COMMISSION STAFF WORKING DOCUMENT Review of the prudential framework for investment firms Accompanying the document Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on the prudential requirements of investment firms and amending Regulations (EU) No 575/2013, (EU) No 600/2014 and (EU) No 1093/2010 Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on the prudential supervision of investment firms and amending Directives 2013/36/EU and2014/65/EU
Date: 2017-12-20
Institutions: Directorate-General for Financial Stability, Financial Services and Capital Markets Union, European Commission
Subjects: administrative supervision, capital market, disclosure of information, financial control, financial legislation, investment company, market supervision, private-sector liquidity, venture capital

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 20.12.2017  SWD(2017) 481 final  COMMISSION STAFF WORKING DOCUMENT Review of the prudential framework for investment firms Accompanying the document Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on the prudential requirements of investment firms and amending Regulations (EU) No 575/2013, (EU) No 600/2014 and (EU) No 1093/2010  Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on the prudential supervision of investment firms and amending Directives 2013/36/EU and2014/65/EU  {COM(2017) 790 final} - {COM(2017) 791 final}  
 
 
1. 

INTRODUCTION 

This  Staff  Working  Document  forms  part  of  the  review  of  the  prudential  treatment  of 
investment  firms,  included  in  the  2017  Commission  Work  Programme  as  a  REFIT-
exercise1. The objective of the review is to ensure an appropriate application of capital, 
liquidity and other key prudential requirements for these firms. It is mandated by a series 
of  Articles2  in  Regulation  (EU)  No  575/2013  (Capital  Requirements  Regulation,  or 
CRR)3.  Together  with  Directive  2013/36/EU  (Capital  Requirements  Directive,  or 
CRDIV)4  the  CRR  constitutes  the  current  prudential  framework  for  investment  firms. 
When these texts were agreed, co-legislators mandated the present review in recognition 
of the fact that the current framework, which is largely focused on credit institutions5, is 
not fully suited to all investment firms.  

As set out in the relevant Articles of the CRR which mandate the review, it is carried out 
in consultation with the European Banking Authority (EBA) and the European Securities 
and  Markets  Authority  (ESMA)  and  the  national  competent  authorities  represented  in 
these European Supervisory Authorities (ESAs)6. Among the ESAs, the competence for 
the prudential framework for investment firms embedded in the CRR/CRDIV rests with 
the EBA. As a result, the review relies to a large extent notably on the work of the EBA, 
based on the successive calls for advice from the Commission7. ESMA and several of its 
members  have  been  involved  in  the  work  of  the  EBA  throughout  but  ESMA  has  not 
provided its own separate advice on the review.   

According to the Better Regulation toolbox (tool #9), no Commission impact assessment 
is necessary whenever an EU agency has been mandated to carry out policy-design work 
and  related  analysis,  to  the  extent  that  the  Commission  proposal  does  not  substantially 
deviate  from  the  agency's  recommendations  and  the  Commission  services  consider  its 
assessment to be of sufficient quality. While the Regulatory Scrutiny Board examined a 
draft  impact  assessment  for  this  initiative,  it  was  ultimately  concluded  that  a  Staff 
Working Document was more appropriate given that the specific mandate of the review 

1 

See 

204 

page 

at 
https://ec.europa.eu/info/sites/info/files/cwp_2017_refit_scoreboard_2016_en.pdf.  The  Commission's 
Regulatory  Fitness  and  Performance  (REFIT)  programme  aims  to  ensure  that  EUR  legislation  stays 
simple,  proportionate  and  up-to-date,  and  delivers  results  for  citizens  and  businesses  effectively, 
efficiently and at minimum cost. 

scoreboard 

REFIT 

the 

of 

2 Articles 493(2), 498(2), 508(2), 508(3) of the CRR 
3  Regulation  (EU)  No  575/2013  of  the  European  Parliament  and  of  the  Council  of  26  June  2013  on 
prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 
648/2012  (OJ  L  176,  27.6.2013,  p.  1–337)  https://ec.europa.eu/info/law/banking-prudential-
requirements-regulation-eu-no-575-2013/law-details_en  

4 Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the 
activity of credit institutions and the prudential supervision of credit institutions and investment firms, 
amending  Directive  2002/87/EC  and  repealing  Directives  2006/48/EC  and  2006/49/EC  (OJ  L  176, 
27.6.2013, p. 338–436)  https://ec.europa.eu/info/law/banking-prudential-requirements-directive-2013-
36-eu/law-details_en  

5 "Credit institution" and "bank" are used interchangeably throughout this staff working document 
6 See annex 3 for the procedural steps and stakeholder consultations which informed the review 
7  The  Commission  calls  for  advice  and  different  steps  and  outputs  of  the  EBA  can  be  accessed  at 

http://www.eba.europa.eu/regulation-and-policy/investment-firms  

1 

 
 
                                                 
is based on the advice of the ESAs and their stakeholder consultation and technical work. 
The objective of this document is therefore rather to explain the ESA's advice, including 
the results of their analysis and consultation, while providing the Commission services' 
views on its conclusions, with a view to guide the Commission's decision-making.    

Prudential  requirements  are  an  integral  part  of  the  regulatory  framework  for  financial 
markets. They are designed to ensure that financial institutions have sufficient resources 
to remain financially viable and to perform their services through economic cycles or to 
enable their orderly wind-down without causing undue economic harm to their customers 
or to the stability of the markets they operate in. They govern the amount and quality of 
resources,  notably  in  terms  of  capital  and  liquidity,  as  well  as  other  risk  management 
measures which financial institutions have to comply with in order to be allowed to offer 
their  services.  They  differ  for  various  institutions  –  banks,  insurance  companies,  asset 
managers etc. They interact with other regulatory requirements which are also designed 
to protect markets and investors from the risks and externalities inherent in the business 
of  financial  institutions,  such  as  rules  to  protect  investors  and  their  assets,  to  centrally 
clear  trades  with  central  counterparties  (CCPs),  and  to  post  collateral  with  CCPs  and 
other  counterparties  to  guarantee  trades.  Typically,  they  are  set  at  levels  which  are 
considered  to  achieve  a  balance  between,  on  the  one  hand,  ensuring  the  safety  and 
soundness  of  the  operations  of  financial  institutions  and,  on  the  other,  avoiding 
disproportionate  or  excessive  costs  which  could  hinder  them  from  conducting  their 
business in a viable way.  

The  review  covers  all  investment  firms  including  those  identified  as  global  or  other 
systemically important institutions in accordance with Article 131 of CRDIV, which are 
however projected to remain fully subject to the CRR/CRDIV-framework, including the 
amendments  proposed  by  the  Commission  thereto  on  23  November  20168.  This  is 
because these firms typically incur and underwrite risks on a significant scale throughout 
the  Single  Market.  Their  activities  expose  them  to  credit  risk,  mainly  in  the  form  of 
counterparty credit risk, as  well as market risk for positions they take on own account, 
whether  for  their  clients  or  themselves.  They  accordingly  present  a  higher  risk  to 
financial  stability,  given  their  size  and  interconnectedness.  There  is  therefore  a  broad 
consensus  among  authorities  that  they  should  remain  subject  to  the  CRR/CRDIV-
framework. However, as explained below in sections 2.1.4 and 4, rather than continuing 
to  rely  on  Article  131  of  the  CRDIV,  a  more  appropriate  way  of  identifying  them  is 
proposed in order to ensure a supervisory and regulatory level playing-field. This is also 
informed  by  the  fact  that,  at  present,  these  systemically  important  investment  firms  are 
largely  concentrated  in  the  UK.  Several  among  them  are  currently  in  the  process  of 
migrating parts of their operations to the EU27. On this point, as explained in section 4.4, 
this  Staff  Working  Document  goes  beyond  the  advice  of  the  EBA  on  the  review  of 
investment firms but aligns with the view of the EBA in its opinion on issues related to 

8  In  line  with  the  second  set  of  advice  of  the  EBA  of  October  2016  (Opinion  of  the  European  Banking 
Authority on the First Part of the Call for Advice on Investment Firms http://tinyurl.com/z3e7fpl), the 
Commission  proposed  in  November  2016  that  investment  firms  identified  as  global  or  as  other 
systemically  important  institutions  (G-SIIs,  O-SIIs)  in  accordance  with  Article  131  of  the  Capital 
Requirements Directive (CRD) should remain subject to the revised CRR. In March 2017 there were 
eight investment firms in this group, all based in the UK. The Commission also proposed that other 
investment  firms  could  be  unaffected  by  these  changes.  See:  Commission  proposals  to  revise  the 
2016 
Capital 
https://ec.europa.eu/info/law/banking-prudential-requirements-directive-2013-36-eu/upcoming_en  

Requirements 

Regulation 

November 

Directive 

and 

23 

of 

2 

 
                                                 
the decision of the UK to withdraw from the Union9. In this opinion the EBA confirms 
that systemic investment firms should remain in the CRR/CRDIV and become subject to 
supervision  by  the  European  Central  Bank  (ECB)  in  the  context  of  the  Single 
Supervisory Mechanism (SSM) for their operations in Member States participating in the 
Banking  Union.  This  Staff  Working  Document  therefore  aligns  with  the  substantial 
advice of the EBA on this point. 

This Staff Working document is structured as follows. Section 2 provides an overview of 
the business models of investment firms and nature of the market they operate in. Section 
3  explains  the  current  prudential  framework  for  investment  firms  and  summarises  the 
problems it represents, based on the extensive analysis of the EBA and ESMA notably in 
their  2015  report10  and  on  the  parallel  work  and  analysis  of  the  Commission  services 
outlined in Annex 3 involving engagement with stakeholders on the problems and costs 
of the current framework. Section 4 sets out the objectives for the review and the EBA's 
policy advice for a new prudential regime for investment firms, presented in their final 
advice to the Commission in September 201711, and examines the separate but connected 
issue of systemic investment firms. Section 5 assesses the content and impact of the EBA 
advice  for  non-systemic  firms  in  terms  of  whether  it  achieves  the  objectives  for  the 
review  of  a  more  appropriate  and  proportionate  prudential  framework  for  investment 
firms to underpin the safe functioning of investment firms and whether it effectively and 
efficiently balances this with the need to ensure investment firms can play their role in 
facilitating  investment  flows  across  the  EU,  boosting  competition  and  improving 
investors' access to new opportunities and better ways of managing their risks, consistent 
with the aims of the Capital Markets Union to mobilise savings and investments to boost 
growth and jobs12. Section 6 concludes. 

2.  BUSINESS MODELS OF INVESTMENT FIRMS AND NATURE OF MARKET 

Investment  firms  provide  a  range  of  services  which  give  investors  access  to  securities 
and derivatives markets (investment advice, portfolio management, brokerage, execution 
of  orders  etc.).  Their  main  difference  to  credit  institutions  is  that  they  do  not  take 
deposits or make loans, meaning they are far less exposed to credit risk and the liquidity 
risk  of  depositors  withdrawing  their  money  at  short  notice13.  Their  services  concern 

9  Opinion  of  the  European  Banking  Authority  on  issues  related  to  the  departure  of  the  United  Kingdom 
2017 

from 
http://www.eba.europa.eu/documents/10180/1756362/EBA+Opinion+on+Brexit+Issues+%28EBA-
Op-2017-12%29.pdf  

(EBA/Op/2017/12) 

European 

October 

Union 

the 

12 

of 

10  EBA  report  on  investment  firms,  response  to  Commission's  call  for  advice  of  December  2014 
https://www.eba.europa.eu/documents/10180/983359/EBA-Op-2015-

(EBA/Op/2015/20) 
20+Report+on+investment+firms.pdf 

Investment 

11 Opinion of the European Banking Authority in response to the European Commission’s Call for Advice 
(EBA/Op/2017/11) 
on 
http://www.eba.europa.eu/documents/10180/1976637/EBA+Advice+on+New+Prudential+Framework
+on+Investment+Firms+%28EBA-Op-2017-11%29.pdf 
http://www.eba.europa.eu/documents/10180/1976637/Annex+to+the+EBA+Opinion+EBA-Op-2017-
11.pdf    

Opinion 

Annex 

Firms 

and 

the 

to 

12  Communication  on  the  mid-term  review  of  the  Capital  Markets  Union  action  plan,  June  2017 
https://ec.europa.eu/info/publications/mid-term-review-capital-markets-union-

(COM(2017)292) 
action-plan_en 

13 However, they can provide loans as an ancillary function as part of a transaction in financial instruments 

(Section B2, Annex I of MiFID) 

3 

 
                                                 
 
financial  instruments,  which  unlike  deposits  are  not  payable  at  par  but  fluctuate 
according to market movements.  

In terms of numbers, investment firms represent a broad array of different types of firms, 
depending on whether they are focussed on providing one or two services mainly to retail 
customers  or  whether  they  offer  a  wide  universe  of  services  to  a  broad  range  of  retail, 
professional and corporate clients. According to information compiled by the EBA, at the 
end of 2015 there were 6051 investment firms in the European Economic Area (EEA)14. 
They are present in all Member States. Most EEA investment firms are small or medium-
sized. The EBA estimates that about eight investment firms control c.80% of assets of all 
investment  firms  in  the  EEA,  corresponding  to  the  eight  EEA  investment  firms 
designated  as  other  systemically  important  institutions15.  Based  on  the  EBA's 
information,  around  85%  of  EEA  investment  firms  limit  their  activities  to  investment 
advice, the reception and transmission of orders, portfolio management and the execution 
of  orders.  Nearly  40%  of  EEA  investment  firms  are  authorised  exclusively  to  provide 
investment advice. Around 20% are authorised to carry out dealing on own account and 
underwriting,  the  services  which  currently  entail  the  most  stringent  prudential 
requirements16. According to the EBA's data, while there are examples of large firms (in 
terms of gross annual income and gross balance sheet size) amongst the former category 
of  firms  whose  licence  is  limited  to  a  few  investment  services,  the  largest  investment 
firms  tend  to  be  those  performing  a  wider  array  of  services17.  Owing  to  its  traditional 
status as an important hub for capital markets and investment activities, the UK has the 
largest  number,  with  roughly  half  of  all  EEA  investment  firms,  followed  by  Germany, 
France, the Netherlands and Spain.  

The  table  compiled  by  the  EBA  and  reproduced  below  provides  a  breakdown  of  the 
numbers of different types of investment firms across Member States, by reference to the 
11 categories which the current CRR/CRDIV-framework divides them into (explained in 
section 3.1 below and presented in Annex 1). 

Table 1 – Number of respective investment firms per Member State18 

Local 
CRD30 
[1] 

CRD 
31(1) 
[2/3] 

Austria  

Belgium  

.  

.  

26  

3  

CRR 
95(2) 
1st 
cat. 
[4] 

.  

.  

CRR 
95(2) 
2nd cat. 
[4] 

CRR 
95(1) 
[5/6/7] 

CRR 
96(1)(a) 
[8] 

CRR 
96(1)(b) 
[9] 

Commodity 
CRR 493 & 
498 [10] 

Full auth. 
CRR 92 
[11] 

All 
MiFID 

48  

15  

.  

9  

.  

.  

.  

.  

.  

.  

.  

11  

74  

39  

14  EBA  report  on  investment  firms,  response  to  Commission's  call  for  advice  of  December  2014 
(EBA/Op/2015/20),  Table  12:  Population  of  investment  firms,  by  category,  by  country,  page  96.   
https://www.eba.europa.eu/documents/10180/983359/EBA-Op-2015-
20+Report+on+investment+firms.pdf  

15 See footnote 8 above 
16 EBA/Op/2015/20, Table 13, page 97. 
17 In the UK for example, the median size of a firm with a limited authorisation is 67 times smaller than a 
firm with a broad authorisation. In France the figure is 48 (EBA/Op/2015/20, Tables 7 and 11, pages 
90-95). 

18 EBA/Op/2015/20, Table 12, page 96. The EBA notes that "the data displayed in this report are provided 
on  a  best  effort  basis  by  national  competent  authorities.  For  Belgium,  France,  Hungary,  Italy  and 
Sweden, the reported total number of MiFID firms differs from the sum of investment firms assigned 
to each category, as this categorisation cannot be aligned with the national regulatory regime."   

4 

 
 
                                                 
Cyprus  

Czech 
Republic  

Germany  

Denmark  

Estonia  

Spain  

Finland  

France  

United 
Kingdom  

Greece  

Croatia  

Hungary  

Ireland  

Italy  

Liechtenstein  

Lithuania  

Luxembourg  

Latvia  

Malta  

Norway  

Poland  

Portugal  

Romania  

Sweden  

Slovenia  

Slovakia  

All  

.  

.  

.  

.  

.  

.  

.  

.  

.  

.  

.  

.  

.  

.  

.  

.  

.  

Netherlands  

9  

.  

.  

.  

.  

.  

.  

.  

.  

12  

.  

6  

.  

48  

596  

1  

.  

32  

.  

148  

12  

7  

18  

.  

20  

.  

.  

.  

.  

.  

.  

.  

.  

83  

7  

14  

.  

1  

24  

32  

28  

6  

1  

.  

.  

.  

1  

1  

.  

2  

1 328  

.  

1 172  

553  

46  

11  

1  

.  

7  

.  

120  

.  

11  

.  

14  

26  

20  

3  

10  

.  

4  

.  

.  

.  

.  

.  

.  

.  

.  

.  

.  

.  

.  

160  

.  

10  

.  

.  

.  

.  

.  

11  

27  

.  

2  

40  

6  

120  

.  

52  

.  

.  

.  

.  

.  

.  

.  

.  

.  

.  

5  

7  

35  

44  

.  

5  

24  

2  

38  

30  

42  

14  

12  

11  

94  

2  

10  

.  

.  

.  

1  

.  

1  

.  

.  

.  

.  

.  

.  

1  

.  

.  

15  

.  

4  

.  

.  

.  

.  

.  

.  

.  

.  

.  

.  

.  

.  

.  

.  

.  

.  

.  

3  

.  

.  

.  

.  

.  

.  

.  

.  

.  

.  

.  

6  

.  

.  

.  

4  

4  

54  

12  

30  

8  

2  

38  

11  

28  

161  

20  

694  

41  

3  

223  

55  

233  

85  

172  

3 358  

.  

.  

3  

.  

.  

.  

.  

.  

.  

.  

.  

5  

.  

.  

.  

.  

.  

.  

11  

2  

10  

11  

16  

16  

1  

8  

.  

9  

5  

34  

23  

2  

17  

4  

3  

0  

60  

8  

19  

94  

81  

16  

6  

96  

5  

61  

230  

100  

51  

24  

28  

135  

5  

14  

11  

1 822  

867  

1 466  

1 178  

77  

3  

103  

637  

6 051  

Table  2  below  provides  an  overview  of  the  key  market  characteristics  per  category  of 
investment firm. It confirms that firms which provide a wide array of services and with 
full  CRR  authorisation  (category  11)  are  on  average  much  larger  than  the  other 
categories.  They  include  the  eight  largest  investment  firms  referred  to  above  and, 
together  with  other  firms  in  this  group,  make  up  more  than  90%  of  total  assets  despite 
constituting around 10% of the market for investment firms in numbers.  

Table 2 – Market characteristics per investment firm category19 

Number of  Mean  size  Dominant  markets 

by  Dominant  markets  by 

19 Commission services analysis using data from the EBA report (EBA/Op/2015/20), Table 12, page 96 

5 

 
 
 
                                                 
firms 

Cat  1,2,3  -  Local  firms 
and 
that  only 
provide 
reception/transmission 
and/or advice 

Cat 4 - Perform, at least, 
orders 
execution 
and/or 
portfolio 
management 

of 

Cat      5,  6,  7  -  Not 
authorised 
to  perform 
deals  on  own  account 
and/or 
underwriting/placing 
with firm commitment 

Cat  8  -  Only  perform 
deals on own account to 
execute client orders 

Cat  9  -  Do  not  hold 
only 
funds, 
client 
perform  deals  on  own 
account,  no 
external 
clients 

Cat  10  -  Commodity 
derivatives 
investment 
firms  not  exempt  under 
MiFID 

Cat  11  -  Firms  that  do 
not 
fall  under  other 
categories 

firms 
EEA 

in 

firm 

of 
(EUR mn) 

1831 

17.95 

number of firms 

size of firms  

UK 
(8%), 
(72%),  Spain 
Liechtenstein (7%),  Germany 
(3%) 

UK  (68%),  Netherlands 
(27%),  Spain (2%) 

2333 

81.60 

UK  (51%),  Germany  (26%), 
Netherlands 
(7%), 
Liechtenstein (5%) 

Netherlands  (73%),  UK 
(24%), Germany (1%) 

1178 

N/A 

UK  (47%),  Sweden  (8%), 
Cyprus 
(4%), 
Norway (4%) 

(7%), 

Italy 

N/A 

77 

864.68 

UK  (60%),  Sweden  (19%), 
Cyprus (8%), Slovakia (5%) 

UK (98%), Sweden (1%) 

3 

N/A 

Latvia (100%) 

Latvia (100%) 

103 

366.00 

UK  (79%),  Germany  (6%), 
Norway  (5%),  Finland  (4%), 
France (4%) 

France (69%), UK (31%) 

637 

5414.21 

UK  (32%),  Cyprus  (10%), 
Spain  (7%),  Germany  (6%), 
Norway  (6%),  France  (5%), 
Poland (4%) 

UK (86%), France (11%), 
Liechtenstein (2%) 

3.  THE CURRENT PRUDENTIAL REGIME 

3.1.

  Regulatory context 

The EU regulatory framework for investment firms consists of two main parts. First, the 
Markets  in  Financial  Instruments  Directive  (MiFID)20  and,  as  of  January  2018  MiFID 
II/MiFIR21, sets out the conditions for their authorisation and organisational and business 

20  Directive  2004/39/EC  of  the  European  Parliament  and  of  the  Council of  21  April  2004  on  markets  in 
financial  instruments  amending  Council  Directives  85/611/EEC  and  93/6/EEC  and  Directive 
2000/12/EC  of  the  European  Parliament  and  of  the  Council  and  repealing  Council  Directive 
93/22/EEC (OJ L 145, 30.4.2004, p. 1–44) 

21  Directive  2014/65/EU  of  the  European  Parliament  and  of  the  Council  of  15  May  2014  on  markets  in 
financial  instruments  and  amending  Directive  2002/92/EC  and  Directive  2011/61/EU  (OJ  L  173, 
12.6.2014,  p.  349–496)  and  Regulation  (EU)  No  600/2014  of  the  European  Parliament  and  of  the 
Council  of  15  May  2014  on  markets  in  financial  instruments  and  amending  Regulation  (EU)  No 
648/2012 (OJ L 173, 12.6.2014, p. 84–148) 

6 

 
 
                                                 
conduct  requirements  under  which  investment  services  can  be  provided  to  investors  as 
well as other requirements governing the orderly functioning of financial markets. Under 
MiFID, investment firms can be licenced to perform between one and eight investment 
services22.  

Second,  they  are  subject  to  the  prudential  framework  under  the  CRR/CRDIV  together 
with  credit  institutions.  This  is  due  to  the  fact  that  they  can  compete  with  credit 
institutions in performing these investment services, which credit institutions can offer to 
their customers under their banking licence23. Credit institutions are in turn subject to the 
key provisions of MiFID, aligning the conditions for the provision of investment services 
between investment firms and credit institutions both in terms of the investor protection 
and  conduct  provisions  of  MiFID  as  well  as  key  prudential  requirements  of  the 
CRR/CRDIV.  

3.2.

  Problems with the current prudential regime  

Over  time,  there  have  been  a  number  of  changes  in  the  prudential  regulation  of  credit 
institutions.  In  particular,  the  internationally  agreed  standards  developed  in  the  Basel 
Committee  on  Banking  Supervision  have  made  prudential  requirements  more  detailed 
and  complex.  Most  recently,  these  standards  were  transposed  into  EU  law  through  the 
current  CRR/CRDIV-package in  2013 in  the wake of the global financial crisis, and in 
the form of the Commission's proposals to update these texts in November 201624.  

Throughout these changes, the link between the prudential treatment of credit institutions 
and  investment  firms  has  been  maintained  and  the  changes  have  also  impacted 
investment  firms  in  the  EU.  However,  considering  that  the  two  have  different  primary 
business models, the framework has always exempted some investment firms from some 
of  the  requirements  which  apply  to  credit  institutions.  As  the  framework  has  become 
more complex, further derogations for investment firms have been introduced.  

Under  the  current  CRR/CRDIV-framework,  investment  firms  can  be  grouped  into  11 
categories  primarily  determined  by  the  investment  services  they  are  authorised  to 
undertake under MiFID, and whether they hold money and securities belonging to their 
clients25.  This  categorisation  reflects  multiple  historic  and  implicit  assumptions  of  the 
risks and prudential relevance of these services and functions and of how effectively the 
available  risk-metrics  developed  principally  for  banks  capture  and  address  those  risks.   
Consequently, investment firms  which conduct a broad range of services  are subject to 
the  same  requirements  as  credit  institutions  in  terms  of  capital  requirements  for  credit, 
market  and  operational  risk,  and  potentially  liquidity,  leverage,  remuneration  and 
governance  rules,  while  firms  with  limited  authorisations  (typically  those  which  are 
considered  less  risky,  i.e.  investment  advice,  reception  and  transmission  of  orders)  are 
largely exempt from most of these requirements. 

22 Annex 1, Section A of Directive 2004/39/EU. MiFID II will add the service of operating an organised 

trading facility to this list. 
23 Annex 1, Directive 2013/36/EU 
24  See:  Commission  proposals  to  revise  the  Capital  Requirements  Regulation  and  Directive  of  23 
November  2016  https://ec.europa.eu/info/law/banking-prudential-requirements-directive-2013-36-
eu/upcoming_en  

25 See Annex 1  

7 

 
                                                 
The starting point of the prudential framework for investment firms is thus largely based 
on the risks faced and posed credit institutions. The requirements are largely calibrated to 
secure  the  lending  and  deposit-taking  functions  of  credit  institutions  through  economic 
cycles. Therefore, it does not effectively capture the actual risks faced by the majority of 
EU  investment  firms  who  do  not  conduct  these  activities  as  their  main  business.  In 
addition, its requirements are not well calibrated to the different business profile of most 
investment firms, and namely to the risks their activities can have for their customers and 
markets more broadly during the normal course of their operations and in case they fail 
and have to be wound-down.  

Based  on  this,  the  current  regime  can  be  shown  to  be  disproportionate  and  a  source  of 
excessive  complexity  and  administrative  and  compliance  costs  for  most  investment 
firms. It does not fully reflect their core business models and risks posed by investment 
firms in  an appropriate and proportionate  way for  their customers and for  other market 
participants,  highlighting  a  lack  of  risk-sensitivity.  Moreover,  several  cases  of  different 
application of the rules by Member States are also observed. 

3.2.1.  Complexity and disproportionate nature  

The underlying rationale of today's regime is that investment firms should apply the same 
rules as banks, with a progressively decreasing set of requirements for investment firms 
which only undertake certain activities. This results in the 11 categories which determine 
the requirements investment firms are subject to in terms of its main components such as 
own  funds,  leverage,  liquidity,  large  exposures,  reporting,  capital  buffers,  remuneration 
and corporate governance.  

This demonstrates the first element of the problem. Banks and investment firms are two 
qualitatively different institutions. While there is  some overlap in the services they can 
provide, and larger investment firms can end up posing risks on a par with large banks, 
their primary business models are quite different: taking deposits and making loans in the 
case of banks, and performing various services giving investors access to securities and 
derivatives  markets  in  the  case  of  investment  firms.  Yet  because  the  services  they 
provide  as  their  primary  function  overlap  with  some  of  those  provided  by  banks  as  an 
ancillary  function,  investment  firms  today  are,  for  reasons  of  historical  and  regulatory 
expediency,  potentially  subject  to  extensive  prudential  rules  designed,  and  frequently 
updated, for the latter. This sets the stage for a partially arbitrary outcome in which some 
types  of  investment  firms  are  subject  to  substantial  capital  requirements  while  others 
escape  with  comparatively  little.  The  fact  that  some  supervisors  are  compelled  to 
"correct" for this anomalous situation by requiring specific types of investment firms to 
comply  with  additional  capital  add-ons  to  cover  risks  not  addressed  by  the  main 
requirements (so-called Pillar 2 powers) testifies to this.  

In contrast to banks, whose prudential rules capture risks in lending and other banking-
activities and broadly aim to protect depositors and financial stability based on the threat 
and likelihood that the risks which they are exposed to materialise, investment firms face 
and  pose  far  fewer  risks  of  this  type.  Rather,  the  risks  they  pose  are  more  specifically 
related  to  potential  undue  and  unexpected  harm  for  their  clients  and  the  markets  they 
operate in. Their prudential rules ought to be based on the activities they conduct which 
can  give  rise  to  these  risks  and  not  those  of  banks.  For  example,  a  starting  point  for 
assessing the risk faced and posed by an investment firm that invests clients' money on a 
discretionary  basis  (a  portfolio  manager)  could  be  the  amount  of  money  invested,  the 

8 

 
type  and  riskiness  of  the  instruments  which  the  firm  invests  in,  or  whether  they  act  on 
behalf  of  retail  or  professional  clients.  For  an  investment  firm  which  holds  and 
safeguards client funds and assets, the assessment of risks could look at the amounts of 
funds and assets held whereas for a firm which executes client orders, it could be based 
on  transaction  volumes.  These  would  constitute  more  relevant  proxies  for  the  potential 
risks  of  investment  firms  than  the  existing  proxies  designed  for  banks.  Instead,  the 
current regime starts from the assumption that investment firms share the same risks as 
banks, and then chips away at the applicable requirements as a second step. Yet this does 
not avoid many classes of investment firms from having to assess their risks through the 
prism of risks of banks. Based on the evidence compiled by the Commission as part of 
the  discussions  with  stakeholders  outlined  in  Annex  3,  this  can  result  in  significant 
overall  compliance  costs  in  the  tens  and  hundreds  of  thousands  of  euros,  covering 
notably staff, legal and IT costs, and depending on the size and type of firm26.  

Moreover,  the  CRR/CRDIV  is  premised  on  ensuring  adequate  capital  and  liquidity  to 
prevent  institutions  from  defaulting  on  their  obligations  in  virtually  all  foreseeable 
circumstances.  While  the  CRR/CRDIV  is  proportionate  to  the  volume  and  range  of 
activities undertaken by institutions, its basic assumption is that the public interest is best 
served  by  avoiding  their  failure.  This  is  notably  premised  on  the  central  role  banks 
perform in granting credit to households and businesses and in accepting deposits from 
the  public;  functions  which,  if  disrupted,  can  severely  impair  financial  stability.  As 
illustrated  above,  most  investment  firms  are  small.  The  volume  and  range  of  their 
activities,  distinct  from  deposit-taking  and  lending,  also  means  they  are  mostly  far  less 
interconnected with the rest of the financial system than large banks. Their services are 
also  largely  substitutable,  in  the  sense  that  few  investment  firms  are  central  to  the 
functioning of  financial markets. In  most cases,  it should therefore be possible to  wind 
them down in an orderly manner without triggering contagion across financial markets. 
As  a  result  of  the  low  systemic  relevance  of  most  investment  firms,  the  underlying 
CRR/CRDIV premise of ensuring sufficient buffers of capital and liquidity to withstand 
significant  losses  may  be  misplaced  and  represent  disproportionate  costs  for  them. 
Rather, the default assumption for investment firms could be the opposite, that a focus on 
ensuring  sufficient  resources  to  manage  an  orderly  wind-down  is  sufficient,  and  that 
cases where extra resources are needed to keep an investment firm alive for the sake of 
the public interest should be the exception.   

This  is  also  relevant  with  respect  to  the  current  CRR/CRDIV  remuneration  and 
governance regime. These rules aim to curb excessive risk-taking in order to prevent the 
failure of individual firms leading to contagion across the financial system and to better 
align the interests of staff members with the long-term interests of the firms they work 
for. However, since most investment firms have different risk-profiles compared to credit 
institutions, do not take deposits or grant loans, and could be wound-down with little risk 
of triggering contagion across financial markets, it is considered that the current rules do 
not capture the risks posed by investment firms in an appropriate and proportionate way. 
While  it  is  assessed  that  large  and  systemic  investment  firms  should  have  sufficient 
resources  to  comply  with  all  CRD  IV/CRR  governance  requirements,  and  should  also 

26 This data is based on a sample of diverse investment firms who replied to the Commission's survey, sent 
to a group of investment firms, trade associations and law firms which were actively engaged in the 
discussions on the review, and a workshop attended by c.30 participants in May 2017 from among this 
group.     

9 

 
                                                 
remain  subject  to  all  CRD  IV/CRR  remuneration  rules27,  for  smaller  investment  firms, 
on-going  compliance  and  implementation  costs  related  to  certain  remuneration  and 
governance  requirements  are  likely  to  exceed  their  prudential  benefits,  given  their  low 
risk to financial stability.  

Therefore,  while  progressively  decreasing  the  requirements  for  all  but  the  largest  and 
most  systemic  investment  firms  recognises  that  their  activities  differ  from  banks, 
covering banks and investment firms together to begin with in a prudential regime which 
has undergone considerable change in response to weaknesses and developments in the 
business  models  of  banks  represents  a  source  of  regulatory  complexity  and 
disproportionality  for  investment  firms.  The  many  exemptions  which  have  been 
necessary  to  continue  to  accommodate  investment  firms  into  the  framework,  coupled 
with  the  lack  of  risk-categories  in  the  framework  tailored  to  their  specific  business 
models can mean some firms escape an effective objective treatment within the current 
regime,  giving  rise  to  regulatory  lacunae  and  possible  opportunities  for  regulatory 
arbitrage for firms. Together, these problems can give rise to cases of inadequate levels 
of capital in some firms, act as a barrier to entry for others, and can complicate oversight 
by supervisors who lack an effective toolkit to monitor investment firms' risks.   

3.2.2.  Lack of risk sensitivity  

Besides the inherent overall complexity of how the regime applies to investment firms in 
the  first  place,  the  detailed  requirements  themselves  which  apply  are  often  poorly 
correlated to their business. The current regime, which is based on the Basel accord, is 
largely  focused  on  addressing  the  risks  posed  by  large  international  banks  and  is 
calibrated accordingly28.  

As  detailed  above,  the  prudential  requirements  that  investment  firms  are  subject  to  are 
driven  by  the  activities  they  undertake.  Some  assumptions  are  made  regarding  the 
riskiness of some, but not all, of these activities. The reasoning is therefore partial. As a 
result,  the  current  regime  imposes  capital  requirements  on  the  basis  of  these  activities, 
according  partially  to  the  main  types  of  business  models  of  investment  firms,  but  does 
not fully address the actual risks posed. For example, the requirements which result from 
institutions'  exposure  to  credit,  market  and  operational  risks  correspond  to  some  of  the 
conceivable threats and externalities posed by an investment firm's business but not all, 
and often in an approximate way (say relative to the size of client portfolios managed by 
an investment firm). Credit risk, the component which accounts for most of the resulting 
capital required from banks, is largely irrelevant for most investment firms which do not 
lend.  Consequently,  operational  risk  assumes  a  disproportionately  high  significance  for 
them. Since the risk-criteria of the CRR/CRDIV often do not accurately reflect many of 
the  risks  which  investment  firms  subject  to  own  funds  requirements  actually  incur, 
considerable  work  is  required  to  reconcile  internal  data  associated  with  running  the 
business  with  the  requirements  of  the  framework.  In  several  cases,  the  work  is 
outsourced at non-negligible on-going cost to consultants and law firms. Also, often the 
precise  risk-weights  and  calibrations  attached  to  specific  exposures  and  transactions, 

27   Final  EBA  report  on  new  prudential  regime  for  investment  firms  (EBA/Op/2017/11),  section  on 

remuneration 

28  This  point  about  the  relevance  of  Basel  is  also  often  made  by  smaller  banks.  However,  the 
proportionality of how CRR/CRDIV applies to them is not under review here. In any case, as banks, 
the applicable requirements correspond to their profile better to begin with than to investment firms.   

10 

 
                                                 
drawn  up  largely  with  banks  in  mind  but  also  undertaken  by  various  investment  firms, 
can result in disproportionate requirements for the latter if they are a key focus of their 
business.  This  can  for  instance  be  the  case  for  some  investment  firms  specialised  in 
commodity derivatives, whose specific case is discussed below. In addition, because the 
existing regime is designed from a banking perspective, some investment firm risks are 
not  addressed  at  all  (e.g.  possible  specific  risks,  distinct  from  the  provision  of  other 
services,  arising  from  the  operation  of  Organised  Trading  Facilities  (OTFs)  under  the 
future MiFID II).  

Further, a key determinant of which category a firm falls into is whether or not it holds 
client  assets  or  money.  However,  the  applicable  requirements  are  not  sensitive  to  the 
amount of assets or money held. Also, because the requirements add up according to the 
range  of  services  provided,  a  firm  performing  a  small  volume  of  services  across  many 
investment services can be subject to some higher requirements than a firm with a high 
turnover in one service even if the latter may in fact pose more risk from a prudential and 
systemic  perspective29.  Moreover,  as  the  treatment  corresponding  to  the  provision  of 
some  investment  services  is  not  explicitly  addressed  in  the  CRR/CRDIV,  they  can 
therefore  trigger  some  higher  requirements  by  default,  but  this  is  not  necessarily 
justified30.   

Also, with the extension of MiFID to all derivatives markets in 2007, some specialised 
firms dealing in commodity derivatives were carved out, either entirely from MiFID and 
prudential  rules,  or  from  capital  and  large  exposure  rules  in  the  prudential  framework, 
and the determination of the appropriate prudential regime to be applied to them has been 
pushed back several times31. This has mostly been due to the revision of MiFID and the 
relevant  exemptions  for  commodity  firms  therefrom,  but  also  reflects  the  fact  that  the 
current  prudential  framework  as  such  as  well  as  its  detailed  requirements  have  been 
generally considered to be ill-suited for these firms. The business of many of these firms 
involving financial instruments tends to revolve around hedging the risks of their parent 
companies  related  to  the  physical  production,  transmission,  storage  or  purchase  of  the 
underlying  physical  commodities.  Depending  on 
the  firm  and  sector  (energy, 
agriculture),  their  volume  of  hedging  activity  can  be  substantial,  implying  a  possible 
major impact from capital requirements under the current framework. Other relevant EU 
regulatory  provisions32  have  already  taken  the  specificities  of  commodity  firms  into 
account but the determination of the prudential rules for firms which would fall under the 
current  framework  has  simply  been  postponed  until  now.  As  a  consequence,  the 
prudential treatment of these types of firms has been marked by continuing uncertainty 
and some differences between Member States33.     

29  Although  internal  practices  of  cross-subsidisation  and  -selling  between  services  may  conceivably  hide 

and amplify risks as well.  

30  This  is  currently  the  case  for  instance  with  regard  to  the  services  of  underwriting  without  a  firm 
commitment basis or operating a multilateral trading facility (MTF). MiFID II will add the service of 
operating an organised trading facility (OTF) to the list of investment services, which will also lack an 
explicit corresponding treatment under CRDIV/CRR.   

31 These exemptions are set to be narrowed down by MiFID II, while the expiry of the exemptions from 

CRR is now set for January 2021.   

32 Namely EMIR and its margin rules for non-financial corporations and MiFIDII with its exemptions for 

commodity dealers.   

33 E.g. UK FCA regime for Energy Market Participants and Oil Market Participants  

11 

 
                                                 
Moreover, 
the  current  framework  on  remuneration  and  governance  does  not 
appropriately  capture  the  business model  of  investment  firms  and  does  not  reflect  their 
remuneration  structure.  A  Commission  review  of  the  remuneration  rules  under  CRD 
IV/CRR  finalised  in  201634 revealed  that  the  deferral  and  pay-out  in  instruments 
requirements  are  generally  not  efficient  in  the  case  of  small  and  non-complex  credit 
institutions and investment firms. The application of the maximum ratio rule could lead 
to an increase of the firm's fixed cost base, which  may be a problem since revenues of 
investment  firms,  unlike  in  the  case  of  credit  institutions,  are  mainly  generated  by 
commissions and fees, and are therefore highly volatile. In such cases, an increased fixed 
pay  resulting  from  the  application  of  the  maximum  ratio  rule  could  impact  investment 
firms' ability to remain profitable in times of economic downturn or reduced revenues35. 
The  lack  of  flexibility  of  the  rules  on  remuneration  and  governance  results  in  a 
suboptimal level of supervision as it compels supervisors to enforce requirements vis-à-
vis investment firms, in situations where this might not be warranted from a prudential 
supervision perspective.  

Overall, the inappropriate and approximate nature of many of the current rules and their 
lack of sensitivity to the risks actually posed by investment firms mean that some of the 
risks  in  their  operations  referred  to  above  are  currently  not  covered  by  appropriate  and 
proportionate prudential requirements. Newcomers can also be discouraged either by the 
overall  lack  of  clarity  how  to  comply  with  the  current  framework,  the  applicability  of 
multiple  requirements  which  are  ill-suited  for  their  business  plans,  the  higher 
requirements which apply by default to some services which are not explicitly considered 
in  the  CRR/CRDIV  or  a  combination  of  all  of  these.  These  problems  can  result  in  a 
barrier  to  entry  for  new  providers  of  investment  services,  add  to  cases  of  inadequate 
levels of capital in some firms, and complicate oversight by supervisors.   

3.2.3.  Differences in application across Member States  

In  addition to the in-built complexity and lack of risk-sensitivity  of the current  regime, 
there  is  the  added  complexity  of  differing  national  transpositions  and  use  of  options  in 
the  framework.  One  such  option  is  the  possibility  for  national  competent  authorities  to 
apply  capital  requirements  from  the  old  CAD  rather  than  the  CRR  to  some  firms 
authorised  only  to  provide  the  execution  of  orders  and  portfolio  management36. 
Furthermore, MiFID was designed for reasons of investor protection and the orderly and 
transparent  functioning  of  markets.  The  way  in  which  the  categorisation  of  investment 
services reads across into prudential requirements was not considered in a coherent way 
as  they  were  developed,  but  separately.  In  addition  there  may  not  be  a  uniform 
application  of  the  designation  of  different  investment  services.  For  example,  in  some 
Member  States,  investment  firms  are  required  to  seek  authorisation  for  closely-linked 
services (e.g. execution of client orders and reception and transmission of client orders, 
or execution of client orders and dealing on own account when the firm trades in its own 
name)  but  not  in  others.  This  issue  of  differences  in  national  interpretations  between 
types of investment services under MiFID is itself not under review here. Indeed whether 

34  Report  from  the  Commission  to  the  European  Parliament  and  the  Council:  Assessment  of  the 
remuneration  rules  under  Directive  2013/36/EU  and  Regulation  (EU)  No  575/2013COM(2016)  510 
final 

35  Final  EBA  report  on  new  prudential  regime  for  investment  firms  (EBA/Op/2017/11),  section  on 

remuneration 

36 Article 95(2), third subparagraph, of the CRR 

12 

 
                                                 
investment  firms'  ordinary  business  falls  under  one  or  two  licensing  requirements  in 
different Member States does not necessarily raise any major regulatory or level-playing 
field issues under MiFID. On its own, these differences would not materially affect their 
business model or choice of where to incorporate. However, because the designation of 
these  services  under  MiFID  determines  the  application  of  the  relevant  CRR/CRDIV 
rules,  this  means  that  prudential  requirements  may  not  be  applied  in  a  harmonised 
manner and the costs these entail may be different in each Member State.  

One  example  of  this  is  the  fact  that  the  designation  of  investment  firms  in  the 
CRR/CRDIV  influences  the  amount  of  initial  capital  that  is  required  for  a  firm  to  be 
authorised. By default, the amount of initial capital held by an investment firm should be 
EUR  730  000  (Article  29  CRDIV).  This  is  reduced  to  EUR  125  000  in  cases  where  a 
firm does not deal on its own account or underwrite on a firm commitment basis while 
still holding client money or securities and, if Member States choose, to EUR 50 000 if 
such a firm is not authorised to hold client money or securities. In some cases, Member 
States have also adopted entirely different initial capital requirements, partly due to the 
fact  that  the  levels  in  CRDIV  have  not  been  amended  since  1993.  The  problem  is  also 
compounded by the fact that neither MiFID nor the CRR contain a precise definition of 
holding  client  assets.  Therefore,  different  determinations  of  whether  client  assets  are 
"held"  under  accounting  or  prudential  norms,  notwithstanding  requirements  to  ensure 
they are properly segregated from the firm's own assets, can mean that the application of 
these rules may differ across Member States.  

Moreover, there are some inconsistencies in the national measures transposing CRD IV. 
These have usually kept the rules on credit institutions and investment firms separated in 
two  different  legal  texts;  therefore,  investment  firms  continued  to  have  their  dedicated 
regime, following the CAD model at EU level in the pre financial crisis period. However, 
provisions  applicable  to  “institutions”  in  CRDIV  (i.e.  both  credit  institutions  and 
investment  firms)  did  not  receive  a  mirroring  transposition  for  investment  firms. 
Additionally,  such  mirroring  provisions  have  sometimes  been  adopted  much  later  than 
those on credit institutions, Member States arguing that CAD rules applied nonetheless. 
Further,  initial  capital  requirements  for  local  firms  (Article  30  CRD  IV)  have  not  been 
transposed in most Member States, the justification provided being that local firms do not 
operate  in  those  Member  States.  Also,  most  Member  States  did  not  see  the  need  to 
transpose  specific  rules  on  the  initial  capital  for  particular  types  of  investment  firms 
(Article 29 CRD IV), as they do not allow investment firms executing investors’ orders 
for financial instruments to hold such instruments for their own account, for example. In 
contrast,  at  least  one  Member  State  has  applied  CRR  own  funds  requirements  to  firms 
which are excluded from the CRR definition of "investment firms", considering that the 
exemptions accorded in the CRR for these firms can create an un-level playing-field.   

Finally,  as  a  result  of  the  lack  of  risk-sensitivity  in  the  current  framework  examined 
above, some firms can end up with very large requirements imposed on them by national 
supervisory practice (so-called Pillar 2 requirements). In other words, absent an effective 
primary means of defining capital requirements (Pillar 1), the tool in the CRR/CRDIV-
kit which is intended as the fall-back (Pillar 2) becomes that primary mechanism. This is 
subject to national supervisory judgment and thus may lead to undue differences in the 
required  prudential  stance  in  similar  circumstances  across  borders.  According  to 
information  gathered  by  the  EBA,  for  several  firms  Pillar  2  requirements  can  exceed 
those  of  Pillar  1  by  100%.  This  observation  of  how  national  discretion  is  applied 

13 

 
confirms that the current prudential regime fails to cover the risks of investment firms in 
an appropriate and risk-sensitive manner. 

3.2.4.  Systemic  investment  firms:  risks  of  regulatory  and  supervisory 

arbitrage 

The  sections  above  demonstrate  that  the  current  framework  is  unsuitable  for  the  vast 
majority  of  investment  firms.  However,  as  advised  by  the  EBA  and  proposed  by  the 
Commission as part of its amendments to the CRR/CRDIV in November 201637, this is 
not  the  case  for  investment  firms  identified  as  global  or  other  systemically  important 
institutions  (G-SIIs/O-SIIs).  Rather,  their  systemic  relevance,  including  the  nature  and 
reach  of  their  activities,  merits  their  continued  application  of  the  existing  framework, 
including  the  amendments  proposed  thereto.  As  explained  in  the  introduction,  this  is 
considered  to  be  a  fully  proportionate  framework  for  these  firms  due  to  the  significant 
scale and size of the risks which they face and pose, which should not be undermined.  

Currently,  investment  firms  identified  as  systemic  (i.e.  O-SIIs)  are  concentrated  in  the 
UK, from where they provide wholesale market and investment banking services across 
the  EU  and  beyond.  These  firms  are  typically  subsidiaries  of  US,  Swiss  or  Japanese 
banking  groups/broker-dealers.  They  incur  and  underwrite  risks  on  a  significant  scale. 
Their activities expose them to credit risk, mainly in the form of counterparty credit risk, 
as well as market risk for positions they take on own account, client related or not. They 
accordingly  present  a  higher  risk 
their  size  and 
interconnectedness.  Moreover,  they  provide  services  throughout  the  internal  market, 
which presents an additional challenge for supervision organised along national lines.  

to  financial  stability,  given 

This introduces two linked challenges. First, as steps are taken to address the problems 
identified  in  the  sections  above  for  the  vast  majority  of  investment  firms,  it  should  be 
ensured that new opportunities for regulatory arbitrage are not created which could allow 
investment firms which should remain subject to the rules of the CRR/CRDIV to escape 
its scope. For example, this could be the case if a systemic investment firm were to split 
itself into smaller sub-entities in an effort to avoid the CRR/CRDIV and instead benefit 
from  any  adjustments  or  simplifications  introduced  for  non-systemic  investment  firms. 
This  type  of  regulatory  arbitrage  could  cause  harmful  disparities  in  the  prudential 
treatment of these firms, which would still constitute a systemic entity on a group-basis 
and  should  remain  subject  to  consolidated  application  and  supervision  under  the 
CRR/CRDIV. Otherwise,  this could in  turn threaten  financial stability and the integrity 
and functioning of the Single Market. Second, amid the intention of the UK to withdraw 
from the EU, these firms are likely to decide to relocate part of their activities to the EU. 
This  raises  an  issue  of  prudential  supervision.  Even  though  these  firms  provide  cross-
border  investment  banking  services  on  a  significant  scale  and  as  such  should  remain 
subject to CRR/CRDIV, their authorisation and prudential supervision would be carried 
out by national competent authorities, not the Single Supervisory Mechanism within the 
European  Central  Bank38  as  would  be  the  case  for  significant  credit  institutions  in  the 

37 See footnote 8 
38 Council Regulation (EU) No 1024/2013 of 15 October 2013 conferring specific tasks on the European 
Central Bank concerning policies relating to the prudential supervision of credit institutions (OJ L 287, 
29.10.2013, p. 63–89) 

14 

 
                                                 
Banking  Union39.  This  may  lead  to  several  shortcomings.  National  supervisors  which 
currently  supervise  large  credit  institutions  or  investment  banks  may  lack  the  expertise 
and  overall  perspective  that  is  essential  to  effectively  address  the  prudential  risks 
associated with these big cross-border firms. There is also a risk of harmful supervisory 
arbitrage.  The  potential  prospect  of  a  "race  to  the  bottom"  could  notably  concern  the 
degree to which firms would be allowed to outsource relocated activity back to the parent 
company  located  in  a  third  country  as  well  as  national  authorities'  stance  on  waiving 
prudential  requirements  on  a  solo  basis  and  on  designating  firms  as  O-SIIs  (allowing 
them to operate outside the CRR/CRDIV under the future bespoke regime for investment 
firms)40.  This  could  lead  to  inconsistent  supervision  between  credit  institutions  and 
systemic investment firms, undermining the level playing field for these firms across the 
EU as well as between systemic investment firms located in different Member States, and 
thereby threaten financial stability and the integrity and functioning of the Single Market.   

These risks exist regardless of whether the relocation of activities would be to Member 
States  which  participate  in  the  Banking  Union  (Euro  Area)  or  to  other  Member  States. 
However,  based  on  anecdotal  information,  at  this  stage  the  indications  are  that  the 
preferred locations for these firms' EU27-operations are in financial centres in Euro Area 
Member  States  (Germany,  Ireland,  Netherlands,  Luxembourg,  France).  Regarding  the 
scale of the activities which are expected to be relocated to these Member States, there 
are some indications to suggest that over time this will constitute a sizeable share.41 

The  possible  relocation  of  other  UK-investment  firms,  while  potentially  significant  in 
terms  of  numbers  of  firms,  does  not  represent  a  challenge  on  a  par  with  the  situation 
regarding  systemic  investment  firms.  The  possibility  for  these  firms,  which  are 
considerably smaller in size and generally have simpler business models and less cross-
border reach,  to generate risks to the same degree is far less, implying that their potential 
relocation  to  EU27  Member  States  does  not  represent  the  same  risks  of  regulatory 
arbitrage, financial stability and fragmentation for the Single Market as systemic firms. 
Indeed,  considering  the  assessment  in  the  sections  above  that  the  CRR/CRDIV  is  not 
appropriate  and  proportionate  for  all  non-systemic  investment  firms,  the  prudential 
treatment of their possible relocated operations in the EU27 should reflect this and they 
should not therefore be forced to apply the CRR/CRDIV-rules. Finally, in contrast to the 
anecdotal information regarding systemic investment firms' actual relocation plans, little 
is known at this stage about these plans for smaller UK-based firms.   

39  In  the  Euro  Area,  prudential  supervision  of  credit  institutions  is  conducted  by  the  ECB  and  national 
competent authorities (NCAs) – within the framework of the Single Supervisory Mechanism (SSM). 
The  allocation  of  responsibilities  between  the  ECB  and  NCAs  depends  on  the  significance  of  the 
supervised  entities.  If  a  credit  institution  meets  certain  significance  criteria  for  the  Euro  Area  as  a 
whole,  it  will  be  supervised  by  the  ECB  (unless  the  ECB  decides  there  are  particular  circumstances 
that  would  justify  a  different  allocation  of  responsibilities).  However,  investment  firms  are  not  be 
supervised by the ECB, and are only included in the supervision of banking groups which include an 
investment firm on a consolidated basis.  

40 ESMA has announced an effort to quell any race to the bottom and to coordinate NCAs' authorisation 
practices  for  relocated  investment  firms  but  the  remit  of  its  members  does  not  always  effectively 
extend to prudential rules. ESMA opinion 31 May 2017 – General Principles to Support Supervisory 
Convergence in the Context of the UK withdrawing from the EU  

41 For example, research published by Bruegel estimates that "35 percent of London wholesale banking is 
related to EU27-based clients, varying from about one fifth for UK-headquartered banks to a third for 
US-headquartered  banks  and  half  for  EU27-headquartered  banks.  Thus,  about  €1.8  trillion  (or  17 
percent) of all UK banking assets might be on the move as a direct consequence of Brexit."  

15 

 
                                                 
4.  REVIEWING THE PRUDENTIAL REGIME 

4.1.

  Role and purpose of prudential requirements 

A starting point for reviewing the current framework is an understanding of the purpose 
served  by  prudential  requirements  for  investment  firms.  In  general,  suitable  and 
sufficient  prudential  requirements  for  financial  institutions  are  considered  to  be  a 
necessary part of the regulatory conditions for them to provide their services. In the case 
of investment firms, their activities are varied but hinge on seeking returns from taking 
risks  for  their  clients  and/or  for  themselves  by  investing  in  different  financial 
instruments. The potential returns on offer of investing in different financial instruments 
can  be  substantial,  potentially  incentivising  investors,  shareholders  and  creditors  in 
investment  firms  to  overlook  cases  of  excessive  risk-taking  or  management  failures  by 
the  firm.  Pure  market  discipline  by  these  stakeholders  may  not  always  be  enough  to 
ensure  that  decisions  taken  by  the  firm  are  in  their  best  interest  or  in  the  wider  public 
interest  of  maintaining  financial  stability.  If  unchecked  by  suitable  prudential 
arrangements, the possibility of problems for their clients and for markets more broadly 
increases  if  the  risks  inherent  in  the  investments  or  in  other  parts  of  the  operations  of 
investment  firms  materialise.  These  problems  can  occur  both  during  the  life  of  an 
investment firm and if it needs to be wound down.  

If firms act exclusively as agents for their clients and for example limit their services to 
investment  advice  or  the  management  of  their  portfolios,  the  risks  inherent  in  the 
financial instruments mostly reside with their clients, meaning the firm's own risks from 
performing  these  services  are  limited.  However,  sufficient  resources  and  arrangements 
are still required to underpin the functioning of these firms in an orderly way and ensure 
that  their  incentives  align  with  the  best  interests  of  their  clients.  If  firms  act  also  as 
principals  to  the  trades,  they  assume  greater  risks  themselves42.  Depending  on  the 
activities they  undertake,  this can extend to them holding their clients' money or  assets 
and  taking  sizeable  positions  on  their  behalf  in  different  market  segments.  Some  firms 
can also offer products with a guarantee on all or a part of their clients' initial investment, 
amplifying  the  market  and  liquidity  risks  they  are  exposed  to,  which  may  not  be  fully 
covered  by  the  fees  charged  for  the  service.  For  the  most  part,  the  core  activities  of 
investment  firms  are  distinct  from  "shadow  banking"-activities  which  typically  involve 
credit  intermediation  by  way  of  maturity  and/or  liquidity  transformation,  credit  risk 
transfer and raising funds with deposit-like characteristics43. Yet larger investment firms 
can also be active in parts of this market, for instance in securities lending and repurchase 
transactions. 

As  with  other  financial  institutions,  it  is  difficult  to  accurately  foresee  in  advance  the 
exact  ways  in  which  an  investment  firm's  actions  could  cause  undue  harm  for  their 
customers  or  for  the  markets  they  operate  in  and  to  assign  capital,  liquidity  and  other 
prudential  requirements  accordingly.  Nonetheless,  these  requirements  should  be 

42 This distinction rests on the fact that firms that deal on own account as principals expose their balance 
sheet  directly  to  risks  in  trading  financial  instruments,  whether  or  not  for  hedging  purposes,  with 
limited overnight positions, or through the use of leverage (borrowing funds to increase the volume of 
transactions).  Consequently,  they  can  pose  an  elevated  risk  to  the  functioning  of  markets  as 
themselves, in contrast to agent-only firms which are not party to the transactions themselves.  

43  See  Commission  Communication  on  Shadow  Banking  –  Addressing  New  Sources  of  Risk  in  the 

Financial Sector of 4 September 2013 (COM(2013)614) 

16 

 
                                                 
calibrated  in  a  proportionate  and  appropriate  way  to  how  a  firm's  services  expose 
customers, the firms themselves and their wider market environment to these risks. The 
CRR/CRDIV requirements have been refined over time based on considerable empirical 
experience  with  how  bank-risks  have  materialised.  They  embed  far  less  detailed 
recognition of how this has played out for investment firms, mostly due to the fact that 
the requirements themselves don't target their risks very well to begin with. As outlined 
in  section  2,  the  result  is  that  their  application  to  investment  firms  is  complex,  risk-
insensitive and subject to considerable fragmentation across Member States.  

4.2.

  Objectives of the review 

As  financial  intermediaries  facilitating  investor  access  to  securities  and  derivatives 
markets,  investment  firms  play  a  useful  socio-economic  role  in  channelling  capital  and 
savings toward productive uses across the EU. Therefore, on a general level the review of 
the prudential rules which apply to these firms forms part of the Commission's initiatives 
to  ensure  a  strong  and  fair  Single  Market  with  a  well-functioning  and  stable  financial 
system and a Capital Markets Union which mobilises investments and boosts growth and 
jobs.  

More specifically the review is aimed at assessing and addressing the problems outlined 
in section 3.2 above. Overcoming these implies setting the objectives below: 

  More appropriate, risk-sensitive prudential requirements: the requirements 

should cover the risks actually posed and incurred by investment firms across all 
types of business models in a more tailored and comprehensive way than the 
current framework. For investment firms in aggregate, capital levels should not 
necessarily change significantly, but the distribution of capital across firms 
should correspond better to actual risks. An appropriate regime would avoid 
misaligning the capital and the actual risks of the firms, in order to ensure that 
any externalities and possible impacts for investment firms' customers and the 
markets in which they operate are adequately addressed without overburdening 
firms with disproportionate requirements. The requirements on remuneration and 
governance should correspond to the risks posed by the activities of investment 
firms and be adjusted to their business models and remuneration structures, 
making the rules easier to comply with and oversee.  

  A framework that accommodates investment firms for the business they conduct 

and avoids regulatory arbitrage: the framework should avoid the situation where 
the identification of investment firms, and the subsequent prudential 
requirements applied to them, is subject to an overly complex, or insufficiently 
clear process, which gives rise to the potential for regulatory arbitrage, including 
in the context of Brexit and potential decisions by UK-firms to relocate parts of 
their activities to the EU27. The framework should be clear as to which 
requirements apply to which firms and should provide transparency as to how 
these requirements are derived, thereby alleviating overall compliance costs. The 
prudential regulatory conditions for investment firms to conduct their business 
should not constitute excessive or disproportionate hurdles to market entry (on 
top of the conduct of business and organisational requirements of MiFID).  

  A streamlined regulatory and supervisory toolkit: the framework should facilitate 
effective supervisory oversight by competent authorities regarding the actual 
risks posed and incurred by investment firms in order to boost the orderly and 

17 

 
efficient functioning of these markets, avoiding excessive or redundant 
supervisory requirements and any regulatory blind-spots. 

These  objectives  are  linked  and  overlap  to  some  extent.  They  are  all  relevant  for 
addressing the problems identified in section 3.2 in a comprehensive manner but table 3 
below illustrates which problem they most notably relate to. 

Problem 

Complex and disproportionate regime 

Lack of risk-sensitivity 

Differences in application by Member 
States 

Objective 
A framework that accommodates 
investment firms for the business they 
conduct and avoids regulatory arbitrage 
More appropriate, risk-sensitive 
requirements 
A streamlined regulatory and supervisory 
toolkit 

4.3.

  Summary of EBA advice on new prudential regime 

The review mandated by Articles 493(2), 498(2), 508(2), 508(3) of the CRR requires the 
Commission to consult the EBA and ESMA. Accordingly, a first call for advice to them 
was sent by the Commission in  December 2014. In  response,  a report by the EBA and 
ESMA was published in December 2015 evaluating the functioning of the current regime 
and recommending a revised prudential framework for all investment firms which are not 
systemic and which should remain in the CRR/CRDIV44. A second call for advice by the 
Commission  on  the  content  of  a  revised  prudential  regime  was  sent  in  June  2016.  The 
final advice of the EBA, developed as a result of this process and including a discussion 
paper  published  for  consultation  in  November  201645,  involves  the  design  of  a  new 
bespoke prudential  regime for non-systemic investment firms distinct from the existing 
CRR/CRDIV-framework46.  

The  starting  point  of  the  EBA  is  to  identify  the  key  risks  which  all  non-systemic 
investment  firms  incur  and  pose  as  part  of  their  daily  business  and  in  case  they  fail  as 
opposed  to  the  existing  framework  which  is  aimed  more  towards  the  risks  faced  and 
posed by credit institutions. As such, it replaces many of the risk-metrics and concepts of 
the  existing  framework  which  are  designed  for  banks  and  which  do  not  capture  the 
business  of  many  investment  firms.  However,  rather  than  invent  new  risk-metrics  and 
concepts in areas which are already captured by the existing framework, the EBA advises 
to  retain  these  for  investment  firms,  albeit  simplified  in  several  respects.  The  bespoke 
regime  would  then  apply  capital  and  other  prudential  requirements  to  investment  firms 
depending  on  whether  or  not,  and  the  degree  to  which,  their  activities  and  business 
profile represented the given risk-metrics and concepts.  

44 EBA/Op/2015/20 
45  EBA/DP/2016/02  Discussion  Paper,  Designing  a  new  prudential  regime  for  investment  firms 

https://www.eba.europa.eu/documents/10180/1647446/Discussion+Paper+on+a+new+prudential+regi
me+for+Investment+Firms+%28EBA-DP-2016-02%29.pdf/cf75b87e-2db3-47a3-b1f3-8a30fa6962da  

46 EBA/Op/2017/11 

18 

 
   
                                                 
The EBA's proposals set prudential requirements in order to mitigate the risks which the 
activities  of  investment  firms  may  pose  towards  their  customers,  the  markets  more 
generally, as well as for the orderly functioning of the firm itself. They are calibrated in 
recognition of the fact that, in most cases, investment firms can be wound down without 
triggering  contagion  across  financial  markets.  Capital,  liquidity  and  other  prudential 
requirements should therefore not exceed their purpose nor increase across the board for 
all  firms,  but  rather  be  better  targeted  at  the  risks  actually  posed  by  different  types  of 
investment firms.  

4.3.1.  Categorisation 

The  EBA  proposals  entail  a  new  categorisation  of  investment  firms.  Rather  than  11 
categories,  there  would  be  three  main  ones.  As  per  their  initial  recommendations, 
systemic investment firms constitute Class 1 and would remain in the CRR/CRDIV (see 
section 4.4 below). Class 2 firms are those which either deal on own account and incur 
market and counterparty credit risk, safeguard and administer client asset, or hold client 
money or are above the following size-thresholds (assets under management under both 
discretionary  portfolio  management  and  non-discretionary  (advisory)  arrangements 
higher than EUR 1.2bn; client orders handled of at least EUR 100mn/day for cash trades 
and/or at least EUR 1bn/day for derivatives; balance sheet total higher than EUR 100mn; 
total  gross  revenues  higher  than  EUR  30mn.  They  are  required  calculate  their  capital 
requirements in relation to the new K-factors (see next section). Class 3 firms are those 
which  don't  conduct the above  activities  and  which  are  below  all  the  above  thresholds. 
They are required to calculate their capital requirements in relation to the existing CRR 
provisions for fixed overheads or as equal to revised levels of initial capital, whichever is 
higher. Class 3 firms are not required to meet a capital requirement set in relation to the 
K-factors. This focuses their requirements solely on facilitating their orderly wind-down. 

4.3.2.  Capital requirements 

For  all  non-systemic  investment  firms,  the  EBA  bases  their  capital  requirements  on  a 
new  set  of  factors  which  measure  their  risk  to  customers,  to  markets  and  to  the  firms 
themselves.  The  result  of  this  approach  is  a  capital  regime  based  on  a  number  of  so-
called "K-factors".  

Risks  to  customers  are  caught  by  the  following  new  K-factors:  client  assets  under 
management  and  ongoing  advice,  assets  safeguarded  and  administered,  client  money 
held, and customer orders handled. For risks to market, the applicable K-factor captures a 
firm's  net  position  risk,  based  on  existing  CRR  requirements  for  market  risk,  or  where 
permitted by the supervisor for specific types of investment firms, one based on margins 
posted  with  a  firm's  clearing  member.  This  allows  investment  firms  to  choose  to  apply 
either  the  standardised  approach  under  CRR  (i.e.  simplified  standardised  approach  in 
CRR2)  if  their  assets  are  below  EUR  300  million  or  the  revised  standardised  approach 
under  the  CRR2  as  well  as  the  option  to  use  internal  models.  In  the  latter  cases,  the 
resulting capital requirement can be decreased to 65%, making permanent the possibility 
under CRR2 to apply this on a temporary basis for three years, in order to take account of 
investment  firms'  overall  lower  prudential  relevance.  Finally,  risks  to  firm  from  the 
default  of  a  trading  counterparty  or  from  concentration  risk  are  caught,  respectively, 

19 

 
based on simplified CRR requirements for counterparty credit risk47 and large exposure 
risk,  while  the  operational  risk  from  intra-day  trading  is  caught  by  reference  to  a  new 
risk-metric for daily trading flow.  

Table 4 – K-factors for determining capital requirements for investment firms 

Metric 

Rationale 

K-factors  New 

or 
based  on 
CRR? 

K-AUM  New 

Risk 
type 

to 
Risk 
Customer 
(RtC) 

Assets  under 
management 

of 

The  risk  of  harm  to  clients  from 
discretionary 
incorrect 
customer 
management 
portfolios  or  poor 
execution, 
providing  customer  reassurance  in 
terms  of  the  continuity  of  service 
of  ongoing  portfolio  management 
and advice 
The 
risk  of  harm  where  an 
investment  firm  holds  the  money 
of  its  customers,  regardless  of 
its  own 
they  are  on 
whether 
balance  sheet  or  segregated  in 
other accounts. 
The  risk  of  safeguarding  and 
administering customer assets, and 
ensures that investment firms hold 
capital 
to  such 
in  proportion 
balances,  regardless  of  whether 
they  are  on  its  own  balance  sheet 
or segregated in other accounts. 
The risk to clients of a firm which 
executes  their  orders  in  the  name 
of  the  client,  and  not  in  the  name 
of  the  firm  itself,  e.g.  as  part  of 
‘execution-only’  services  and  in 
the  reception  and  transmission  of 
orders. 
The  risk  of  trading  exposures  in 
instruments,  FX  and 
financial 
commodities based on the CRR 

K-CMH  New 

Client  money 
held 

K-ASA 

New 

K-COH 

New 

Assets 
safeguarded 
and 
administered 

Customer 
orders 
handled  

to 

Risk 
Market 
(RtM) 

K-NPR 

CRR 

Net  position 
risk  

Or 
K-CMG  New 

to 

K-TCD 

CRR 

Risk 
Firm 
(RtF) 

Clearing 
member 
guarantee 
Trading 
counterparty 
default  

The margin posted with a clearing 
member against trading risks 

The  risk  to  an  investment  firm  of 
counterparties failing to fulfil their 
obligations,  multiplying  exposures 

47 However, the firm could opt to apply CRR-methods for counterparty credit risk instead, for instance if it 

is part of a banking group.   

20 

 
                                                 
K-CON 

CRR 

Concentration 
risk 

K-DTF 

New 

Daily  trading 
flow  

by  risk  factors  based  on  the  CRR, 
into  account  the  mitigating  effects 
of  effective  netting  and 
the 
exchange of collateral. 
Concentration  risk  in  relation  to 
individual  or  highly  connected 
private  sector  counterparties  with 
whom firms have exposures above 
25%  of  their  capital  and  resulting 
in  capital  add-ons  in  line  with  the 
CRR. 
The  operational  risks 
large 
volumes  of  intra-day  trades  based 
on  the  gross  value  of  settled  cash 
trades  and  notional  value  of 
derivatives.  

in 

The  overall  capital  requirement  is  the  sum  of  the  above  K-factors.  This  is  derived  by 
multiplying  the  volume  of  activity  referred  to  by  the  new  K-factors  for  K-AUM,  K-
CMH, K-ASA, K-COH, and K-DTF by the coefficients indicated in Table 5 for a given 
K-factor48. The volumes of K-CMH, K-ASA, K-COH and K-DTF are calculated on the 
basis of a rolling average from the previous three months, while for K-AUM it is based 
on the previous year. 

Table 5 – Coefficients for each new K-factor (besides K-CMG) 

K-factor 
K-AUM 
K-ASA 
K-CMH 
K-COH & K-DTF cash/derivatives 

Coefficient 
0.02% 
0.04% 
0.45% 
0.1/0.01% 

For  those  risks  which  rely  on  existing  rules  the  capital  requirement  is  set  either  with 
reference to or by a modified application of the respective CRR-provisions. K-NPR is set 
with reference to the CRR while K-TCD and K-CON are set by a modified application of 
the respective CRR-provisions. 

The  overall  capital  requirement  from  applying  K-factors  would  be  the  sum  of  the 
following: 

48 The EBA developed the calibration of the coefficients for each K-factor individually based on the data it 
collected as a flexible way of ensuring the targeted outcome of the review, namely that overall capital 
requirements for investment firms across the EU should not increase significantly and that there should 
be a rebalance in the way capital applies in favour of Pillar 1 over Pillar 2. The starting point is the 
calculation of the ratio of the fixed overheads requirement (FOR) to the different metrics used for each 
K-factor,  as reported by  firms.  These  ratios are  then  used to  set  the  coefficient  for  each  K-factor,  at 
levels  that  would  correspond  largely  to  the  objectives  of  ensuring  that  capital  is  not  increased 
substantially  across  the  board  and  that  the  majority  of  smaller  firms  continue  to  be  subject  to  the 
simpler FOR requirement rather than to the K-factor approach. 

21 

 
 
 
                                                 
Capital requirement = (a*K-AUM + b*K-CMH + c*K-ASA + d*K-COH + (K-
NPR or K-CMG where permitted) + K-TCD + K-CON + e*K-DTF 

where a, b, c, d and e are coefficients in Table 5 and where the amount of a K-factor is 
simply zero if a firm does not undertake the relevant activity. 

Finally, the capital instruments which qualify as own funds for investment firms to meet 
their  capital  requirements  consist  of  the  same  items  as  under  CRR/CRDIV.  For  this 
purpose, Common Equity Tier 1 (CET1) capital CET1 should constitute at least 56% of 
regulatory capital, while Additional Tier 1 (AT1) is eligible up to 44% and Tier 2 capital 
up to 25% of regulatory capital. 

4.3.3. 

Initial capital 

The EBA proposes to revise the levels of initial capital as follows. The initial capital of 
an investment firm that is authorised to provide the investment services or to perform the 
investment  activities  of  dealing  on  own  account,  underwriting  or  placing  on  a  firm 
commitment basis, or operating a multilateral trading facility (MTF) or organised trading 
facility  (OTF)  should  be  EUR  750  000.  An  investment  firm  that  is  not  authorised  to 
provide  these  investment  services  and  which  does  not  hold  client  money  or  securities 
should have initial capital of EUR 75 000. Finally, all other investment firm should have 
initial capital of EUR 150 000. These amounts should be met by firms on a permanent 
basis. 

4.3.4.  Liquidity 

The EBA proposes that liquidity requirements apply, in some cases for the first time, to 
both  Class  2  and  3  firms.  Specifically,  both  should  demonstrate  adequate  internal 
procedures to manage their liquidity needs and are required to hold a minimum amount 
of  liquid  assets  equal  to  one  third  of  their  fixed  overheads  requirement  to  cover  these. 
The  list  of  liquid  assets  and  applicable  haircuts  is  aligned  with  the  Liquidity  Coverage 
Ratio (LCR) under the CRR49 and supplemented with cash at external banks (excluding 
any client money). For Class 3 firms, this is further supplemented with receivables from 
trade  debtors  and  fees/commissions  from  their  services  within  30  days,  provided  these 
don't exceed one-third of the minimum liquidity requirement, do not count towards any 
additional liquidity requirements imposed by the competent authority, and that they are 
subject  to  a  haircut  of  50%.  In  exceptional  circumstances,  investment  firms  can  fall 
below  the  required  threshold  by  monetising  their  liquid  assets  to  cover  liquidity  needs, 
provided  they  notify  their  competent  authority  immediately.  All  financial  guarantees 
provided  to  customers,  which  can  give  rise  to  increased  liquidity  needs  if  triggered, 
reduce  the  amount of available liquid assets by at least  1.6%  of the  total  value of such 
guarantees. 

4.3.5.  Concentration risk 

The  EBA  proposes  that  all  investment  firms  are  required  to  monitor  and  control  their 
concentration risk, including in relation to their customers. However, only Class 2 firms 

49 Commission Delegated Regulation (EU) 2015/61 of 10 October 2014 to supplement Regulation (EU) No 
575/2013 of the European Parliament and the Council with regard to liquidity coverage requirement 
for credit institutions (OJ L 11, 17.1.2015, p. 1–36) 

22 

 
                                                 
are required to report to competent authorities on their concentration risks for instance in 
terms  of  the  risk  of  default  of  their  counterparties,  where  they  hold  client  money, 
securities  and  their  own  cash,  and  concentration  risk  from  their  earnings.  Those  firms 
that deal on own account or execute client orders in their own name should not exceed an 
exposure  to  a  single  or  to  connected  counterparties  equal  to  25%  of  their  regulatory 
capital,  subject  to  specific  derogations  for  exposures  to  credit  institutions  or  other 
investment  firms  and  with  broadly  aligned exemptions in  terms  of  exposures  to  central 
banks,  governments,  central  counterparties  etc.  These  limits  may  only  be  exceeded  if 
additional  capital  requirements  under  K-CON  are  met,  calculated  as  a  multiple  of  the 
amount of any K-NPR and K-TCD attributed to the relevant exposure and according to 
the relative size of the excess.  

4.3.6.  Treatment of groups 

The EBA proposes that investment firms which are part of a banking group should also 
apply the new rules on an individual basis. A waiver is provided for Class 3 firms which 
are part of a banking group headquartered in the same Member State, considering that the 
consolidated application of the CRR/CRDIV to the group should sufficiently cover their 
risks. For groups containing only investment firms, the EBA retains the existing option 
under CRR to ensure sufficient capital at the top-company level and makes this the norm. 
However,  competent  authorities  can  also  require  groups  of  firms  to  apply  the 
requirements  on  a  group-basis,  for  instance  in  circumstances  where  a  group  of 
investment firms are deliberately structured to fall below the thresholds for being a Class 
2 firm or are highly interconnected and applying capital to the group as a whole would 
better reflect its risks.  

4.3.7.  Supervisory reporting and public disclosure 

The  EBA  recommends  that  investment  firms  are  required  to  report  to  their  competent 
authorities  on  their  compliance  with  the  prudential  framework,  in  accordance  with 
detailed requirements to be articulated in Level 2 implementing measures. Class 2 firms 
which are subject to the K-factors have more granular reporting requirements than those 
subject to the capital requirement either in terms of permanent minimum capital or fixed 
overheads.  These  firms  shall  publicly  disclose  their  levels  of  capital  and  their  capital 
requirements  whereas  small  and  non-interconnected  firms  shall  not  have  public 
disclosure requirements. 

4.3.8.  Supervisory review and evaluation (Pillar 2) 

Based on the internal capital adequacy assessments of both Class 2 and 3 firms, the EBA 
recommends  that  competent  authorities  should  have  powers  to  review  and  evaluate  the 
prudential  situation  of  investment  firms  and,  where  necessary,  to  exercise  powers  to 
require  changes  in  areas  such  as  internal  governance  and  controls,  risk  management 
processes and procedures and, where needed, setting additional requirements, including 
in particular in relation to capital and liquidity requirements.  

4.3.9.  Corporate governance and remuneration 

With  regard  to  corporate  governance  and  remuneration  requirements,  the  EBA 
recommendations  are  based  on  the  assessment  that  MiFID  II  overall  offers  sufficient 
guarantees for Class 3 investment firms. For Class 1 investment firms the CRR/CRDIV 
regime,  including  the  maximum  ratio  rule,  is  considered  fully  appropriate.  For  Class  2 

23 

 
firms,  given  their  risk  profile,  the  EBA  assessment  is  that  some  CRD-like  provisions 
could  be  an  appropriate  add-on  to  MiFID  II  requirements.  With  regard  to  corporate 
governance, these would include risk management arrangements and country-by-country 
disclosure.  Specialised  management  body  committees  are  recommended  only  for 
significant  Class  2  investment  firms.  With  regard  to  remuneration,  the  additional 
provisions should be in the EBA's assessment similar to those in CRD IV, UCITS50 and 
AIFMD51 Directives. However, the EBA does not provide a concrete recommendation on 
whether the maximum ratio rule should be maintained for Class 2 investment firms. On 
the one hand, the EBA draws the attention to the fact that the maximum ratio rule can be 
an  effective  tool  to  limit  the  incentives  for  short-term  risk  taking,  especially  if  the 
deferral and pay out in instruments requirements are not applied. On the other hand, the 
EBA  points  out  to  the  impact  of  the  maximum  ratio  on  the  fixed  costs  of  investment 
firms and their ability to remain profitable in times of economic downturn. The collection 
of data and aggregate disclosure of high-earners is recommended. Finally, EBA proposes 
some  simplification  of  the  pay  out  in  instrument  rules  for  Class  2  firms  and  provides 
estimates for the number and market share of investment firms which could be excluded 
from the application of the pay out in instruments and deferral rules should derogations 
for smaller Class 2 investment firms be considered.   

4.3.10.  Transitional provisions  

To mitigate the effects of possible increases in capital requirements, the EBA proposes 
that these can be limited to twice the level of the capital requirements under the current 
regime for 3 years after entry into force of the new regime. For new firms which are not 
subject to the current regime, the capital requirements can be limited to twice the level of 
the  fixed  overheads  requirement,  while  those  subject  only  to  initial  capital  today  can 
apply  a  cap  equal  to  twice  this  level.  Increases  in  initial  capital  can  also  be  met 
incrementally over a period of five years.  Firms  that transition from Class  3 to  Class 2 
would have to apply the K-factor requirement immediately, except for the K-AUM and 
K-COH  where  firms  should  be  allowed  3  months  from  the  date  they  exceed  the 
categorisation thresholds before being reclassified to Class 2. Meanwhile a Class 2 firm 
should meet the criteria for being in Class 3 for at least 6 months before being confirmed 
as belonging to Class 3. Finally, investment firms specialised in commodity derivatives 
which  fall  within  the  scope  of  MiFID  II  should  be  granted  a  phase-in  period  before 
becoming fully subject to the prudential regime together with all other investment firms.  

4.4.

  Systemic investment firms 

The EBA proposes to develop detailed Level 2 regulation for the identification of Class 1 
systemic  investment  firms.  However,  amid  the  backdrop  of  UK-based  systemic 
investment  firms  relocating  to  the  EU27  and  the  recommendations  of  the  EBA52  and 

50  Directive  2009/65/EC  of  the  European  Parliament  and  of  the  Council  of  13  July  2009  on  the 
coordination  of  laws,  regulations  and  administrative  provisions  relating  to  undertakings  for  collective 
investment  in  transferable  securities  (UCITS),  amended  by  Directive  2014/91/EU  of  the  European 
Parliament and of the Council of 23 July 2014   
51  Directive  2011/61/EU  of  the  European  Parliament  and  of  the  Council  of  8  June  2011  on  Alternative 
Investment Fund Managers   
52 Opinion of the European Banking Authority on issues related to the departure of the United Kingdom 
2017 

from 
http://www.eba.europa.eu/documents/10180/1756362/EBA+Opinion+on+Brexit+Issues+%28EBA-
Op-2017-12%29.pdf  

(EBA/Op/2017/12) 

European 

October 

Union 

the 

12 

of 

24 

 
                                                 
ESMA53  to  ensure  a  regulatory  level  playing  field  between  credit  institutions  and 
systemic investment firms, rather than postpone the decision until the process reaches the 
Level  2  stage,  it  is  considered  that  this  is  more  appropriately  done  at  Level  1.  This 
section describes the options for doing so and therefore goes beyond the EBA's advice in 
its opinion on the review of investment firms and delivers on its opinion on issues related 
to the decision of the UK to withdraw from the Union.  

There  are  two  main  options  to  avoid  regulatory  loopholes  which  could  allow  systemic 
investment  firms  which  should  remain  subject  to  the  CRR/CRDIV  to  escape  its  scope 
and to  help ensure that the relocated activities of UK-based systemic firms are brought 
under effective supervision to ensure a level playing field54. First, the criteria for being 
identified  as  a  global  or  other  systemically  important  institution  (G-SII/O-SII)  which 
should continue to fall under CRR/CRDIV could be tightened to ensure systemic firms 
are  effectively  caught  and  Member  States'  discretion  to  designate  them  is  reduced. 
Second,  the  definition  of  "credit  institution"  in  the  CRR/CRDIV  could  be  amended  to 
also  cover  these  systemic  investment  firms  based  on  the  nature  and  size  of  investment 
services they provide and thereby lock them into the CRR/CRDIV and bring them under 
the scope of the SSM.  

Both  of  these  options  have  advantages  and  disadvantages.  The  first  would  have  the 
advantage of making the G-SII/O-SII criteria more tailored for investment firms. On the 
other  hand,  it  could  involve  an  extensive  and  lengthy  examination  of  the  criteria,  with 
little  work  and  consensus  achieved  so  far  on  what  these  changes  should  consist  of.  It 
would  also  involve  revisiting  provisions  which  were  difficult  to  agree  in  the  current 
framework. Even if the changes did not affect the designation of banks and were limited 
to investment firms, tightening the O-SII criteria to minimise some more subjective and 
discretionary elements could be controversial for many Member States keen to retain the 
flexibility  of  the  current  framework.  The  current  level  of  discretion  was  a  conscious 
choice  by  the  legislators  considering  that  the  O-SII  framework  was  conceived  as  a 
macroprudential tool. 

The second option, amending the CRR definition of credit institution to capture systemic 
investment firms, has the advantage of sidestepping a lengthy examination of the O-SII 
criteria.  It  essentially  concerns  amending  one  definition  and  is  thereby  more 
straightforward. This would equate systemic investment firms with credit institutions in a 
permanent  sense,  helping  to  minimise  the  scope  for  any  regulatory  arbitrage  which  the 
tinkering  of  the  O-SII  criteria  could  leave  open.  This  could  be  done  by  adding  to  the 
current definition of credit institutions those investment firms that provide the most risky 
and systemically critical investment services on a significant scale, namely undertakings 
that (1) deal on own account and underwrite on firm commitment basis; and (2) exceed 
certain  size  thresholds  in  terms  of  e.g.  total  assets  at  individual  or  group  level.  This 
would be coherent with the recommendation of the EBA, referred to in section 3.2 above, 

53 ESMA opinion 31 May 2017 – General Principles to Support Supervisory Convergence in the Context of 

the UK withdrawing from the EU 

54  A  third  option,  amending  the  scope  of  the  SSM  Regulation  is  not  considered  here.  The  Commission 
report reviewing the SSM Regulation (forthcoming, add reference) did not find any major issues in the 
application of that Regulation that would need to be addressed. Opening it up for the issue discussed 
here  alone  is not considered an  effective  and  efficient  way of  proceeding,  considering that the  SSM 
Regulation  can  only  be  amended  by  unanimity  and  it  could  risk  opening  up  other  aspects  of  the 
functioning of the SSM that were controversial at the time of its negotiation.    

25 

 
                                                 
to  exclude  investment  firms  which  perform  these  activities  from  falling  in  the  lighter 
category of Class 3, ensuring they fall under the more stringent Class 2 instead. In this 
case, if their size reaches a critical threshold, they are then 'elevated' into Class 1. 

In  addition, this option would also have  a read-across to  other pieces  of EU legislation 
which refer to the CRR/CRDIV-definition of 'credit institution', notably the Directive on 
Deposit  Guarantee  Schemes55  and  the  Bank  Recovery  and  Resolution  Directive56.  The 
change  in  the  definition  would  also  have  implications  for  the  SSM  Regulation  and 
thereby  imply  not  only  that  systemic  investment  firms  would  remain  subject  to  the 
CRR/CRDIV,  but  also  that  their  prudential  supervision  is  ensured  by  the  SSM  to  the 
extent  that  they  are  established  in  Member  States  participating  in  the  Banking  Union. 
This would further consolidate the aim of ensuring that systemic investment firms do not 
escape the requirements of the CRR/CRDIV, avoiding the regulatory arbitrage and risks 
for financial stability and the fragmentation of the Single Market which this would entail, 
by vesting  key decisions over the authorisation and  supervision of these  firms with  the 
ECB  and  creating  a  level  playing  field  with  the  centralised  supervision  of  credit 
institutions, subject to the same rulebook.  

By  extension,  this  would  also  then  apply  to  the  Regulation  setting  up  the  Single 
Resolution Mechanism (SRM)57. Otherwise, the responsibility between the national and 
the EU-level for supervision and resolution would not be aligned. This would also mean 
that the contributions of these investment firms  to  resolution funds would no longer be 
made  to  national funds set up pursuant to  the  Bank Recovery  and Resolution Directive 
(BRRD)58  but  to  the  Single  Resolution  Fund  (SRF)  under  the  SRM.  This  could  create 
some redistribution in the contributions of institutions to the SRF, but conceptually this 
would be no different than when credit institutions already subject to contributions to the 
SRF  grow  or  shrink  in  size59.  However,  in  some  cases  different  business  models  will 
continue to be treated differently. For example, whether or not they were to fall under the 
Directive  on  deposit  guarantee  schemes  (DGS),  including  in  terms  of  having  to 
contribute to DGS funds, would depend on whether they began to accept deposits.  

One  difficulty  with  this  approach  is  to  determine  the  right  size-threshold  in  order  to 
ensure  the  population  of  investment  firms  which  is  caught  is  neither  too  large  nor  too 

55  Directive  2014/49/EU  of  the  European  Parliament  and  of  the  Council  of  16  April  2014  on  deposit 

guarantee schemes (OJ L 173, 12.6.2014, p. 149–178) 

56  Directive  2014/59/EU  of  the  European  Parliament  and  of  the  Council  of  15  May  2014  establishing  a 
framework  for  the  recovery  and  resolution  of  credit  institutions  and  investment  firms  and  amending 
Council  Directive  82/891/EEC,  and  Directives  2001/24/EC,  2002/47/EC,  2004/25/EC,  2005/56/EC, 
2007/36/EC,  2011/35/EU,  2012/30/EU  and  2013/36/EU,  and  Regulations  (EU)  No  1093/2010  and 
(EU) No 648/2012, of the European Parliament and of the Council (OJ L 173, 12.6.2014, p. 190) 
57  Regulation  (EU)  No  806/2014  of  the  European  Parliament  and  of  the  Council  of  15  July  2014 
establishing uniform rules and a uniform procedure for the resolution of credit institutions and certain 
investment firms in the framework of a Single Resolution Mechanism and a Single Resolution Fund 
and amending Regulation (EU) No 1093/2010 (OJ L 225, 30.7.2014, p. 1–90) 

58  Directive  2014/59/EU  of  the  European  Parliament  and  of  the  Council  of  15  May  2014  establishing  a 
framework  for  the  recovery  and  resolution  of  credit  institutions  and  investment  firms  and  amending 
Council  Directive  82/891/EEC,  and  Directives  2001/24/EC,  2002/47/EC,  2004/25/EC,  2005/56/EC, 
2007/36/EC,  2011/35/EU,  2012/30/EU  and  2013/36/EU,  and  Regulations  (EU)  No  1093/2010  and 
(EU) No 648/2012, of the European Parliament and of the Council (OJ L 173, 12.6.2014, p. 190) 
59 The target level of the SRF is set in relation to a percentage of deposits covered under Deposit Guarantee 
Schemes in participating Member States, with individual institutions contributions a function of their 
share of the total liabilities of all institutions in these Member States. 

26 

 
                                                 
small. A hard threshold can also cause possible cliff-effects for firms as they grow/shrink 
in  size,  although  this  can  be  mitigated  by  setting  the  threshold  based  on  an  average  of 
assets over time. 

Therefore,  amending  the  CRR  definition  of  credit  institution  to  capture  systemic 
investment  firms  is  considered  the  best  option  for  minimising  the  scope  for  regulatory 
arbitrage  and  potential  risks  for  financial  stability  and  the  fragmentation  of  the  Single 
Market  which  the  creation  of  a  new  regime  for  non-systemic  investment  firms  could 
entail.  As  discussed,  this  would  firmly  subject  systemic  investment  firms  into  the 
CRR/CRDIV  which  is  considered  to  be  the  appropriate  and  proportionate  regime  for 
them.  For  these  firms  little  would  change  as  they  would  continue  to  apply  the  current 
framework.  This  option  would  also  imply,  for  Member  States  participating  in  the 
Banking  Union,  their  prudential  supervision  by  the  ECB.  Furthermore,  by  limiting  the 
necessary  changes  to  the  definition  of  credit  institution  rather  than  more  far-reaching 
changes, it is an efficient way of achieving this outcome.  

5.  ASSESSING THE IMPACT OF THE NEW REGIME 

5.1.

  Changes implied by the EBA advice 

The EBA advice would rely on three main tools and result in a number of changes. First, 
it would set up a dedicated and harmonised new prudential framework for non-systemic 
investment  firms  separate  from  the  CRR/CRDIV.  Second,  it  would  introduce  a  new 
categorisation of investment firms based on the size and type of their activities. Third, it 
would  revise  the  scope  and  content  of  prudential  requirements  that  would  apply  to 
investment  firms  depending  on  their  categorisation  and  profile,  targeting  the  business 
models  of  investment  firms  both  with  the  new  K-factors  for  setting  tailored  capital 
requirements  and  in  other  areas  such  as  liquidity  and  concentration  risk  where  existing 
provision for risks already targeted by the current framework would be adjusted.  

These  tools  and  associated  changes  as  well  as  how  they  would  help  achieve  the 
objectives  of  the  review  outlined  in  section  4.2  above  (more  appropriate,  risk-sensitive 
prudential requirements; a framework that accommodates investment firms better for the 
business they conduct and avoids regulatory arbitrage; and a streamlined regulatory and 
supervisory toolkit) are summarised in table 6 below. For example, greater harmonisation 
notably  serves  to  streamline  the  regulatory  and  supervisory  toolkit.  The  simpler 
categorisation also helps in this respect but also to avoid regulatory arbitrage, for instance 
in  terms  of  ensuring  that  systemic  firms  alone  remain  in  the  CRR/CRDIV  while 
opportunities  and  incentives  for  other  firms  to  adjust  their  business  in  order  to  secure 
specific  prudential  treatment  are  minimised.  Finally,  the  revised  scope  and  content  and 
the  tailoring  of  the  requirements  to  investment  firms  improves  its  appropriateness  and 
overall risk-sensitivity.  

Table 6 – Outline of key changes and contribution to achieving objectives 

CRR/CRDIV 

EBA proposals 

Appropriate  and 
risk-sensitive 
rules 

Accommodate 
less 
firms  better, 
scope for arbitrage   

Streamlined 
toolkit 

Level 
harmonisation 

of 

Medium 

High 

27 

 
 
 
 
 
 
Categories 

11  

3 main categories 

Scope 
content 
requirements 

and 
of 

Largely 
centric 

bank-

New  K-factors  + 
modified CRR 

5.2.

  Main impacts 

The following sections examine the main impacts of the changes proposed by the EBA in 
terms of capital and liquidity requirements, compliance costs and wider effects. In terms 
of  quantitative  impacts,  the  EBA's  aim  was  to  calibrate  its  proposals  in  line  with  the 
objectives  outlined  in  section  4.2.  Namely  overall  capital  requirements  across  the 
population of investment firms should not change significantly, but they should be better 
targeted  at  the  actual  risks  faced  and  posed  by  different  kinds  of  firms.  Second,  most 
investment firms which are small and non-interconnected should continue to be subject 
to lighter requirements, notably in relation to their capital.     

5.2.1.  Capital requirements 

Based  on  the  sample  of  firms  it  obtained  data  from  (c.1200  firms  or  c.20%  of  EEA 
investment firms), the EBA assesses that under the new regime approximately two-thirds 
would be Class 2 firms and one-third would be Class 3 firms. However, the EBA admits 
that  its  data  is  biased  towards  Class  2  firms  since  smaller  firms  (prospective  Class  3 
firms) contributed less data. Therefore, the share of firms in each category is likely to be 
different in practice.  

For  firms  in  Class  3,  their  capital  requirements  would,  where  higher  than  their  initial 
capital,  be  set  in  terms  of  their  fixed  overheads  requirements,  calculated  in  accordance 
with  Commission  Delegated  Regulation  (EU)  2015/48860.  For  around  1800  firms  that 
only  provide  reception  and  transmission  of  orders  and/or  investment  advice,  based  on 
EBA  data  from  201561,  this  would  mean  becoming  subject  to  the  fixed  overheads 
requirement  for  the  first  time  (and  to  the  K-factors  if  they  exceeded  the  relevant 
thresholds  of  assets  under  advice  of  EUR  1,2bn  or  annual  income  of  EUR  30mn  or 
balance  sheet  size  of  EUR  100mn).  However,  the  EBA's  data  gathering  from  c.1200 
firms indicates that most firms ought to comfortably meet the new requirements based on 
their existing levels of own funds. Based on the fact that the fixed overheads requirement 
mostly  relies  on  common  expenses  associated  with  running  an  investment  firm,  this 
finding  could  be  extrapolated  with  a  reasonable  degree  of  confidence  to  most  firms 
which  currently  do  not  have  a  specific  regulatory  requirement  to  hold  own  funds. 
Nonetheless, the EBA proposes to revise the content of the fixed overheads requirement 
in  a  Level  2  measure,  in  order  to  account  for  the  specificities  of  some  firms  whose 
business  models  and  associated  overheads  might  not  be  sufficiently  reflected  in  the 
present  rules  (e.g.  commodity  dealers  subject  to  MiFID  II  for  the  first  time).  Little 
concrete  change  is  expected  for  firms  which  are  already  subject  to  the  fixed  overheads 
requirement and which would fulfil the criteria for Class 3.  

60   Commission  Delegated  Regulation  (EU)  2015/488  of  4  September  2014  amending  Delegated 
Regulation (EU) No 241/2014 as regards own funds requirements for firms based on fixed overheads 
(OJ L 78, 24.3.2015, p. 1–4) 
61 Table 12 in EBA/Op/2015/20 

28 

 
 
 
 
 
 
 
 
                                                 
For  investment  firms  in  Class  2,  whose  capital  would  be  set  by  the  K-factors  which 
capture some risks for the first time, the impacts can be expected to be more substantial. 
However,  the  EBA's  assessment  is  that  these  impacts  would  be  concentrated  in  a 
relatively small number of individual firms, not for all or some types of investment firms 
more generally. This is explained on the one hand by the fact that the K-factors for K-
AUM, K-COH, K-ASA and K-CMH would capture the corresponding activities for the 
first  time  and  accordingly  increase  capital  requirements  for  some  firms  which  conduct 
these  activities  on  a  significant  scale.  On  the  other,  two  K-factors  which  are  based  on 
requirements in the CRR (K-TCD and K-NPR) would also be responsible for increasing 
capital requirements for some firms which incur these risks62. 

The data analysis of the EBA, presented in summary form in Annex 2, illustrates that the 
most  impacted  business  models63  in  terms  of  higher  capital  requirements  include 
investment  advisors,  execution  brokers,  firms  which  place  securities  and  portfolio 
managers.  The  results  mask  individual  impacts  for  firms,  meaning  that  the  increase 
across the population as a whole for that business model can in some cases be attributed 
to a small number of firms. For others such as trading firms and custodians, requirements 
as a whole would decrease, but for individual firms in these groups this would depend on 
whether they were subject to the either the fixed overheads requirement, the permanent 
minimum capital or to the K-factors . The decrease for trading firms under the K-factors 
can  for  example  be  due  to  the  fact  that  they  would  no  longer  need  to  calculate  capital 
requirements for operational risk under the EBA proposals. 

On aggregate, for investment firms across the board, the EBA assesses that requirements 
would  increase  10%  compared  to  Pillar  1  requirements  today,  and  decrease  16% 
compared  to  total  requirements  applied  as  a  result  of  Pillar  2  add-ons.  In  terms  of 
available  own  funds,  the  EBA  finds  that  most  firms  ought  to  have  sufficient  capital  to 
comfortably  meet  the  new  requirements.  On  aggregate,  around  7%  in  their  data  from 
c.1200  firms  exhibit  a  shortfall,  mostly  concentrated  in  a  small  number  of  investment 
advisors,  trading  firms,  and  multiservice  firms.  As  mentioned,  for  firms  in  this  group 
whose  increases  would  be  over  twice  their  current  requirements,  a  cap  for  three  years 
could be granted.  

The  EBA's  proposals  for  calibrating  the  requirements  are  on  the  basis  of  EU-wide 
aggregates. Consequently, in some Member States the national aggregate level of capital 
for investment firms may increase or decrease. In some cases where some Member States 
have several investment firms with a particular business model (e.g. proprietary trading 
firms  in  the  Netherlands  who  trade  through  clearing  members),  consideration  is  also 
being given to allowing capital to be set according to existing practices (i.e. K-factor for 
clearing member guarantee explained in section 3.1).   

5.2.2.  Liquidity requirements 

A  similar  story  applies  in  relation  to  the  EBA's  proposed  liquidity  requirements.  They 
find  that,  based  on  their  data  from  over  1200  firms,  more  than  80%  of  firms  meet  the 

62 However, the EBA assesses that this may be overestimated based on firms having reported non-trading 

book positions in the EBA's data collection which the future regime would not apply to.  

63  The  EBA  stresses  that  the  business  model  categorisation  is  subject  to  a  high  degree  of  subjective 

assessment regarding firms' principal profile.   

29 

 
                                                 
proposed  level  set  at  a  third  of  the  fixed  overheads  requirements  with  cash  or  highly 
liquid assets. Around 70% of firms have over three times the amount available. Less than 
10% of the firms in their data set would fail to meet the requirements if they were applied 
today. While the EBA's data exercise did not subject the liquid assets of investment firms 
to the haircuts they propose to apply pursuant to the LCR, it is observed that most firms 
would meet the requirements in cash to which no haircut applies.   

5.2.3.  Compliance and administrative costs 

Besides the direct costs associated with the new requirements for some firms in terms of 
capital  requirements,  one-off  indirect  costs  can  be  expected  from  the  need  for  firms  to 
revamp  risk  management  systems,  update  compliance  departments  and  revise  contracts 
with  law  firms  and  other  providers  of  services  currently  used  to  facilitate  compliance. 
Some  stakeholders  consider  these  to  represent  sunk  costs  from  the  present  regime, 
potentially  exposing  individual  firms  to  EUR  tens  of  thousands,  based  on  the 
approximate  costs  identified  in  the  work  of  the  Commission  regarding  the  costs  of  the 
current regime64.     

In terms of the benefits of the changes, the migration of investment firms to a prudential 
regime more tailored to their risks ought to considerably benefit them. Setting capital and 
other prudential requirements, including  remuneration and governance, in proportionate 
fashion to investment firms for the first time alleviates the significant costs which firms 
incur as a result of the bank-centric requirements of the current regime. The complicated 
task of matching and reconciling business data to an ill-fitted regulatory framework and 
reporting  regime  would  end,  bringing  down  compliance  costs  in  the  process.  For 
example, streamlining the current onerous reporting framework can be expected to result 
in  a reduction of administrative burdens and compliance  costs for all  investment firms. 
How these reductions in compliance costs would relate and compare to changes in capital 
requirements for different types of firms is not known at this stage but should feature in 
the  monitoring  and  evaluation  of  the  framework.  Their  operating  conditions  ought  to 
improve  as  a  result,  freeing  capital  from  mislaid  and  unproductive  regulatory  purposes 
for more productive uses, including for innovative firms seeking to grow through digital 
means. Finally, remuneration policies and practices should be more appropriate to their 
business cycles and revenue streams.  

5.2.4. 

Impacts beyond investment firms 

In terms of their customers and counterparties, the increased resilience and risk-readiness 
of  investment  firms  should  reassure  them  that  they  will  not  be  unduly  impacted  by the 
risks and possible problems incurred by firms. Through the application of rules which are 
more tailored to their business, customers of investment firms should be better protected 
from the  risks incurred by firms,  including in  the event that they fail. This  should help 
reduce  economic  losses  in  drawn-out  insolvency  proceedings  or  reliance  on  investor 
compensation  schemes,  avoiding  consequent  impacts  on  other  firms  to  top-up  these 
schemes to handle pay-outs. Overall confidence, investor sentiment and market stability 

64 This data is based on a sample of diverse investment firms who replied to the Commission's survey, sent 
to a group of investment firms, trade associations and law firms which were actively engaged in the 
discussions on the review, and a workshop attended by c.30 participants in May 2017 from among this 
group.     

30 

 
                                                 
should  also  benefit,  with  positive  knock-on  effects  for  the  needs  of  the  users  of 
investment firms, including those seeking to access finance in securities markets.      

Supervisors  would  also  have  a  more  appropriate  framework  of  rules  to  carry  out  their 
oversight.  Redundant  regulatory  and  supervisory  information  could  be  scrapped  while 
decreasing  the  possibility  of  actual  risks  going  undetected.  A  more  tailored  set  of  risk-
measures,  required  ratios  of  capital,  liquidity  and  other  indicators,  and  the  relevant 
associated  reporting  by  firms,  as  well  as  remuneration  and  governance  requirements, 
would help supervisors perform their role in a more focused and targeted way, boosting 
the orderly and efficient functioning of financial markets. At the same time, the proposed 
powers  for  supervisors  would  not  limit  their  ability  to  impose  additional  prudential 
requirements on firms where necessary, including as part of macro-prudential oversight.            

In  tandem,  the  functioning  of  the  Single  Market  and  the  development  of  the  Capital 
Markets Union should be boosted. This includes facilitating access to finance for SMEs 
which  are  not  banks  or  investment  firms  themselves.  A  more  suitable  prudential 
framework should help free up capital from unproductive regulatory purposes and allow 
investment  firms  to  offer  better  services  to  their  customers,  including  SMEs,  boosting 
competition  and  improving  investors'  access  to  new  opportunities  and  better  ways  of 
managing  their  risks.  This  should  contribute  to  helping  investment  firms  act  as 
intermediaries  in  mobilising  investments  from  savers  across  the  EU  and  thereby 
facilitating non-bank sources of finance for European economic actors. 

5.3.

  Assessment of the EBA proposals in terms of the objectives of the review 

This section examines how the EBA's proposals align with the objectives of the review 
for:  more  appropriate,  risk-sensitive  prudential  requirements;  a  framework  that 
accommodates  investment  firms  better  for  the  business  they  conduct  and  avoids 
regulatory arbitrage; and a streamlined regulatory and supervisory toolkit.  

The  EBA's  proposals  would  remove  investment  firms  from  the  complex  and 
disproportionate  application  of  the  CRR/CRDIV  framework,  which  was  designed  to 
capture  the  risks  of  banks,  and  base  their  prudential  requirements  on  the  specific  and 
most relevant risks they pose for customers and markets. It would allow capturing risks 
in investment firms' business models which have thus far gone unaddressed for the first 
time,  thereby  improving  risk-sensitivity  and  supervisory  oversight.  For  instance 
requirements for firms in Class 2 would be scaled appropriately for firms depending on 
whether and what amount of client money and securities they hold, administer or handle. 
Together,  this  would  serve  the  objective  of  the  review  to  design  more  risk  sensitive 
prudential requirements.  

The EBA proposals would also carry over some requirements which are already specific 
to investment firms in the existing framework and which continue to serve a purpose, e.g. 
fixed overheads requirement for smaller firms.  Having initially considered an option to 
conceive  of  investment  firms'  risks  from  trading  in  a  different  way  from  the  CRR-
provisions  on  market  risk65,  the  EBA  advice  would  also  support  a  level  playing  field 
between  banks  and  investment  firms  where  the  risks  faced  by  each  are  similar  (e.g. 
market risk arising from trading activities). In this respect, it relies on concepts that are 

65  The  EBA's  November  2016  discussion  paper  proposed  capital  requirements  be  set  relative  to  trading 

volume.   

31 

 
                                                 
familiar  to  firms  both  from  their  existing  regulatory  requirements  and  market  practice 
(e.g. possibility to rely on margins posted with clearing members to cover trading risk), 
but  applies  existing  requirements  in  a  slightly  simpler  manner  than  the  existing  regime 
and  the  revisions  it  is  currently  undergoing.  It  would  also  allow  for  some  specific 
consideration  e.g.  for  investment  firms  specialised  in  commodities  for  their  trades 
conducted  for  hedging  purposes  for  the  group  and  the  resulting  intra-group  exposures. 
Furthermore,  rather  than  rethinking  other  prudential  concepts  like  liquidity  and  large 
exposures rules anew, it completes the framework through a simplified application of the 
existing CRR provisions. These factors all contribute to the proportionality objectives of 
the review, both for investment firms themselves and in order not to create competitive 
distortions vis-à-vis other players in the market, notably credit institutions. 

The requirements would be sensitive and would adjust as firms' risks grow in accordance 
with the business they undertake, unlike today where they shift abruptly as a firm moves 
into a new category if it adds a new investment service to its profile. With its fixed set of 
criteria for distinguishing Class 2 and 3 firms, the EBA's revised categorisation is more 
predictable and balances greater certainty for firms with greater risk-sensitivity. It would 
reduce  the  scope  for  regulatory  arbitrage  by  firms  between  the  current  categories  of 
treatment and between Member States. By capturing their business in a more blunt and 
direct  way  than  the  existing  regime,  investment  firms  would  be  less  able  to  secure  a 
significantly different prudential treatment by adjusting specific aspects of their business 
models.  

Altogether, this represents a significant simplification in the way their capital is set, both 
from the perspective of supervisors and firms. It would make the process of complying 
with  capital  requirements  far  more  linked  to  the  business  models  of  firms.  It  should 
therefore  help  achieve  the  objective  of  better  accommodating  investment  firms  for  the 
actual  business  they  conduct  and  should  facilitate  market  entry.  This  notably  also 
contributes to the REFIT-aims of the review, namely to ensure that legislation is simple, 
proportionate and up-to-date, and delivers on its aims effectively and efficiently. 

In terms of governance and remuneration rules, relying on MiFID II for Class 3 firms and 
going  beyond  these  rules  only  for  Class  2  firms  seems  proportionate.  The  EBA 
recommendations  for  the  additional  corporate  governance  requirements  comparable  to 
CRDIV  rules66  are  not  considered  to  be  excessive.  With  regard  to  remuneration,  the 
general  remuneration  principles  in  CRD  IV/CRR67  also  seem  appropriate  for  Class  2 
firms  in  order  to  promote  sound  and  effective  risk  management  and  not  to  encourage 
excessive  risk-taking.  Concerning  the  requirements  for  deferral  and  pay-out  in 
instruments, it has been assessed that these are not efficient in the case of small and non-
complex credit institutions and investment firms, and of staff with low levels of variable 
remuneration68. On that basis, in November 201669 the Commission already proposed to 
amend  the  CRDIV  to  exempt  small  institutions  (defined  on  the  basis  of  their  balance 
sheet) and persons with low levels of variable remuneration from these two requirements. 
Given that Class 2 investment firms are generally much smaller in terms of the balance 
sheet than credit institutions and Class 1 investment firms, a threshold set at a lower level 

66 Based on Articles 76(1) and (2) and 89 of CRDIV 
67 Art 92 CRDIV 
68  Report  from  the  Commission  "Assessment  of  the  remuneration  rules  under  Directive  2013/36/EU  and 

Regulation (EU) No 575/2013 (COM (2016) 510 final). 

69 COM(2016) 854 final, Article 94(3). 

32 

 
                                                 
would  be  more  appropriate.  With  regard  to  the  maximum  ratio  rule,  the  observations 
made  by  the  EBA  on  its  impacts  on  the  cost  flexibility  and  profitability  of  Class  2 
investment  firms  in  times  of  reduced  revenues  have  led  to  questions  as  to  the 
appropriateness of the rule for such firms. 

Compliance costs should decrease across all types of firms as they would be relieved of 
all awkward CRR-calculations to determine their capital and instead perform these in a 
more straightforward way based on how their business operates. The reduction should be 
greatest for Class 3 firms, who would have the simplest requirements. Among the main 
beneficiaries  are  investment  firms  which  are  SMEs70.  A  more  proportionate  and 
appropriate  prudential  framework  for  investment  firms  should  help  improve  the 
conditions  for  conducting  their  business  and  barriers  to  entry  should  decrease.  For 
example, streamlining the current onerous reporting framework can be expected to result 
in a reduction of administrative burdens and compliance costs for SME-firms, including 
for innovative firms seeking to grow through digital means. Likewise, compliance would 
be  simplified  for  all  Class  2  firms  which  don't  trade  financial  instruments,  who  would 
simply  multiply  the  volumes  of  their  easily  and  readily  measurable  business  lines  by  a 
given  coefficient  to  determine  their  capital.  Initial  one-off  costs  in  adapting  to  the  new 
rules  should  rapidly  smooth  out  over  time  as  the  regime  beds  down.  Relative  to 
investment firms that don't trade on own account, the greater complexity for some trading 
firms  to  apply  CRR-requirements  for  market  risk  alongside  simplified  versions  of 
existing  CRR-rules  should  be  offset  by  the  fact  that  in  most  cases  these  requirements 
already apply today.  

In  terms  of  impacts  on  levels  of  capital,  if  aggregate  requirements  are  not  expected  to 
increase significantly across the board in line with one of the objectives of the review, the 
EBA's  proposals  for  calibrating  the  requirements  seem  like  a  fair  and  balanced 
compromise. The impacts for types of firms who would see their capital increase would 
be relatively smaller than under possible alternative calibrations with lower thresholds to 
qualify  for  Class  3  status  and/or  higher  K-factor  coefficients  which  were  discussed  as 
part  of  the  review,  and  in  a  way  which  would  be  more  proportionate  in  attempting  to 
achieve  the  objectives  of  the  review  to  increase  prudential  safety  where  necessary  but 
without  overburdening  specific  firms  or  the  sector  overall  with  significant  capital 
increases. The EBA's proposals to phase-in the regime in case of significant increases for 
some firms are also useful in this respect.  

Furthermore,  the  EBA's  recommendations  have  been  developed  with  input  from 
stakeholders. Investment firms represent various business models and their views tend to 
focus  on  aspects  of  the  proposals  specific  to  them.  This  complicates  cross-cutting 
comparisons  of  the  relative  weight  of  stakeholder-positions.  Overall  however,  the  large 
majority of stakeholders welcome a tailored prudential framework more suitable for their 
business  models.  They  stress  that  their  systemic  relevance  is  limited,  that  they  do  not 
pose  risks  akin  to  credit  institutions  e.g.  for  depositors,  and  that  capital  requirements 
should focus on ensuring they can be wound down in an orderly way. In terms of specific 
requirements  which  apply  to  their  particular  business  model,  investment  firms  which 

70   As defined  in the  Commission  Recommendation of 6  May 2003 concerning  the definition of  micro, 
small  and  medium-sized  enterprises  (OJ  L  124,  20.5.2003,  p.  36–41),  i.e.  enterprises  which  employ 
fewer than 250 persons and which have an annual turnover not exceeding EUR 50 million, and/or an 
annual balance sheet total not exceeding EUR 43 million. 

33 

 
                                                 
conduct agency-only services and do not enter into transactions in financial instruments 
using  their  own  balance  sheet  generally  criticise  proposals  for  linking  capital 
requirements  to  the  volume  of  client  portfolios  and  orders  they  handle  or  manage  in  a 
linear  way.  Many  firms  which  trade  on  own  account  agree  that  the  provisions  of  the 
existing framework for capturing market risk have some merit in light of the risks they 
incur and pose but welcome further simplification and downward-adjustments compared 
to the rules applicable to banks. Concerns have also been expressed by commodity firms, 
for  instance  regarding  the  zero-threshold  for  trading  activities  for  Class  2  and  their  de 
facto exclusion from the lighter regime for Class 3 firms.  

The EBA is understood to have taken these views into account in the calibration of the 
proposed  new  risk-metrics,  the  possibility  to  phase-in  and  cap  higher  requirements,  the 
adjustments for commodity firms, the commitment to revisit the way fixed overheads are 
calculated,  and  a  general  review  clause  on  the  calibration  in  due  course.  Alternatively, 
the EBA could have opted to propose higher thresholds or fewer criteria for investment 
firms to fall into Class 2 and/or lower coefficients for the K-factors for firms in Class 2. 
These would have led to more firms being able to benefit from the lighter requirements 
for  Class  3  firms,  and  to  lower  capital  requirements  for  Class  2  firms.  However,  this 
would  probably  have  meant  a  decrease  of  overall  capital  across  the  population  of 
investment firms and capital levels for Class 2 firms which are insufficiently calibrated to 
the  risks  they  incur  and  pose.  While  sensitive  to  the  proportionality-objectives  of  the 
review,  this  would  have  compromised  the  objective  of  ensuring  that  capital  is  properly 
risk-sensitive.  

Finally, as noted in section 4.4, the only critical area where it is considered better to go 
beyond  the  EBA's  advice  on  the  investment  firms'  review  regards  the  method  for 
classifying  systemic  investment  firms.  Rather  than  postpone  decisions  for  identifying 
them to Level 2, it is preferred to recategorise them as credit institutions in Level 1 and 
thus deliver on the EBA's opinion on issues related to the decision of the UK to withdraw 
from the Union. The supervision of large and complex investment firms under the remit 
of supervisors responsible for credit institutions, including direct supervision by the ECB 
for  significant  institution,  would  minimise  the  scope  for  regulatory  arbitrage  and 
potential risks for financial stability or the integrity of the Single Market in a number of 
ways. First, it would level the playing field in terms of authorisation and supervision of 
large  investment  firms  and  large  credit  institutions.  Second,  it  would  strengthen  the 
supervision  of  wholesale  market  activities,  as  it  would  enable  prudential  supervisors  to 
have  a  more  comprehensive  overview  of  the  group  of  institutions  providing  those 
services.  Finally,  it  would  make  supervision  more  consistent  across  groups,  as  the 
consolidating supervisor would also have powers over large individual investment firms 
within the group.   

6.  CONCLUSION 

Overall, compared to the status quo, the EBA recommendations are considered to be an 
appropriate  and  proportionate  means  of  achieving  the  objectives  of  the  review  in  an 
effective  and  efficient manner.  More  generally,  the  EBA  advice  is  a  clear  positive step 
towards  a prudential  framework for investment firms which can  both  underpin the safe 
functioning  of  investment  firms  on  a  sound  financial  basis  while  not  hindering  their 
commercial  prospects.  As  such,  it  should  support  the  aims  of  the  review  in  a  balanced 
fashion,  on  the  one  hand  helping  to  ensure  that  the  risks  of  investment  firms  for 

34 

 
customers  and  markets  are  addressed  in  a  more  targeted  way  both  in  their  ongoing 
operations and in case they need to be wound down and, on the other, that they can fully 
perform their role in facilitating investment flows across the EU, consistent with the aims 
of the Capital Markets Union to  mobilise savings and investments to boost growth and 
jobs. 

35 

 
 
ANNEX 1 – SYNOPTIC TABLE OF INVESTMENT FIRMS IN CRR/CRDIV71 

Initial 
capital 

€50k  (CRD 
30)  

€50k  (CRD 
31(1))  

€25k  (CRD 
31(2))  

Own 
funds  

N/A  

Large 
exposures 

Liquidity 

Leverage 

Buffers 

Reporting 

Remuneration 
and governance 

N/A 

N/A 

N/A 

N/A 

National rules 

MiFID II 

N/A  

N/A 

N/A 

N/A 

N/A 

National rules 

MiFID II 

N/A  

N/A 

N/A 

N/A 

N/A 

National rules 

MiFID II 

Categories 

1  

Local firms (CRR 4(1)(4))  

Firms  falling  under  CRR  4(1)(2)(c) 
provide 
that 
reception/transmission 
and/or 
investment advice  

only 

only 

Firms  falling  under  CRR  4(1)(2)(c) 
provide 
that 
and/or 
reception/transmission 
investment advice and are registered 
under 
Insurance  Mediation 
Directive (IMD)  

the 

2  

3  

4  

Firms  falling  under  CRR  4(1)(2)(c) 
that  perform,  at  least,  execution  of 
orders and/or portfolio management  

€50k  (CRD 
31(1))  

CRR 95(2)   N/A 

N/A 

N/A 

N/A 

MiFID II 

COREP  (COM 
regulation  Art 
7)72    if  95(2)2nd 
subpara  applies; 

71 The information in the table is based on Table 2 in EBA/Op/2015/20 and refers to some of the key Articles of the main provisions of the CRR/CRDIV which apply to firms' treatment 

on an individual basis. It does not give a complete overview of applicable requirements. A different treatment can apply on a consolidated basis.  

72  Commission  Implementing  Regulation  (EU)  No  680/2014  of  16  April  2014  laying  down  implementing  technical  standards  with  regard  to  supervisory  reporting  of  institutions 

according to Regulation (EU) No 575/2013 of the European Parliament and of the Council (OJ L 191, 28.6.2014, p. 1–1861) 

 
 
 
 
 
                                                 
5  

6  

7  

8  

9  

Investment  firms  not  authorised  to 
perform  deals  on  own  account 
and/or  underwriting/placing  with 
firm  commitment  that  do  not  hold 
client funds/securities  

Investment  firms  not  authorised  to 
perform  deals  on  own  account 
and/or  underwriting/placing  with 
firm  commitment  but  hold  client 
funds/securities  

€50k  (CRD 
(29(3))  

€125k  (CRD 
29(1))  

Investment  firms  that  operate  an 
MTF  

€730k  (CRD 
28(2))  

CRR 95(1)   N/A 

N/A 

N/A 

N/A 

CRR 95(1)   N/A 

N/A 

N/A 

N/A 

CRR 95(1)   N/A 

N/A 

N/A 

N/A 

Investment  firms  that  only  perform 
deals  on  own  account  to  execute 
client orders  

€730k  (CRD 
28(2))  

CRR 
96(1)(a)  

N/A 

Investment  firms  that  do  not  hold 
client funds/securities, only perform 
deals  on  own  account,  and  have  no 
external clients  

€730k  (CRD 
28(2))  

CRR 
96(1)(b)  

N/A 

73 CCB – Capital conservation buffer; CyCB – Countercyclical capital buffer 

CRD  128,  or 
national 
exemption 
under  129(2) 
and 
130(2) 
from CCB and 
CyCB73  

CRD  128,  or 
national 
exemption 
under  129(2) 

N/A 

CRR 6(4), or 
national 
exemption 
pending 
review 

N/A 

CRR 6(4), or 
national 
exemption 
pending 

37 

national  rules  if 
3rd 
95(2) 
subpara applies 

COREP  (COM 
regulation  Art 
7)  

MiFID  II  &  CRD 
IV/CRR 

COREP  (COM 
regulation  Art 
7)  

MiFID  II  &  CRD 
IV/CRR 

COREP  (COM 
regulation  Art 
7) 

COREP  (COM 
regulation  Art 
7) 

MiFID  II  &  CRD 
IV/CRR 

MiFID  II  &  CRD 
IV/CRR 

COREP  (COM 
regulation  Art 
7) 

MiFID  II  &  CRD 
IV/CRR 

 
                                                 
10   Commodity  derivatives  investment 
firms  that are  not exempt  under  the 
MiFID  

€50k to 730k 
(CRD  28  or 
29)  

CRR 498  

CRR 493 

11  

Investment  firms  that  do  not  fall 
under the other categories  

€730k  (CRD 
28(2))  

CRR 92  

CRR 387 

review 

CRR 6(4), or 
national 
exemption 
pending 
review 

CRR 6(4), or 
national 
exemption 
pending 
review 

CRR 6(5) 

CRR 6(5) 

130(2) 
and 
from CCB and 
CyCB 

CRD  128,  or 
national 
exemption 
under  129(2) 
130(2) 
and 
from CCB and 
CyCB 

CRD  128,  or 
national 
exemption 
under  129(2) 
130(2) 
and 
from CCB and 
CyCB 

National rules 

 MiFID II & CRD 
IV/CRR 

COREP  (COM 
regulation  Art 
5) 

MiFID  II  &  CRD 
IV/CRR  

38 

 
 
 
 
ANNEX II – EBA advice: main impacts 

Table 1 – Changes in capital requirements per business model74 

Business models 

Nb. 
Firms 

% Changes vs Current Pillar 
1 requirement 

Business models 

Nb. Firms  % Changes vs Current Pillar 

1 requirement 

Custodians 

     17  

FOR 

PMC 

        7  

        6  

K_Factors 

        4  

Execution brokers 

     92  

FOR 

PMC 

     33  

     37  

K_Factors 

     22  

-11% 

-16% 

-63% 

26% 

47% 

47% 

8% 

48% 

Portfolio managers 

             533  

FOR 

PMC 

             237  

             163  

K_Factors 

             133  

Trading firms 

               69  

FOR 

PMC 

               16  

               21  

K_Factors 

               32  

19% 

0% 

-12% 

31% 

-13% 

29% 

-27% 

-14% 

74 Business models are illustrative and grouped by the EBA on a judgemental basis. The total number of firms is based on the sample from which the EBA obtained data. For advisory 
firms,  increases  are  due  inter  alia  to  currently  several  (large)  advisors  being  subject  to  initial  capital  only  and  the  new  K-factor  proportional  to  the  assets  under  advisory 
arrangements.  

 
 
 
 
  
  
  
  
  
  
  
  
  
                                                 
Investment advisors 

     87  

FOR 

PMC 

     37  

     32  

K_Factors 

     18  

MTF 

FOR 

PMC 

        8  

        6  

        1  

K_Factors 

        1  

Placing firms 

     12  

FOR 

PMC 

        3  

        6  

K_Factors 

        3  

308% 

365% 

-7% 

306% 

0% 

0% 

3% 

0% 

29% 

31% 

10% 

42% 

Multiservice firms 

               93  

FOR 

PMC 

               17  

               29  

K_Factors 

               47  

   Wholesale market brokers 

FOR 

PMC 

K_Factors 

Total 

9  

6  

1  

2  
             920  

5% 

-16% 

-38% 

14% 

8% 

4% 

3% 

12% 

10% 

40 

 
  
  
  
  
                  
  
                  
  
                  
  
                  
  
  
  
  
  
  
  
  
  
  
 
 
 
 
 
 
 
Table 2 – shortfall with respect to current own funds75 

Firms in sample 

Firms with shortfall 

Total shortfall (€) 

Average shortfall (€) 

Custodians 

FOR 

PMC 

K_Factors 

Execution brokers 

FOR 

PMC 

K_Factors 

Investment advice 

FOR 

17 

7 

6 

4 

92 

33 

37 

22 

87 

37 

0 

0 

0 

0 

11 

4 

2 

5 

11 

3 

                                              -    

                                              -    

                                              -    

                                              -    

                                              -    

                                              -    

                                              -    

                                              -    

                               18,640,454  

                                 1,694,587  

                                 5,344,868  

                                 1,336,217  

                                              -    

                                              -    

                               13,295,587  

                                 2,659,117  

                               83,143,620  

                                 7,558,511  

                                    442,190  

                                    147,397  

75  ‘Shortfall’  is  meant  as  the  difference  between  the  capital  requirements  under  the  new  framework  and  the  own  funds  currently  available.  These  values  are  calculated  only  for 

investment firms having a shortfall; firms with excess of own funds with respect to the capital requirements are not included in this calculation 

41 

 
 
 
                                                 
PMC 

K_Factors 

MTF 

FOR 

PMC 

K_factors 

Placing firms 

FOR 

PMC 

K_Factors 

Portfolio managers 

FOR 

PMC 

K_Factors 

Trading firms 

FOR 

32 

18 

8 

6 

1 

1 

12 

3 

6 

3 

533 

237 

163 

133 

69 

16 

                                              -    

                                              -    

                               82,701,430  

                               10,337,679  

                                              -    

                                              -    

                                              -    

                                              -    

                                              -    

                                              -    

- 

                                          - 

- 

- 

                                              -    

                                              -    

                                               -   

                                               -  

                                              -    

                                              -    

                               85,478,895  

                                    2,971,215  

                                 6,124,632  

                                      1,020,772  

 - 

                                               -                  

                               79,354,263  

                                    3,450,185  

                                 23,548,244  

                                      7,849,415  

                                 2,216,000  

                                    2,216,000  

0 

8 

0 

0 

0 

0 

0 

0 

0 

0 

32 

6 

3 

23 

3 

1 

42 

 
PMC 

K_Factors 

Multiservice firms 

FOR 

PMC 

K_Factors 

Wholesale market brokers 

FOR 

PMC 

K_Factors 

Total 

21 

32 

93 

17 

29 

47 

9 

6 

1 

2 

0 

2 

3 

0 

1 

2 

1 

0 

0 

1 

                                                -  

                                                    -  

                                    21,332,244                                           10,666,122 

                             104,609,856   

                                 34,869,952    

                                              -    

                                              -    

                                                   -  

                                                    -  

                             104,609,856  

                                    53,304,928   

                                 2,934,351  

                                    2,934,351 

                                              -    

                                              -    

                                              -    

                                              -    

                                 2,934,351  

                                       2,934,351 

920 

61 

                             318,355,420  

                                    5,218,941  

43 

 
 
 
 
 
ANNEX III – PROCEDURAL STEPS AND STAKEHOLDER CONSULTATION   

I. Introduction 

The  review  has  been  carried  out  with  the  comprehensive  advice  of  the  EBA,  in 
consultation  with  ESMA,  as  required  by  the  relevant  Articles  in  Regulation  (EU)  No 
575(2013)  which  constitute  the  legal  basis  for  the  review  (notably  Article  508(2)  and 
(3)).  It  was  also  conducted  in  close  consultation  with  industry  stakeholders  throughout 
the process. These steps are outlined in detail below. 

In terms of the main milestones, following a first Call for Advice by the Commission in 
December 2014, the EBA published a first report on the current prudential framework for 
investment firms together with proposals for changes in December 2015. This constitutes 
a comprehensive and publicly available analysis of the status quo, with data on numbers 
and types of investment firms in Member States. This analysis helped broaden the reach 
of the review to stakeholders who may not be directly impacted by the rules to engage in 
the subsequent discussion. 

On 4 November 2016, the EBA published a discussion paper for consultation focusing on 
a potential new prudential regime for investment firms. The discussion  paper was open 
for  comments  for  3  months  (until  4  February  2017).  Its  work  was  also  supported  by  a 
detailed data-gathering exercise from investment firms by national competent authorities 
on  behalf  of  the  EBA.  This  helped  substantiate  and  verify  stakeholders'  input  with 
granular data.  

Given the detailed public consultation and data collection undertaken by the EBA, it was 
agreed  that  the  Commission  would  not  run  a  general  public  consultation  in  parallel. 
Instead  the  Commission  services  engaged  in  targeted  consultation  with  stakeholders  in 
order  to  gather  views  on  the  main  elements  of  the  review.  This  included  a  roundtable 
with  industry  stakeholders  (investment  firms,  investors,  law  firms,  consultants)  on  27 
January  2017  on  the  proposed  future  regime,  a  workshop  on  the  costs  of  the  current 
regime on 30 May 2017 and a workshop on the EBA's draft final recommendations on 17 
July. The review was discussed with Member States in the Financial Services Committee 
in  March  and  October  2017  and  in  the  Experts  Group  on  Banking,  Payments  and 
Insurance in June and September 2017.  

These targeted consultations and meetings helped further substantiate the analysis of the 
current  regime  and  of  the  available  policy  alternatives  in  line  with  Better  Regulation 
guidelines. This enabled developing a robust analysis and consensus behind the proposals 
developed on the basis of the EBA's work. 

 
 
 
 
The Commission also considered input received previously in the wide-ranging Call for 
Evidence  on  the  efficiency,  consistency  and  coherence  of  the  overall  EU  regulatory 
framework for financial services in which several respondents pointed to various issues 
relevant for the review76. 

The EBA outlined its final recommendations together with an indication of the proposed 
calibration  of  the  new  regime  in  July  2017.  The  final  report  was  delivered  on  29 
September 2017. 

II. Overview 

  December 2014 – First call for advice from the Commission to EBA 
  September 2015 –Commission Call for Evidence on the EU regulatory 

framework for financial services. 

  December 2015 – First report by EBA evaluating the status quo and suggesting 

changes 

  December 2015 – Commission's Stakeholders Meeting - Fact-finding on 

remuneration under CRD IV 

  April 2016 – Commission request for further clarifications on EBA December 
2015 Opinion on the application of proportionality to CRD IV remuneration 
provisions77. 

  June 2016 – Second call for advice to EBA 
  June 2016 – Agreement by co-legislators on the extension of CRR-exemptions 

for commodity dealers until 2021   

  July 2016 – Launch of first data gathering by EBA 
  July 2016 – Commission Report on the assessment of the remuneration rules 

under CRDIV/CRR (COM(2016) 510 final) 

  October 2016 – First reply from EBA to second call for advice on systemic 

investment firms to be kept under full CRR/CRDIV 
  November 2016 – Publication of EBA discussion paper 
  November 2016 – Commission proposals revising CRR/CRDIV, including 

waivers therefrom for all non-systemic investment firms 

  November 2016  - EBA response to the Commission request for further 

clarifications on EBA Opinion on the application of proportionality to CRD IV 
remuneration provisions, with regard to credit institutions 
  December 2016 – Launch of second data gathering by EBA  
  January 2017 – Commission workshop on overall direction of EBA proposals  

76  See  e.g.  various 

replies  submitted 

in 

the  Commission's  Call 

for  Evidence  of  2015 

http://ec.europa.eu/finance/consultations/2015/financial-regulatory-framework-review/index_en.htm  

77 

https://www.eba.europa.eu/documents/10180/1667706/EBA+Opinion+on+the+application+of+the+pri
nciple+of+proportionality+to+the+remuneration+provisions+in+Dir+2013+36+EU+%28EBA-2016-
Op-20%29.pdf 

45 

 
                                                 
  March 2017 – Publication of inception impact assessment on Europa 
  May 2017 – Commission workshop on costs of the current regime  
  July 2017 – First publication of EBA final recommendations, EBA consultation 
on calibration proposals, Commission workshop on EBA proposals, and EBA 
data gathering for outstanding calibrations 

  September 2017 – Final EBA report  

46