First Consultations on Proposed Technical Standards for New EU Investment Firm Prudential Regime

The European Banking Authority has opened consultations on several draft technical standards required to implement the new prudential framework for investment firms. The Investment Firm Regulation and the Investment Firm Directive introduce a more tailored prudential regulatory regime for many EU investment firms that reflect the risks inherent in the diverse activities those firms undertake. It also aims to amend the prudential requirements imposed on certain investment firms to avoid the imposition of undue administrative burdens by removing those firms from the scope of the revised Capital Requirements Regulation and Capital Requirements Directive. Only the largest investment firms will be subject to, and need to obtain bank authorization under, CRD and CRR. The majority of both the IFR and IFD will apply from June 26, 2021. The EBA's consultations are on proposed technical standards that will supplement the IFR and IFD.

The technical standards that the EBA is consulting on are set out in four consultation papers, split as follows:

• Consultation on draft Regulatory Technical Standards on the prudential requirements for investment firms, which covers draft RTS on the following topics:
  • information to be provided to national regulators for the authorization of an investment firm as a credit institution;
  • calculation of the EUR 30 bn threshold for an investment firm to be required to apply for a credit institution authorization, including clarification of the notion of consolidated assets, the definition of assets, the procedure to calculate the total assets on a monthly basis, the treatment of assets of branches of third-country groups and the inclusion of undertakings that are established outside the EU as being part of EU groups;
  • calculation of the fixed overheads requirement and to define the notion of a material change which allows a national regulator to adjust a firm's own funds requirements upon a material change in the business activities of that firm;
  • methods for measuring K-factors, where these were not fully specified in IFR;
  • definition of segregated accounts, in respect of which, in the event of failure of an investment firm, the firm must meet certain conditions designed to ensure the protection of client money; the EBA is proposing a subset of requirements to those imposed under the Markets in Financial Instruments Directive RTS on organizational requirements for investment firms;
  • adjustments to the coefficients for the daily trading flow (K-DTF) in periods of extreme market volatility to encourage trading activities; the periods of market stress are those set out in the MiFID RTS on the requirements on market making agreements and schemes;
  • calculation of the amount of the total margin for the calculation of the K-factor for margin in respect of cleared positions (clearing margin given) (K-CMG);
  • criteria for national regulators to take into account before subjecting an investment firm to the CRR that is not otherwise due to be subject to CRR; and
  • prudential consolidation of investment firm groups, which set the scope of and methods for prudential consolidation by building on those criteria set in CRR, adjusted for investment firms.

• Consultation on draft Technical Standards on reporting and disclosure requirements for investment firms, which covers:
  • draft Implementing Technical Standards on supervisory reporting and disclosures of investment firms which set out uniform reporting formats and templates, instructions and methodology on how to use those templates, the frequency and dates of reporting and the definitions for the reporting of investment firms as well as uniform disclosure formats; and
  • draft RTS on the obligation to provide information to the relevant national regulator to allow effective monitoring of the thresholds that determine whether a firm should be subject to IFR or CRR and CRD.

• Consultation on draft RTS on classes of instruments that adequately reflect the credit quality of the investment firm as a going concern and possible alternative arrangements that are appropriate to use for variable remuneration
• Consultation on draft RTS on the qualitative and appropriate quantitative criteria to identify categories of staff whose professional activities have a material impact on an investment firm's risk profile.