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I am an Investment Firm
What is this new prudential IFD/IFR framework I am hearing about?
Investment firms play an important role in facilitating pension savings and investment flows across the EU, with various services used to support effective capital allocation and risk management. As such, they are subject to the CRD IV /CRR prudential regime. As CRD IV/CRR focusses on credit institutions and not necessarily on investment firms, the European Parliament has adopted the Investment Firm Directive (IFD) and the Investment Firm Regulation (IFR). IFD and IFR will both apply from July 2021 onwards.
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- So, what changes?
- Okay, so now I fall under IFD/IFR. Where’s the impact?
- So, what’s next?
- The impact of the new IFD/IFR regime
- More information?
So, what changes?
Under the current regime, credit institutions are firms that take deposits and provide loans. These are authorized under CRD IV. Investment firms are firms that provide one or more investment services or activities. These are authorized under MiFID II. Both types of firms need to meet prudential requirements described under CRD IV and CRR, or under the older CRD III requirements.
Under the new regime dealing on own account and underwriting are riskier investment services and activities. Large investment firms with assets of over €30 Bn that deal on own account or perform underwriting will be required to apply for authorization under CRD IV. When so authorized, they will have a banking license and will be able to take deposits and issue credit on own account. Other investment firms will still be authorized/licensed under MiFID II, but will be supervised from a prudential perspective based on the IFD/IFR.
Investment firms that are not quite as large may still need to comply with the CRD IV/CRR prudential requirements. This is the case if the firm has over €15 Bn in assets and deals on own account or performs underwriting services . Furthermore, if the firm has over €5 Bn in assets, and it is systemically important, the competent authority may choose to apply the CRD IV/CRR prudential requirements as well. We will go into this in more detail in a follow-up article.
For now it is good to realize, that firms which remain MiFID II authorized, will become subject to the new IFD/IFR prudential regime.
Okay, so now I fall under IFD/IFR. Where’s the impact?
The main impact of the new regime will be in capital and liquidity requirements. These will be calculated in a new way, and will differ significantly between types of investment firms. Most importantly, capital requirement calculations will now be based on so-called K-factors. The K-factor approach models the exposures to which investment firms are subjected. The size of each these exposures contributes to the required capital. This has several important effects: the new capital requirements may force firms to reconsider their business model. As reporting requirements on capital adequacy are now based on K-factor calculations, there will be IT changes as well.
The IFD/IFR rules on internal governance are very similar to the rules under CRD IV/CRR. Note that the European Banking Authority (EBA) will issue guidelines specific to IFD/IFR internal governance and these may differ from the guidelines issued for firms subject to CRD IV/CRR. In follow-up articles we will dive deeper into the impact of these changes.
The EBA issued the first draft Regulatory Technical Standards (RTS) and draft Implementing Technical Standards (ITS) for consultation on June 4. These consists of four consultation papers:
- The first consultation paper is on the prudential requirements
- The second consultation paper is on the reporting requirements and disclosures
- The third and fourth consultation papers are on the remuneration requirements
The consultation period runs until September 4.
In addition, the EBA issued a roadmap for the implementation of the new prudential regime for investment firms. The roadmap outlines the EBA’s work plan for the mandates described in IFD/IFR and clarifies the sequencing and rational behind their prioritization.
The impact of the new IFD/IFR regime
This article is the first of five in our latest investment management campaign. Click on the button on the right to see an overview of all the perspectives and sign up at the top right to automatically receive the next IFD/IFR perspective by email.
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Would you like to know more about the impact of the new IFD/IFR regime? For more information or questions, please contact Marieke van Eenennaam or Stephan Ong via their contact details below.