Prudential Risk

Thresholds and Criteria for large MiFID Firms: the new horizon

As outlined in our previous publication, the new prudential regime for investment firms which comes into force 26 June 2021, encompasses the Investment Firm Regulation (‘IFR’) and Investment Firm Directive (‘IFD’) and allows for a tailored prudential approach based on the business model, risk profile and systemic importance of MiFID firms. This regime will provide a clearer classification of investment firms based on their MiFID regulated activities. Different classes of investment firms will experience different levels of regulatory requirements and supervisory overview tailored to their regulated activities.

To identify which category of Investment Firm you are, we outline the characteristics of each of the different classes of investment firms introduced by the new regime.

Categorisation of investment firms

The categories Investment Firms can be classified are:

Class 1 Firms: Investment Firms, that are categorised as systemically important and are authorised to deal on own account and to underwrite or place financial instruments on a firm commitment basis, will be required to submit an application for authorisation as a credit institution where one of the following condition is met:

  • average monthly total assets (calculated over a period of 12 consecutive months) is >= €30bn; or
  • average monthly total assets (calculated over a period of 12 consecutive months) is < €30bn, and the undertaking is part of a group in which the total value of the consolidated assets of group undertakings that individually have total assets of less than €30bn and deal on own account or underwriting of financial instruments and/or placing of financial instruments on a firm commitment basis.

Class 1 firms will be treated as a credit institution and will be subject to the requirements outlined in the Capital Requirements Regulation and Capital Requirements Directive IV (collectively ‘CRR and CRD IV’ and as will be amended by CRR2 and CRD V) and will be directly supervised by the European Central Bank (‘ECB’). These firms will be required to seek authorisation as a Credit Institution and will be required to hold an initial capital requirement of €5 million at a minimum.

Class 2 Firms: Investment Firms that are not classified as systemically important and do not meet the thresholds outlined in Figure 1 below and prescribed by Article 12 of the IFR (i.e. are not classified as Class 3 Firms) will be classified as Class 2 Firms. These firms will be subject to the scope of the IFR and IFD including the remuneration requirements and the K-factor requirements which facilitates firms to establish capital requirement aligned to the risk profile using the K-factor methodology. Class 2 Firms will be required to hold liquid assets to the value of one third of the firm’s fixed overhead requirement.

Class 3 Firms: Investment Firms that do not engage in high risk activities (e.g. dealing on own account or place financial instruments on a firm commitment basis) will be subject to a less invasive supervision regime based on proportionality under the new regime. All of the prescriptions outlined in Figure 1 should be met in order for investment firms to be classified as small and non-interconnected, if not, these firms will be categorised as Class 2 Firms.

Figure 1 - Thresholds Art. 12 of the IFR

Thresholds Art.12 of the IFR.png

What’s next on the regulatory horizon?

As outlined in Figure 2 below, the EBA is mandated to deliver four Regulatory Technical Standards (‘RTS’), in their final draft, by the end of December 2020 to the European Commission. These RTS will further substantiate the new prudential regime in the area regarding thresholds and criteria providing additional regulatory considerations for the impacted investment firms.

Figure 2 – EBA mandates: thresholds and criteria

EBA mandates.png

How Grant Thornton can help:

Grant Thornton’s Financial Services Risk, Consulting and Advisory teams have supported a number of investment firms with understanding, preparing for and implementing the new prudential framework. In particular, our prudential risk experts have extensive knowledge of the relevant legislation and guidance and the challenges these pose to your firm.

Our experts could help your firm assess its regulatory requirements arising from the new regime and advise on methods to ensure full compliance balanced with your business needs.

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