It is very important to recognise that prudential regulations have a key impact on the functioning of capital markets and policies should be proportionate and should achieve the right balance between mitigating prudential risk while promoting competition, competitiveness and the overall goal of improving the EU’s capital markets within the CMU. It will be important to recognise the global regulatory environment applicable to investment firms outside the EU (noting that the EU is the only jurisdiction to apply Basel type rules to investment firms), and to calibrate prudential rules to no more than what is necessary to safeguard the resiliency of the financial markets. Doing otherwise will risk damaging the level of competition in EU liquidity provision and make it harder for investment firms to support the objectives of the CMU.
Challenges and Overregulation
It is important to acknowledge that EU capital markets are currently lagging behind those in the US and Asia. The IFR/IFD framework already is the most stringent prudential framework targeting Investment Firms globally. FIA EPTA identifies a shift in the EBAs DP away from the underlying principles that were the original driver for IFR back towards a bank driven CRR approach for investment firms, raising the risk of overregulation, specifically:
• Exacerbating Existing Trends: Further adoption of CRR-type requirements may intensify the ongoing trend of firms increasing their liquidity provision activities outside the EU, which could further weaken our EU capital markets. This contradicts the Union’s priorities in light of the CMU.
• Increased Regulatory Complexity: Additional bank-derived regulation would add further layers of complexity, making compliance more challenging and costly for firms. This effectively creates higher barriers to entry for new firms and makes it more difficult for established firms to grow inside the EU. Ultimately risks deterring firms from starting new operations in the EU, reducing the attractiveness of our markets compared to other jurisdictions.
• Undermining of IFR/IFD's Original Purpose: A shift towards CRR risks undermining the original intent of the IFR/IFD framework, which was specifically designed to establish a tailored and proportionate regulatory regime that recognizes the unique risk profiles of investment firms, distinct from those of credit institutions. This fundamental difference in risk profiles underscores the need for a differentiated regulatory approach.
• Many important proposed changes in this DP are not subject to consultation questions. Any proposed changes should be submitted to consultation with relevant questions and evidenced with data that would show that such changes are necessary and proportionate. We have nevertheless provided some comments on these proposed changes.
• Many important concerns raised to the attention of the EBA in the past have not been sufficiently addressed in this DP, which represents a missed opportunity to implement targeted changes to some aspects of IFR that have a significant impact on EU liquidity and competitiveness. We have again highlighted these areas of concern in this DP. FIA EPTA would like to provide comments to Q1 (removal of the threshold) as well as more general comments on the classification, consolidation and use of group capital test (noting that there is no question in section 1 of the DP on classification and in section 8 consolidation, therefore, all of these comments are provided under question 1).
