Regulation (EU) 2019/2033 establishes specific prudential requirements for investment firms to ensure their orderly management and protect client interests. It aims to address the particular risks associated with these firms' activities, which are not fully covered by existing regulations. This regulatory framework seeks to avoid excessive administrative burdens while ensuring appropriate oversight of the risks…
The document is Regulation (EU) 2019/2033 adopted by the European Parliament and the Council of the European Union on 27 November 2019. It establishes uniform prudential requirements applicable to investment firms authorized and supervised under Directive 2014/65/EU. The regulation also amends Regulations (EU) No 1093/2010, (EU) No 575/2013, (EU) No 600/2014, and (EU) No 806/2014. The scope covers capital requirements, liquidity, concentration risk limits, as well as reporting and disclosure obligations. The document applies to investment firms in the European Union, taking into account their size, interconnectedness, and nature of activities, with entry into force planned from 2019 (p. 1-17).
Regulation (EU) 2019/2033 aims to establish a specific and harmonized prudential framework for investment firms in the European Union, distinct from the rules applicable to credit institutions. This framework is necessary because existing regimes, based on international banking standards, do not adequately cover the specific risks of investment firms, which notably differ by the absence of loan portfolios and client deposits. The regulation distinguishes systemically important investment firms, which remain subject to the existing banking framework, from other investment firms, to which an adapted prudential regime applies, proportionate to their risks and activities. This regime is based on capital requirements calculated from K-factors, covering risks to clients (RtC), to the market (RtM), and to the firm (RtF). It also provides liquidity requirements, concentration risk limits, as well as reporting and disclosure obligations adapted to the size and risk profile of firms. Small non-interconnected investment firms benefit from exemptions and specific thresholds, notably a precise definition based on several quantitative criteria (assets, orders processed, balance sheet, revenues). The regulation provides transitional measures to limit the impact of new requirements on existing firms. Furthermore, large investment firms presenting risks similar to credit institutions must be converted into credit institutions to ensure consistent supervision and avoid regulatory arbitrage. The regulation also includes provisions related to access for third-country firms, cooperation between authorities, and the development of technical standards by the European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA). In conclusion, this regulation aims to ensure the financial soundness, orderly management, and client protection of investment firms, while ensuring fair competition and harmonized supervision within the Union (p. 1-17).
The regulation was drafted to address the shortcomings of the existing prudential framework, which relies mainly on international banking standards designed for credit institutions. These standards only partially cover the specific risks of investment firms, which have different risk profiles and activities, notably the absence of significant deposits and loans. The document aims to establish a specific, proportionate, and harmonized prudential regime at Union level, covering risks to clients, markets, and the firms themselves. The objective is to ensure that investment firms operate on a sound financial basis, are managed in an orderly manner and in the best interest of their clients, while avoiding disproportionate administrative burdens. The regulation distinguishes systemically important investment firms, which remain subject to the banking framework, from other firms for which an adapted regime is necessary. It also aims to prevent national divergences in rule application, avoid regulatory arbitrage, and ensure effective supervision, notably for large cross-border investment firms. The scope is limited to investment firms authorized and supervised under Directive 2014/65/EU, with specific exclusions and derogations (p. 1-17).
1. Specific prudential framework for investment firms:
- The regulation establishes an adapted prudential regime for non-systemic investment firms, distinct from the banking framework (p. 2-4).
- Systemically important investment firms remain subject to Regulation (EU) No 575/2013 and Directive 2013/36/EU (p. 3).
2. Classification of investment firms:
- Precise definition of small non-interconnected investment firms based on combined thresholds: assets under management < €1.2 billion, orders processed < €100 million (cash) or €1 billion (derivatives), balance sheet < €100 million, gross revenues < €30 million (p. 4).
- These small firms benefit from exemptions from specific prudential requirements (p. 4-5).
3. Capital requirements:
- Calculation based on K-factors covering risks to clients (RtC: K-AUM, K-CMH, K-ASA, K-COH), to the market (RtM: K-NPR, K-CMG), and to the firm (RtF: K-TCD, K-CON, K-DTF) (p. 5-7).
- Volumes are calculated on moving averages over several months according to the factors (p. 5).
- Approach aligned with Regulation (EU) No 575/2013 for market risk and counterparty credit risk, with simplifications (p. 5-7).
- Permanent minimum capital requirement equal to the initial capital required for authorization (p. 4).
4. Liquidity requirements:
- Firms must hold at least one third of their fixed overheads in high-quality liquid assets, including unencumbered cash, short-term deposits, and certain liquid financial instruments (p. 6-7).
- Possible exemptions for small non-interconnected firms (p. 7).
- Possibility to temporarily fall below the threshold in case of monetization of liquid assets, with notification to the competent authority (p. 7).
5. Concentration risk:
- Obligation to monitor and control concentration risks, with additional capital requirements for exposures exceeding 25% of capital (p. 6).
- Certain exposures related to commodity derivatives may exceed limits without additional capital if used for commercial or risk management purposes (p. 6).
6. Supervision and enforcement:
- Individual application of requirements, with possible exemption for small non-interconnected firms integrated into groups subject to consolidated supervision (p. 11-12).
- Competent authorities have supervisory powers under Directive (EU) 2019/2034 (p. 12).
- Firms may apply stricter requirements than those of the regulation (p. 12).
7. Large investment firms and conversion into credit institutions:
- Large investment firms presenting risks similar to credit institutions must be converted into credit institutions, subject to Regulation (EU) No 575/2013 and Directive 2013/36/EU, and supervised by the ECB under the Single Supervisory Mechanism (p. 8-10).
- This measure aims to ensure consistent supervision, avoid regulatory arbitrage, and guarantee financial stability (p. 8-10).
8. Access for third-country firms:
- Third-country firms providing services in the Union must be registered with ESMA and subject to equivalence requirements, with an obligation to report annually on their activities (p. 9-10).
9. Technical standards and harmonization:
- The EBA and ESMA develop implementing technical standards to specify calculation methods for requirements, regulatory reporting, information disclosure, and prudential consolidation (p. 10-11).
- The European Commission is empowered to adopt delegated and implementing acts to complement and clarify the regulation (p. 10-11).
10. Definitions and key concepts:
- The regulation provides a detailed list of technical definitions, notably on the notions of investment firm, capital, risks, services, assets under management, segregated accounts, etc. (p. 12-16).
11. Transitional measures:
- Five-year transitional period to limit increases in capital requirements to a maximum of twice previous requirements (p. 7-8).
- Specific provisions for firms never previously subject to capital requirements (p. 7-8).
Established facts:
- The existing prudential framework does not adequately cover the specific risks of investment firms (p. 1-2).
- Investment firms have different risk profiles from credit institutions, notably due to the absence of deposits and loan portfolios (p. 2-3).
- Large investment firms present systemic risks similar to credit institutions and must be treated as such (p. 8-9).
- The regulation defines precise quantitative thresholds to distinguish small non-interconnected firms (p. 4).
Assumptions:
- Applying a specific, proportionate, and harmonized prudential regime will reduce risks to clients, markets, and the firms themselves (p. 2-4).
- Converting large investment firms into credit institutions will improve supervision and financial stability (p. 8-10).
Interpretations:
- The use of K-factors allows an approach adapted to the different types of risks incurred by investment firms (p. 5-7).
- Transitional measures are necessary to avoid too abrupt impacts on firms (p. 7-8).
Uncertainties:
- The evolution of business models and associated risks requires regular reassessment of thresholds and requirements (p. 4-5).
- The effectiveness of supervisory measures will depend on cooperation between national and European authorities (p. 9-11).
- The real impact of exemptions granted to small non-interconnected firms on financial stability remains to be observed (p. 4-7).
The regulation establishes an adapted, proportionate, and harmonized prudential framework for investment firms in the European Union, aiming to ensure their financial soundness, orderly management, and protection of clients and markets. It recommends the conversion of large investment firms presenting systemic risks into credit institutions to ensure consistent and effective supervision. The framework is based on capital requirements calculated via K-factors covering risks to clients, the market, and the firm, as well as liquidity requirements and concentration risk limits. Transitional measures are provided to mitigate the impacts of new rules. The regulation emphasizes the importance of harmonized supervision, cooperation between national and European authorities, and the establishment of technical standards by the EBA and ESMA. Finally, it provides mechanisms to prevent regulatory arbitrage and ensure fair competition conditions. The Commission is empowered to adopt delegated and implementing acts to complement and clarify the framework. These provisions must be applied rigorously to ensure stability and confidence in the investment firm sector within the Union (p. 1-17).
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