.
    • Other K-Factors: The review extends to other K-factors to ensure they adequately capture the risks associated with the activities of investment firms Recommendations are given in definitions and calculation of methodologies.
  5. Inclusion of New K-Factors
    • Addressing Uncovered Risks: The discussion includes the possibility of introducing new K-factors to address risks not currently covered, such as those related to non-trading book positions, crypto-assets, and operational risks specific to firms calculating K-DTF.
  6. Implications of the Banking Package (CRR3/CRD6)
    • FRTB Adoption: The adoption of the Fundamental Review of the Trading Book (FRTB) for investment firms is considered, along with the delineation between trading book and banking book positions. This is aimed at preventing regulatory arbitrage and ensuring consistent treatment of similar risks.
    • Regulatory Interactions: The potential impacts of the CRR3/CRD6 package on investment firms are discussed, highlighting the need for coherence between different regulatory frameworks.
  7. Liquidity Requirements
    • Risk Sensitivity and Adequacy: The current liquidity requirements are assessed for their risk sensitivity and adequacy. The paper suggests improvements to better reflect the liquidity needs of various activities and services provided by investment firms.
  8. Prudential Consolidation
    • Investment Firm Groups: The framework for prudential consolidation of investment firm groups is examined. The discussion includes the potential extension of the scope to incorporate crowdfunding and crypto service providers.
    • Ensuring Consistency: Ensuring that the consolidation framework remains consistent and applicable to the evolving structures of investment firms is a key focus.
  9. Interactions with Other Regulations
    • Overlap and Gaps: The paper analyses the interactions between the IFD/IFR and other regulations like MiFID, MiCAR, and UCITS/AIF. It addresses potential overlaps and regulatory gaps, aiming to streamline and harmonize the regulatory landscape.
    • Harmonisation: Efforts to harmonise the prudential framework with other regulatory requirements are discussed to ensure coherence and reduce compliance burdens.
  10. Remuneration and Governance
    • Policies and Practices: The discussion on remuneration policies includes aspects such as variable remuneration, governance, and oversight. The need for transparency and disclosure in remuneration practices is emphasized.
    • Regulatory Compliance: Ensuring that remuneration practices comply with regulatory standards and promote sound risk management is a key consideration.
  11. Other Reporting Requirements
    • Other Elements: Extending Reporting Requirements to financial information. Including considerations on topics which are covered by other EBA publications (ESG risk factors, investment policy disclosures for investment firms, CfA on commodities markets)


The EBA-ESMA discussion paper represents a thorough review of the current prudential framework for investment firms. By seeking extensive feedback, the EBA and ESMA aim to enhance the framework’s effectiveness, risk sensitivity, and adaptability to the evolving financial environment. The feedback from stakeholders will be crucial in shaping the final report in response to the European Commission’s call for advice, ensuring that the prudential framework remains fit for purpose and capable of addressing future challenges.

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