On 8 March, FIA submitted feedback on the European Commission’s Proposal for a Regulation on the prudential requirements of investment firms. FIA members welcome the legislative proposals and support the idea of a calibrated regime taking into account the business of investment firms. However, FIA members have raised a number of concerns regarding the proposals as follows:
• Risk to Market (RtM) – K-CMG
FIA members’ key concerns relate to Article 21 and Article 23.
Article 21 - FIA recommends that the language of Article 21 be redrafted to (i) align with recitals (20) and (24) and (ii) make clear that rather than investment firms having to apply the "higher of" K-NPR and K-CMG, the requirement is that when calculating RtM, investment firms must apply K-NPR under Article 22, unless they have been permitted by their competent authority to apply K-CMG under Article 23.
Article 23 - FIA recommends that the proposed Article 23(1)(d) (which limits the availability of K-CMG to those investment firms whose clearing member is a credit institution) is deleted. Otherwise, such differentiation in capital treatment (based upon whether or not the clearing member is a credit institution) would likely result in several non-credit institution clearing members ceasing to provide client clearing services and/or relocating their business outside of the EU. Each such outcome would have a very negative impact on an area of great concern to the European Commission – namely, it would further reduce access to clearing, reduce competition between clearing members, result in clearing being concentrated in a smaller number of firms and could potentially result in investment firms reducing the amount of hedging that they conduct via cleared derivatives, thereby increasing systemic risk.
• Own Funds requirements
Article 9 in Part 2 of the proposed Regulation - FIA recommends that investment firms should be permitted to hold evergreen subordinated debt, with the provision that it can only be repaid if the resulting capital surplus is above a certain threshold.
• Risk to Market – K-NPR
Article 22 of the proposed Regulation - FIA recommends that more time is spent considering these provisions and that consideration be given to the development of some form of FRTB “lite” regime in the intervening five years.
• Risk to Firm – K-TCD
Article 26 of the proposed Regulation – FIA requests clarification of the rationale for the application of an 18% supervisory factor for commodities and encourage further analysis before committing a specific percentage to primary legislation.
Article 30 of the proposed Regulation - FIA recommends adding highly liquid commodities (e.g. LME warrants) as eligible collateral to Table 4 of Article 30 of the proposed Regulation.
• Concentration Risk – K-CON
Article 36 of the proposed Regulation – FIA believes that the reference to “regulatory capital” is a typographical error and should be replaced with a reference to “own funds”.
• Liquidity requirement
Article 42 of the proposed Regulation - FIA recommends that the Commission considers assets in addition to cash and those in Articles 10 to 13 of Commission Delegated Regulation (EU) 2015/61.
