On 13 November 2017, the Dutch Central Bank (De Nederlandsche Bank, DNB) circulated a letter on amendments that will be made to the regulatory framework for the so-called local firms (plaatselijke ondernemingen) (the Letter).

In its letter, DNB states that investment firms holding a licence to perform the investment activity of “proprietary trading” only since 1 January 2014 have under specific conditions been designated by DNB as “local firm” within the meaning of Article 4(1)(4) of the Capital Requirements Regulation (CRR), which exempts these firms from the scope of the CRR. Instead, a national framework of capital requirements has applied to these firms since that date, including a solvency requirement that is at all times at least equal to the total net margin requirements of the clearing members under whose responsibility and guarantee the investment firm performs proprietary trading. The European Banking Authority (EBA) has performed extended preliminary assessments and queried DNB on this Dutch framework for “local firms” for the application of the CRR.

According to the EBA, DNB’s interpretation of the term “local firm”  is too broad. EBA takes the view that a “local firm” may be active as a proprietary trader both on the derivative and cash markets, but where it regards the cash markets this should be limited exclusively to transactions performed to hedge positions in derivatives markets. The EBA has made it clear that transactions in the cash markets, such as proprietary trading in units in Exchanged-Trade Funds that do not have the purpose of hedging directly related derivatives transactions, fall outside of the scope of the definition of “local firm” in the CRR. In view of this, the EBA has initiated a Breach of Union Law (BUL) investigation against DNB, as it takes the view that DNB has applied the definition of “local firm” in a manner that is incompatible with Union law.

Although DNB is of the opinion that the current national regime is appropriate and proportional from a prudential perspective, DNB has following internal and external analyses come to the conclusion that its interpretation is legally untenable. Consequently, DNB will going forward discontinue the national prudential regime for “local firms”. DNB will take immediate action to apply the CRR to the investment firms concerned, but at the same time believes that it would be disproportional to apply and enforce all CRR capital requirements with immediate effect. Therefore, proprietary firms will need to report to DNB ultimately by 14 May 2018 about the CRR capital requirements that apply to the proprietary firm concerned. If it is clear that the proprietary firm concerned will not meet the relevant requirements, it will need to provide a capital restoration plan to DNB which justifies the conclusion that the proprietary firm will comply with the CRR within a reasonable term to be set by DNB, but no later than by 31 December 2019. Any proprietary firms currently applying for an investment firm licence will be subject to the aforementioned transition trajectory, which will be confirmed by means of a requirement included in the licence.

These amendments to the supervisory framework will also mean that the exemption to the bonus cap available for proprietary firms that used to qualify as a local firm will lapse. The Netherlands Authority for the Financial Markets (Autoriteit Financiële Markten) has indicated that it will not be enforcing the bonus cap for proprietary firms before 31 December 2019. The Dutch Minister of Finance will consult with the AFM and the sector in the period ahead to discuss potential new remuneration regulations for this sector.

A stakeholder meeting was held at DNB’s offices on 14 November 2017 during which more background information was provided.

View DNB’s letter (Dutch only), 13 November 2017.