First Steps on Proposed Revisions to the EU Prudential Framework for Investment Firms

by Shearman & Sterling LLP
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The European Banking Authority has published an Opinion on the design of a new EU prudential framework for non-bank, non-systemically important investment firms. The EBA published a report in December 2015 in response to a Call for Advice from the European Commission on the suitability of certain aspects of the EU prudential regime for investment firms. In that report, the EBA recommended that it was necessary to distinguish between investment firms for which the requirements in the Capital Requirements Directive and the Capital Requirements Regulation are appropriate and investment firms for which those requirements are inappropriate and for which a separate prudential regime should be established. The Commission issued a second CfA in June 2016 asking for: (i) advice on the criteria to identify the investment firms for which the CRD IV requirements are appropriate and which rules should apply to them; and (ii) advice on the new prudential regime for investment firms that should not be subject to CRD IV. The EBA published an Opinion on point (i) on October 19, 2016 concluding that investment firms that have been identified, according to the current EU regulatory framework contained in the relevant technical standards and EBA Guidelines, as global systemically important institutions (G-SIIs) or other systemically important institutions (O-SIIs) should be subject to the full requirements of CRD IV although these criteria might need to be revised through technical standards to take into account the specificities of investment firms. This latest Opinion is in response to the second part of the Cfa and follows the EBA's November 2016 Discussion Paper on its proposals.

The EBA is maintaining its initial recommendation that there should be three different categories of investment firm: (i) systemic "bank-like" firms which should remain within the scope of the CRD IV (Class 1 firms); (ii) a middle category for a majority of firms that are not systemic but do pose risks and should therefore be subject to a tailored prudential regime (Class 2 firms); and (iii) small firms which are not interconnected and which only provide limited services which should only be subject to a very simple regime (Class 3 firms). The EBA recommends that a consolidated rulebook should be developed for all Class 2 and 3 investment firms which is separate from the rulebook applied to banks and that a transitional regime be put in place before the new regime comes into force. The EBA recommendations cover details on the proposed framework for Class 2 and 3 firms, including thresholds for the categories, consolidated supervision, the definition of capital, capital requirements, liquidity requirements, concentration risks, Pillar 2 requirements, reporting, remuneration and governance. In addition, the EBA recommends that commodity derivatives investment firms within the scope of MiFID II should be subject to a tailored new prudential regime within the new framework.

As an Annex to the Opinion, the EBA has published its feedback to responses it received to the Discussion Paper issued in November 2016. The Opinion will feed into the Commission's development of a new prudential regime for investment firms that do not fall within CRD IV.

View the Opinion.

View the Annex to the Opinion.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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