United Kingdom (and EU regulation)

EBA publish final draft technical standards on the prudential treatment of investment firms

On 16 December 2020, the European Banking Authority (EBA) issued a final report containing seven final draft regulatory technical standards (RTS) on the prudential treatment of investment firms.

The first draft RTS included in the final report have been developed for the mandates related to the authorisation of certain credit institutions. Article 8a(6)(a) of the Capital Requirements Directive IV (CRD IV) asks the EBA to draft RTS specifying the information to be provided to Member State competent authorities for the authorisation of a credit institution in accordance with the new definition introduced in point (b) of Article 4.1.(a).1 of the Capital Requirements Regulation (CRR). The proposed draft RTS consist of a subset of the information needed for the authorisation of a credit institution.

A second group of RTS relate to capital requirements for investment firms at solo level. The draft RTS relate to the following mandates:

Article 13(4) of the Investment Firm Regulation (IFR) asks the EBA to draft RTS specifying the deductions to be applied for the calculation of the fixed costs, which are the basis for the calculation of the fixed overheads requirements. The notion of ‘material change’ is also specified, in accordance with which the Member State competent authority may allow the fixed overheads requirement to be adjusted.
Point (a) of Article 15(5) of the IFR asks the EBA to draft RTS specifying the methods for measuring the K-factors, when they are not already fully detailed in the IFR. The draft RTS provide clarification on the measurement of most of the Risk-to-Client (RtC) K-factors and some of Risk-to-Firm (RtF) K-factors, whereas the Risk-to-Market (RtM) K-factors are either defined as references to the CRR or detailed in the IFR and therefore require no further specification.
Point (b) of Article 15(5) of the IFR asks the EBA to draft RTS providing clarification on the notion of segregated accounts by setting the conditions for their identification for the purpose of calculating the capital requirement related to the K-factor ‘client money held’ (K-CMH).
Point (c) of Article 15(5) of the IFR asks the EBA to draft RTS specifying the adjustments to the K-factor ‘daily trading flow’ (K-DTF) coefficients in the event that, in stressed market conditions, K‐DTF requirements seem overly restrictive and detrimental to financial stability. The draft RTS also specify that stressed market conditions shall cover only those stressed market conditions which are referred in point (a) of Article 3 of Commission Delegated Regulation (EU) 2017/578 when they lead to increased trading volumes.
Article 23(3) of the IFR asks the EBA to draft RTS specifying the calculation of the amount of the total margin required for the calculation of the K-factor ‘clearing margin given’ (K-CMG) and the criteria for avoiding regulatory arbitrage in the event that K-CMG approach is used.
Article 5(6) of the Investment Firm Directive (IFD) asks the EBA to further specify the criteria set out in points (a) and (b) of paragraph 1 of Article 5 of the IFD and ensure the consistent application thereof. Therefore the draft RTS set the quantitative thresholds above which, an investment firm’s activities should be considered to be of a significant scale which could lead to a systemic risk.

The above draft RTS are part of the phase 1 mandates of the EBA roadmap on investment firms.