The European Commission has published legislative proposals for a Regulation and a Directive that it has adopted introducing a revised EU prudential regime for investment firms. The two legislative acts would amend the existing prudential framework for investment firms set out in the Capital Requirements Directive IV (CRD IV) and the Capital Requirements Regulation (CRR) and the revised Markets in Financial Instruments Directive (MiFID II) and Markets in Financial Instruments Regulation (MiFIR).

The legislative proposals divide investment firms into three classes:

  • Class 1 investment firms are those with total assets above €30bn and which provide underwriting services and dealing on own account. These investment firms would remain under the CRD IV/ CRR;
  • Class 2 investment firms would be those above any of the following size thresholds: (i) assets under management under both discretionary portfolio management and non-discretionary arrangements higher than €1.2 billion; (ii) client orders handled of at least €100 million / day for cash trades and/or at least €1 billion / day for derivatives; (iii) balance sheet total higher than €100 million; (iv) total gross revenues higher than €30 million; (iv) exposure to risks from trading financial instruments higher than zero; (v) client assets safeguarded and administered higher than zero; and (vi) client money held higher than zero;
  • Class 3 investment firms would be those below all of the above thresholds.

For class 3 investment firms their minimum capital would be either the level of initial capital required for their authorisation or a quarter of their fixed costs for the previous year, whichever is higher.

For class 2 investment firms the minimum capital requirement would be set either as for class 3 investment firms, or according to a new ‘K-factor’ approach for measuring their risks, whichever is higher. The K-factors specifically target the services and business practices that are most likely to generate risks to the firm, to its customers and to counterparties. They set capital requirements according to the volume of each activity.

Revised governance and remuneration requirements will also apply to class 2 and 3 investment firms.

The provisions in MiFIR on assessing the equivalence of a third country’s regulatory framework are adjusted in light of the proposals.

The legislative proposals will now be discussed by the European Parliament and the Council of the EU. Once adopted, an implementation period of 18 months is envisaged before the new regime starts to apply.

View Review of the prudential framework for investment firms, 20 December 2017

View European Commission frequently asked questions: revised framework for investment firms, 20 December 2017