Response to discussion on a new prudential regime for investment firms
Go back
The Dutch Association of Proprietary Traders (“APT”) wishes to emphasise that none of its members would, if the methodologies would be applied to asses Global Systemically Important Institutions (“GSIIs”) or Other Systemically Important Institutions (“OSIIs”), qualify as such, not on a global scale, not on a European scale and not on a domestic scale. None of the APT-Members would qualify as a firm whose distress or failure would have a systemic impact on the Dutch or the EU economy or global financial system due to size, importance (including substitutability or financial system infrastructure), complexity, cross-border activity, and interconnectedness. It is based on the criteria developed by EBA in furtherance of the provision of article 131(3) Capital Requirements Directive IV (Directive 2013/36/EU, “CRD IV”)) to identify other systemically important institutions that APT has concluded that none of its members would qualify as systemically important within the meaning of prevailing assessment methodologies.
Following the rationale and recommendations of EBA in its Opinion to the European Commission of 19 October 2016 (Opinion of the European Banking Authority on the First Part of the Call for Advice on Investment Firms, 19 October 2016, EBA-Op-2016-16) in the initial and first set of responses to the Call of Advice of the European Commission of 13 June 2016, investment firms that do qualify as systemically important (whether on a global basis or on a domestic basis) should continue to be subject to (parts of) the CRD IV and Capital Requirements Regulation (“CRR”). For these investment firms, there is no convincing case to consider the development of a separate and revised prudential regime.
APT therefore believes that the assessment methodology for G-SIIs and O-SIIs is appropriate for the identification of systemically important institutions, but rejects the analysis that other criteria to assess whether an investment firm would perform “systemic and bank-like” activities would be a suitable method to categorise investment firms as being “systemically important” or not.
Second Question:
For investment firms that may not be assessed as being systemically important, there is good reason to develop a separate prudential regime. EBA establishes its views and recommendations in the Discussion Paper on such separate and deviating prudential regime for investment firms that in any event do not qualify as systemically important. APT is supportive to this analysis.
If an investment firm that has significant trading activity, does not exceed the thresholds of the methodology of assessing whether firms are systemically important, such an investment firm should not be subject to specific and extraordinary prudential supervision rules. Such a firm is not systemically important and cannot (consequently) cause systemic risk.
Non-systemically important investment firms that are not (potential) perpetrators of systemic risk should not be subject to specific prudential supervision rules to manage their potential impact on market confidence. Market confidence must be preserved and must be managed through the comprehensive MiFID II market conduct rules and Market Abuse Regulation framework applicable to such investment firms without exceptions.
In summary: APT does not support the analysis that certain activities such as proprietary trading constitute a “qualitative” criterion suitable to categorise investment firms as systemically important, and consequently the mere fact of the “quantitative” criterion of scale of the activities does not conclusively assess whether an
investment firm is to be categorised as systemically important or not.
Third Question:
APT does not support the analysis made by EBA in respect of introducing additional qualitative criteria to rank investment firms in certain categories. APT does not believe that an investment firm that is not systemically important can be systemic. APT does see a conflict between the internationally agreed upon assessment methodology for systemically important institutions (which APT believes is not an open-ended system for which additional assessment criteria can be added) and the addition of new qualitative criteria. APT believes that there is a fundamental flaw in the analysis with respect to the criterion of “bank-like”. Either an investment firm is performing banking activities for which it would need to be licensed as a credit institution, or the firm is acting in accordance with the MiFID authorisation performing investment services and investment activities in accordance with the scope of its license.
Further details of the viewpoints of APT can be found in paragraph 4.3 and 4.4 of its Feedback and Responses Memorandum dated 1 February 2017.
EBA’s Discussion Paper proposes such separate prudential supervision regime for investment firms. APT agrees with the viewpoints of EBA as regards the alignment of risk factors to the typical business models of investment firms who operate in a different way as opposed to banks. In this manner incompatibilities of the current CRR/CRD IV regime with such business models will be removed and the risk sensitivity of the prudential supervision regime will be improved.
EBA’s proposals in the Discussion Paper require to address a very broad population of investment firms active in all the EU-Member States having very different business models and propositions to the markets and customers. Although APT has not analysed the applicability of the proposed risk factors for other types of businesses in a detailed way, it appears that, in balance, the proposed bespoke regime seems to adequately address the requirements for prudential supervision of investment firms.
None of the APT-Members have or build up exposures with external customers. Proprietary trading firms do not have access to client funds or assets, nor may these firms utilise customer funds or assets for their own trading business (for instance there is no securities lending business). Therefore, there is a strong case to consider capital requirements’ objectives to only focus on the orderly winding down of the proprietary trading firm. In the event a proprietary trading firm (suddenly) exits the market and terminates its operations, the only stakeholders affected by such event would be the corporate stakeholders of the firm.
Further details of the viewpoints of APT can be found in paragraph 4.3 and 4.4 of its Feedback and Responses Memorandum dated 1 February 2017.
APT acknowledges that for the larger proprietary trading firms there may be a need to consider an uplift of the FOR capital requirement. These firms would classify as Class 2 proprietary trading firms. Such an uplift should serve to address potential
market participant concerns and perceptions as regards the risks that could be caused by such larger proprietary trading firms. Such market participant concern would transmit to the supervisory authorities as well, which absent a suitable mandatory requirement applicable to the larger firms, would not be constrained to use all of the available discretionary powers (such as the powers set forth in article 104 CRD IV in the context of the Supervisory review and Evaluation process). APT-Members also have an interest in legal certainty as regards the capital requirements regime that applies to all of the types of the firms.
For this reason, APT suggests that for any of the proprietary trading firm that exceeds a certain threshold an uplift of the FOR capital requirement would be an appropriate capital requirement regime for the larger firms. Such uplift capital requirement would then be aligned to the level of the charges to the proprietary trading firms for the exposures (which would be close to a tail risk number at the end of the distribution scale of unexpected losses) existing upon assignment of all trade positions to the clearing infrastructure occurring on a daily basis. This charge would be the comprehensive assessment of the entire range of risks that may be construed in theoretical models, including settlement risk, interest rate risk, operational risk, credit valuation adjustment risk and any other relevant risk areas.
The relevant uplift numbers could be derived from the daily calculated aggregated margin numbers in the relationship between the proprietary trading firm and its clearing member. This is what is referred to by APT as the Risk Margin measure, which is quantified by applying the risk assessment models of the clearing member. An uplift of the FOR requirement for the larger proprietary trading firms would therefore result in the requirement to hold capital against the Risk Margin calculated on a daily basis.
APT suggests that this uplift of the FOR requirement should apply to the larger firms being part of its member population. In order to establish a sufficiently objective and strong threshold number that is not subject to discretion or interpretation issues, APT proposes to use a threshold based on the FOR-numbers calculated in four quarters on an average basis in the relevant measurement year.
The uplift factor in the form of the Risk Margin should apply to proprietary trading firms that may be considered to be perceived as being a significant participant to the markets. We expect that an appropriate threshold would lead to three to four of the current APT-Members to be subject to the uplift factor in the form of the Risk Margin measure.
In order to avoid that in view of volatility swings in the financial markets, larger firms subject to the Risk Margin measure would at any time be undercapitalised depending on market circumstances, APT proposes to impose the objective capital floor of the FOR requirement as the safeguard against undercapitalisation.
Further details of the viewpoints of APT can be found in paragraph 4.3 and 4.4 of its Feedback and Responses Memorandum dated 1 February 2017.
Further details of the viewpoints of APT can be found in paragraph 6 of its Feedback and Responses Memorandum dated 1 February 2017.
Particularly the fact that none of the RtC K-Factors are relevant for proprietary trading firms as they are organised in the way APT-Members are, would be the most important reason why the potential damages that a firm would incur in view of its business model or firm-specific characteristics, are not impacting third parties. Therefore, there is no direct or indirect risk that the rights, assets or position of third parties could be damaged or prejudiced if it turns out that a proprietary trading firm would be inadequately capitalised. This may only be different for the risk borne by the clearing member with whom proprietary trading firms have a dependent and important relationship.
APT points out that proprietary trading firms are without exception organised as firms whose shareholders/owners are exclusively exposed to the risks borne by the firm. RtF is equal to the risk of its shareholders. There is no rationale whatsoever to be found, why prudential requirements should be imposed on firms whose shareholders are exclusively exposed to the firm’s risks.
The fact that shareholders are exclusively bearing the risks of the firm does not prevent the firm being subject to capital requirements. Effectively the capital requirements which apply to the firm will further constrain the shareholders’ rights vis-à-vis the firm. This is related to the qualitative requirements applicable for the firm’s capital to be held, also in the regime that APT proposes for its members.
Further details of the viewpoints of APT can be found in paragraph 3, 5 and 5 of its Feedback and Responses Memorandum dated 1 February 2017
- Assets under management (AUM): none of the APT-Members manages customer portfolios or implements (whether or not discretionary) investment mandates for and on behalf of customers;
- Assets under advice (AUA): APT-Members do not have external relations with customers and therefore never render investment advice;
- Assets safeguarded and administered (ASA): APT-Members’ business operations does not require safeguarding and administration of assets of third parties. For most APT-Members being holders of MiFID permits, safeguarding and administration activities within the meaning of MiFID Annex I Part B (1) is not in scope of their authorisation. Such firms would, consequently, even not be allowed to conduct assets safeguarding and administration activities;
- Client money held (CMH): Under no circumstances will APT-Members have access to third parties’ money (not in the form of own balance sheet liabilities or by means of access to asset segregation structures) and consequently this important K-Factor as outlined in paragraph 38(d) of the Discussion Paper does not apply for such businesses;
- Liabilities to customers (LTC): APT-Members will not engage with customers to issue guarantees or indemnities to the benefit of such customers or any other arrangements (whether it be contractual, quasi-contractual or tort law type of relations) that would bring APT-Members into the position of being indebted to external customers. This K-Factor consequently does not apply for APT-Members’ businesses;
- Customer orders handled (COH): The trading activities of APT-Members does not involve or relate to, directly or indirectly, the processing of customer orders in whatsoever form. APT-Members have no responsibilities towards customers for the proper, timely and adequate processing of securities’ orders or comparable transactions in other financial instruments. Any trading activity of APT-Members is for own account and always against their own proprietary capital. APT-Members also do not form part of a chain of intermediaries responsible for the processing of securities orders on behalf or for external customers. In this respect there is also no indirect exposure to external customers.
With its comprehensive analysis as regards the RtM K-Factor approach as contained in the Discussion Paper, APT wishes to demonstrate that the proposed metrics and proxies to establish the K-Factor for this risk area are not fit for purpose. APT concludes as follows:
- Absent evidentiary support to the need to establish a complete new risk category in the prudential supervision regime for investment firms, it should be generally concluded that it should be avoided to impose the RtM measure to proprietary firms;
- Applying the assessment methodology of article 131 CRD IV for GSIIs and OSIIs and incorporating the EBA guidelines for application of the leverage ratio disclosure requirements for global systemically important firms and other large institutions, it can be concluded that, in view of size and importance (even if this is expressed in terms of the non-risk weighted balance sheets of all APT-Members) none of the APT-Members qualify as systemically important institutions or large institution, not on a domestic scale, not on a European scale and not on a global scale;
- APT also respectfully rejects the analysis that size or importance of investment firms should be measured taking the commercial (IFRS) balance sheet as focus point. The economic balance sheet of proprietary trading firms, does not represent the actual accruals of legal obligations of firms that exclusively operate on regulated markets or otherwise submit their trades to central clearing. Eventually and in any event each time as per the close of a trading day, open positions are assigned via the clearing member to the central counterparty. Settlement risk is therefore reduced to zero for all categories of financial instruments, whether it be straightforward securities, exchange traded funds, derivatives or any other product in which the APT-Members trade;
- Furthermore, and notwithstanding the zero score as regards the size or importance, if a proprietary firm would raise high scores on the scoring categories of interconnectedness or substitutability within the meaning of the GSII/OSII assessment methodology, such a firm could be considered to be “systemic” and in such case the proprietary trading firm should be made subject to the CRR/CRD IV prudential supervision regime. None of the APT-Members have high scores on either one of the scoring categories and therefore there is no need to analyse or address as to whether or not the risk of interconnectedness or cluster-risk could accrue in respect of proprietary trading firms towards other investment firms (where these firms are themselves proprietary trading firms or investment firms with customers);
- From this analysis it follows, that if a proprietary trading firm is not to be categorised as systemically important, such a firm would also not be “systemic”. APT respectfully rejects the analysis of the Discussion Paper that there is a need or rationale to assess whether firms that are not systemically important, could nevertheless qualify as being “systemic”;
- None of the APT-Members are performing “bank-like” activities, which APT interprets as the (high risk) combination of conducting investment activities (f.i. dealing on own account) with other investment services (f.i. brokerage, investment advice or portfolio management). Consequently, there is no risk of comingling of customer monies or financial instruments with those of the investment firm;
- The number and frequency of trades is an inappropriate proxy for the establishment of K-Factors for the RtM risk area. The number and frequency of trades carried out by proprietary trading firms is carried out to prevent mispricing, and is driven by market circumstances, and is therefore most important in volatile markets as a risk mitigation tool in order to be able to provide liquidity under challenging circumstances. Penalising proprietary trading firms with capital requirements that are raised depending the number or frequency of transactions, would form a significant impediment for the fulfilment of the important roles as market makers and liquidity providers. Such roles require proprietary trading forms to perform transaction with high frequency and in large numbers of transactions. APT reiterates, however, that proprietary traders never act on an exclusive basis.
APT cannot concur with the viewpoints included in the Discussion Paper as regards the need to impose the uplift factor for RtF to proprietary trading firms. Such firms are managed entirely at the risk of the owners/shareholders of the firm and there is no justification nor need to impose mandatory capital requirements for the RtF.
In addition, APT believed that the RtF measure as it has been designed in the Discussion Paper, does not effectively address the actual risks borne by proprietary trading firms. Those risks are towards the clearing member that requires, as part of the clearing arrangements, proprietary trading firms to cover the Risk Margin with capital. Any other risks are transferred and/or mitigated through the operation of the clearing arrangements, in which positions are assigned to the clearing member and subsequently contributed to the central counterparty.
Further details of the viewpoints of APT can be found in paragraphs 3, 4 and 5 of its Feedback and Responses Memorandum dated 1 February 2017.
APT points out that proprietary trading firms are without exception organised as firms whose shareholders/owners are exclusively exposed to the risks borne by the firm. RtF is equal to the risk of its shareholders. There is no rationale whatsoever to be found, why prudential requirements should be imposed on firms whose shareholders are exclusively exposed to the firm’s risks. APT therefore recommends that the RtF uplift factor should not apply to proprietary trading firms.
Second question:
APT therefore does not propose an alternative for the RtF, but wishes to address capital requirements in line with the proposed approach as set forth in paragraph 79 of the Discussion Paper, in which a risk margin model is considered as al alternative way forward.
Further details of the viewpoints of APT can be found in paragraph 6 of its Feedback and Responses Memorandum dated 1 February 2017.
Further details of the viewpoints of APT can be found in paragraph 6 of its Feedback and Responses Memorandum dated 1 February 2017.
Further details of the viewpoints of APT can be found in paragraph 6 of its Feedback and Responses Memorandum dated 1 February 2017.
For this reason, APT suggests that for any of the proprietary trading firm that exceeds a certain threshold an uplift of the FOR capital requirement would be an appropriate capital requirement regime for the larger firms. Such uplift capital requirement would then be aligned to the level of the charges to the proprietary trading firms for the exposures (which would be close to a tail risk number at the end of the distribution scale of unexpected losses) existing upon assignment of all trade positions to the clearing infrastructure occurring on a daily basis. This charge would be the comprehensive assessment of the entire range of risks that may be construed in theoretical models, including settlement risk, interest rate risk, operational risk, credit valuation adjustment risk and any other relevant risk areas.
The relevant uplift numbers could be derived from the daily calculated aggregated margin numbers in the relationship between the proprietary trading firm and its clearing member.
This is what is referred to by APT as the Risk Margin measure, which is quantified by applying the risk assessment models of the clearing member. An uplift of the FOR requirement for the larger proprietary trading firms would therefore result in the requirement to hold capital against the Risk Margin calculated on a daily basis.
APT suggests that this uplift of the FOR requirement should apply to the larger firms being part of its member population. The uplift factor in the form of the Risk Margin should apply to proprietary trading firms that may be considered to be perceived as being a significant participant to the markets. APT suggests that an objective threshold should be developed to differentiate between Class 2 and Class 3 proprietary trading firms in close consultation between the legislator and the industry. APT believes that when the appropriate metric would be applied that about three to four of the current APT-Members will be subject to the uplift factor in the form of the Risk Margin measure.
Further details of the viewpoints of APT can be found in paragraph 6 of its Feedback and Responses Memorandum dated 1 February 2017.
Further details of the viewpoints of APT can be found in paragraph 4.3 and 4.4 of its Feedback and Responses Memorandum dated 1 February 2017.
Further details of the viewpoints of APT can be found in paragraph 9 of its Feedback and Responses Memorandum dated 1 February 2017.
Further details of the viewpoints of APT can be found in paragraph 9 of its Feedback and Responses Memorandum dated 1 February 2017.
Most of the APT-Members apply the capital requirements by means of the raising of fully paid in ordinary capital from its shareholders and prudent policies as regards retained earnings distribution. Retained earnings reserves are in many instances utilised to support the further growth of the firm and serve as buffer for future expansion of the business. Shareholders waive in such cases their rights for full dividend distribution.
APT does see the advantage of a second tier of capital that may qualify as regulatory capital in the form of medium term subordinated debt. Such “Tier 2” regulatory capital instrument should be properly aligned to the requirements of proprietary trading firms however. APT notes that regulatory capital requirements for proprietary trading firms should serve to support the orderly winding down of the firm applying a maximum horizon of three months.
In view of the limited horizon where regulatory capital serves to wind down the firm’s affairs and to liquidate the business operations, any provisions in the qualitative requirements for Tier 2 capital instruments, should take into account that restrictions on repayment of the principal amount borrowed upon the issue of the Tier 2 instrument should be sufficiently flexible to cater for a winding down of the Tier 2 instrument as well, simultaneously with the process of liquidating the firm.
Further details of the viewpoints of APT can be found in paragraph 9 of its Feedback and Responses Memorandum dated 1 February 2017.
APT concurs that any prudential filters related to accounting values might not be relevant for the investment firm industry and in a revised prudential supervision regime, the abolishment of the larger majority of the prudential filters and deductions would contribute to the further simplification of the rules, without frustrating the general concepts of the risk sensitive approach.
Further details of the viewpoints of APT can be found in paragraph 9 of its Feedback and Responses Memorandum dated 1 February 2017.
Most of the APT-Members apply the capital requirements by means of the raising of fully paid in ordinary capital from its shareholders and prudent policies as regards retained earnings distribution. Retained earnings reserves are in many instances utilised to support the further growth of the firm and serve as buffer for future expansion of the business. Shareholders waive in such cases their rights for full dividend distribution.
APT does see the advantage of a second tier of capital that may qualify as regulatory capital in the form of medium term subordinated debt. Such “Tier 2” regulatory capital instrument should be properly aligned to the requirements of proprietary trading firms however. APT notes that regulatory capital requirements for proprietary trading firms should serve to support the orderly winding down of the firm applying a maximum horizon of three months.
In view of the limited horizon where regulatory capital serves to wind down the firm’s affairs and to liquidate the business operations, any provisions in the qualitative requirements for Tier 2 capital instruments, should take into account that restrictions on repayment of the principal amount borrowed upon the issue of the Tier 2 instrument should be sufficiently flexible to cater for a winding down of the Tier 2 instrument as well, simultaneously with the process of liquidating the firm.
Further details of the viewpoints of APT can be found in paragraph 9 of its Feedback and Responses Memorandum dated 1 February 2017.
For market entrants an upfront FOR requirement would be a sufficient high threshold to avoid the market entrance by firms insufficiently capitalised. A firm that wishes to enter the market, will be subject to severe scrutiny by the supervisory authorities in the license application process in any event. Such firms are likely to be required to properly budget costs and forecast the financial condition of the firm as a requirement to obtain the license. In line with this process it will not be too burdensome to calculate upfront a FOR for such a firm which will also serve as the “entrance” capitalisation level.
Further details of the viewpoints of APT can be found in paragraph 9 of its Feedback and Responses Memorandum dated 1 February 2017.
For market entrants an upfront FOR requirement would be a sufficient high threshold to avoid the market entrance by firms insufficiently capitalised. A firm that wishes to enter the market, will be subject to severe scrutiny by the supervisory authorities in the license application process in any event. Such firms are likely to be required to properly budget costs and forecast the financial condition of the firm as a requirement to obtain the license. In line with this process it will not be too burdensome to calculate upfront a FOR for such a firm which will also serve as the “entrance” capitalisation level.
Further details of the viewpoints of APT can be found in paragraph 4.3 and 4.4 of its Feedback and Responses Memorandum dated 1 February 2017.
Most of the APT-Members apply the capital requirements by means of the raising of fully paid in ordinary capital from its shareholders and prudent policies as regards retained earnings distribution. Retained earnings reserves are in many instances utilised to support the further growth of the firm and serve as buffer for future expansion of the business. Shareholders waive in such cases their rights for full dividend distribution.
APT does see the advantage of a second tier of capital that may qualify as regulatory capital in the form of medium term subordinated debt. Such “Tier 2” regulatory capital instrument should be properly aligned to the requirements of proprietary trading firms however. APT notes that regulatory capital requirements for proprietary trading firms should serve to support the orderly winding down of the firm applying a maximum horizon of three months.
In view of the limited horizon where regulatory capital serves to wind down the firm’s affairs and to liquidate the business operations, any provisions in the qualitative requirements for Tier 2 capital instruments, should take into account that restrictions on repayment of the principal amount borrowed upon the issue of the Tier 2 instrument should be sufficiently flexible to cater for a winding down of the Tier 2 instrument as well, simultaneously with the process of liquidating the firm.
Further details of the viewpoints of APT can be found in paragraph 9 of its Feedback and Responses Memorandum dated 1 February 2017.
In addition, it should be noted that the risk management model applied by clearing member firms in respect of their clients, already incorporates a stress tested liquidity and concentration risk factor in the charges of capital and requirements to post high quality liquid assets as collateral by proprietary trading firms. For example, illiquid positions held in the trading book are made subject to stricter stress tests and more severe shocks and accounted for in the Risk Margin charged to the proprietary trading firm.
Introducing a supplemental regime to manage liquidity risk for proprietary trading firms utilising the Risk Margin model would result in double counting of liquidity measures and should be avoided.
Further details of the viewpoints of APT can be found in paragraph 7 of its Feedback and Responses Memorandum dated 1 February 2017.
If a liquidity supervision scheme is to be introduced, APT would be in favour of keeping such regime very simple. In this respect the minimum liquidity standard for investment firms should be in the form of a simple metric, for instance by imposing the requirement that a significant percentage of the capital requirement applicable to the firm is to be held in the form of liquid assets.
Further details of the viewpoints of APT can be found in paragraph 7 of its Feedback and Responses Memorandum dated 1 February 2017.
Further details of the viewpoints of APT can be found in paragraph 7 of its Feedback and Responses Memorandum dated 1 February 2017.
Further details of the viewpoints of APT can be found in paragraph 7 of its Feedback and Responses Memorandum dated 1 February 2017.
Further details of the viewpoints of APT can be found in paragraph 7 of its Feedback and Responses Memorandum dated 1 February 2017.
Further details of the viewpoints of APT can be found in paragraph 6 of its Feedback and Responses Memorandum dated 1 February 2017.
APT does not support any rules on supervision on consolidated basis that would introduce regulatory capital requirements on a solo basis for unregulated firms. The principle to restrict capital requirements to regulated firms only also applies for the consolidated supervision regime for credit institutions (banks) and the supplementary supervision regime for insurance groups. There is no convincing reason to introduce rules for groups of investment firms that would deviate from general principles of group supervision as adopted in Europe.
Unregulated subsidiaries in the group of which an investment firm forms part, should neither be exposed to regulatory capital requirements on a solo basis nor should these requirements be created indirectly and at the level of the parent company on a consolidated basis. Unregulated subsidiaries’ values should be accounted for in the consolidated financial statements of the (European) parent, applying ordinary valuation principles and applying ordinary accounting principles (IFRS or local GAAP applicable to the parent company).
Constraints imposed on unregulated subsidiaries in the group of which one or more investment firms form part, should be restricted to the deduction and/or impairment for the purposes of regulatory consolidation of financial indebtedness relations or cross-capital holdings among the group members. These rules should support the avoidance of double gearing of regulatory capital and dilution of the quality of the capital of regulated investment firms in the group. Such rules should be without prejudice to the ability and permissibility of the inclusion (and therefore non-impairment) of certain intragroup debt or equity positions and values for ordinary accounting purposes if permitted under the IFRS or local-GAAP frameworks.
Any rules on consolidated supervision requiring regulated firms to hold regulatory capital levels should be restricted to firms established in the EEA. In this respect, APT is in favour of the territorial scope of application of the mitigated consolidated supervision regime for groups of investment firms as laid out in article 15 CRR. APT therefore suggests that this territorial restriction to EEA-investment firms as this is prevailing in the article 15 CRR provision, is to be confirmed in the new prudential supervision regime as well.
Further details of the viewpoints of APT can be found in paragraph 8 of its Feedback and Responses Memorandum dated 1 February 2017.
Further details of the viewpoints of APT can be found in paragraph 8 of its Feedback and Responses Memorandum dated 1 February 2017.
EBA’s Discussion Paper proposes such separate prudential supervision regime for investment firms. APT agrees with the viewpoints of EBA as regards the alignment of risk factors to the typical business models of investment firms who operate in a different way as opposed to banks. In this manner incompatibilities of the current CRR/CRD IV regime with such business models will be removed and the risk sensitivity of the prudential supervision regime will be improved.
EBA’s proposals in the Discussion Paper require to address a very broad population of investment firms active in all the EU-Member States having very different business models and propositions to the markets and customers. Although APT has not analysed the applicability of the proposed risk factors for other types of businesses in a detailed way, it appears that, in balance, the proposed bespoke regime seems to adequately address the requirements for prudential supervision of investment firms.
None of the APT-Members have or build up exposures with external customers. Proprietary trading firms do not have access to client funds or assets, nor may these firms utilise customer funds or assets for their own trading business (for instance there is no securities lending business). Therefore, there is a strong case to consider capital requirements’ objectives to only focus on the orderly winding down of the proprietary trading firm. In the event a proprietary trading firm (suddenly) exits the market and terminates its operations, the only stakeholders affected by such event would be the corporate stakeholders of the firm.
Further details of the viewpoints of APT can be found in paragraph 4.3 and 4.4 of its Feedback and Responses Memorandum dated 1 February 2017.
Further details of the viewpoints of APT can be found in its Feedback and Responses Memorandum dated 1 February 2017.
EBA’s Discussion Paper proposes such separate prudential supervision regime for investment firms. APT agrees with the viewpoints of EBA as regards the alignment of risk factors to the typical business models of investment firms who operate in a different way as opposed to banks. In this manner incompatibilities of the current CRR/CRD IV regime with such business models will be removed and the risk sensitivity of the prudential supervision regime will be improved.
EBA’s proposals in the Discussion Paper require to address a very broad population of investment firms active in all the EU-Member States having very different business models and propositions to the markets and customers. Although APT has not analysed the applicability of the proposed risk factors for other types of businesses in a detailed way, it appears that, in balance, the proposed bespoke regime seems to adequately address the requirements for prudential supervision of investment firms.
None of the APT-Members have or build up exposures with external customers. Proprietary trading firms do not have access to client funds or assets, nor may these firms utilise customer funds or assets for their own trading business (for instance there is no securities lending business). Therefore, there is a strong case to consider capital requirements’ objectives to only focus on the orderly winding down of the proprietary trading firm. In the event a proprietary trading firm (suddenly) exits the market and terminates its operations, the only stakeholders affected by such event would be the corporate stakeholders of the firm.
APT does not concur that there is a convincing need to introduce a separate and bespoke recovery and resolution regime for proprietary trading firms, in view of the very limited relevance of such a regime in the event a proprietary exits the markets or fails. As has been established in more detail in its Feedback and Responses Memorandum dated 1 February 2017, APT takes the position that an exiting or failing proprietary trading firm should and can be dissolved in a very short time period, without damages to external stakeholders. In such an event, positions of the firm will be wound down in a number of days as a result of the running clearing and settlement processes. Such positions are furthermore fully secured by a guarantee of the clearing member.In turn, the clearing member or clearing members would have an appropriate coverage for the risks it or they run on the exiting or failing proprietary trading firm. Clearing member(s) are not exposed in such circumstances to risks that may impact their own business. The exiting or failing proprietary trading firm will be resolved and only claims from its corporate stakeholders will need to be settled. APT does not believe that there is a rationale for a prudential supervision regime to address recovery or resolution.
Further details of the viewpoints of APT can be found in its Feedback and Responses Memorandum dated 1 February 2017.
Further details of the viewpoints of APT can be found in paragraph 10 of its Feedback and Responses Memorandum dated 1 February 2017.
(i) Setting the limitation on levels of variable remuneration should be left at the discretion of the proprietary trading firms and no mandatory statutory law limits should apply. This measure allows proprietary firms to expose their employees and contractors trading on the markets to the full effects of risk management and subject such individuals fully to the upside but also downside of the business of the firm, co-sharing risks as if the individuals are shareholders;
(ii) Retention and vesting rules regarding variable remuneration should allow for implementing of vesting schemes and distribution schemes with shorter time horizons and intervals, permitting sufficient flexibility in the recruiting and employee redundancy schemes of proprietary trading firms whilst fully accommodating claw back arrangements for underperforming individuals;
(ii) Profit distribution and retention rules regarding variable remuneration should be aligned to the time horizon of the necessary survival period of proprietary trading firms, being a briefer period to enable the orderly winding down of the firm with no need to resurrect or recover the business to serve the interests of external stakeholders. Therefore, there is in any event no convincing reason to include Pillar2-capital requirements into the calculation of maximum distributable reserves for proprietary trading firms.
Further details of the viewpoints of APT can be found in paragraph 10 of its Feedback and Responses Memorandum dated 1 February 2017.
Question 1: What are your views on the application of the same criteria, as provided for G-SIIs and O-SIIs, for the identification of ‘systemic and bank-like’ investment firms? What are your views on both qualitative and quantitative indicators or thresholds for ‘bank-like’ activities, being underwriting on a firm commitment basis and proprietary trading at a very large scale? What aspects in the identification of ‘systemic and bank-like’ investment firms could be improved?
First Question:The Dutch Association of Proprietary Traders (“APT”) wishes to emphasise that none of its members would, if the methodologies would be applied to asses Global Systemically Important Institutions (“GSIIs”) or Other Systemically Important Institutions (“OSIIs”), qualify as such, not on a global scale, not on a European scale and not on a domestic scale. None of the APT-Members would qualify as a firm whose distress or failure would have a systemic impact on the Dutch or the EU economy or global financial system due to size, importance (including substitutability or financial system infrastructure), complexity, cross-border activity, and interconnectedness. It is based on the criteria developed by EBA in furtherance of the provision of article 131(3) Capital Requirements Directive IV (Directive 2013/36/EU, “CRD IV”)) to identify other systemically important institutions that APT has concluded that none of its members would qualify as systemically important within the meaning of prevailing assessment methodologies.
Following the rationale and recommendations of EBA in its Opinion to the European Commission of 19 October 2016 (Opinion of the European Banking Authority on the First Part of the Call for Advice on Investment Firms, 19 October 2016, EBA-Op-2016-16) in the initial and first set of responses to the Call of Advice of the European Commission of 13 June 2016, investment firms that do qualify as systemically important (whether on a global basis or on a domestic basis) should continue to be subject to (parts of) the CRD IV and Capital Requirements Regulation (“CRR”). For these investment firms, there is no convincing case to consider the development of a separate and revised prudential regime.
APT therefore believes that the assessment methodology for G-SIIs and O-SIIs is appropriate for the identification of systemically important institutions, but rejects the analysis that other criteria to assess whether an investment firm would perform “systemic and bank-like” activities would be a suitable method to categorise investment firms as being “systemically important” or not.
Second Question:
For investment firms that may not be assessed as being systemically important, there is good reason to develop a separate prudential regime. EBA establishes its views and recommendations in the Discussion Paper on such separate and deviating prudential regime for investment firms that in any event do not qualify as systemically important. APT is supportive to this analysis.
If an investment firm that has significant trading activity, does not exceed the thresholds of the methodology of assessing whether firms are systemically important, such an investment firm should not be subject to specific and extraordinary prudential supervision rules. Such a firm is not systemically important and cannot (consequently) cause systemic risk.
Non-systemically important investment firms that are not (potential) perpetrators of systemic risk should not be subject to specific prudential supervision rules to manage their potential impact on market confidence. Market confidence must be preserved and must be managed through the comprehensive MiFID II market conduct rules and Market Abuse Regulation framework applicable to such investment firms without exceptions.
In summary: APT does not support the analysis that certain activities such as proprietary trading constitute a “qualitative” criterion suitable to categorise investment firms as systemically important, and consequently the mere fact of the “quantitative” criterion of scale of the activities does not conclusively assess whether an
investment firm is to be categorised as systemically important or not.
Third Question:
APT does not support the analysis made by EBA in respect of introducing additional qualitative criteria to rank investment firms in certain categories. APT does not believe that an investment firm that is not systemically important can be systemic. APT does see a conflict between the internationally agreed upon assessment methodology for systemically important institutions (which APT believes is not an open-ended system for which additional assessment criteria can be added) and the addition of new qualitative criteria. APT believes that there is a fundamental flaw in the analysis with respect to the criterion of “bank-like”. Either an investment firm is performing banking activities for which it would need to be licensed as a credit institution, or the firm is acting in accordance with the MiFID authorisation performing investment services and investment activities in accordance with the scope of its license.
Further details of the viewpoints of APT can be found in paragraph 4.3 and 4.4 of its Feedback and Responses Memorandum dated 1 February 2017.
Question 2: What are your views on the principles for the proposed prudential regime for investment firms?
In 2013 CRR/CRD IV amalgamated the Capital Adequacy Directive of 2006 setting forth market risk rules for banks and investment firms with the provisions of the Capital Requirements Directive of 2006 containing the banking credit and operational risk rules. As result of this process, significant out of scope, incompatibilities with business models, disproportional effects and improper alignment of the rules for investment firms occurred in supervisory practice. There is, therefore, a convincing case that the broader group of European investment firms will be made subject to an own prudential supervision regime.EBA’s Discussion Paper proposes such separate prudential supervision regime for investment firms. APT agrees with the viewpoints of EBA as regards the alignment of risk factors to the typical business models of investment firms who operate in a different way as opposed to banks. In this manner incompatibilities of the current CRR/CRD IV regime with such business models will be removed and the risk sensitivity of the prudential supervision regime will be improved.
EBA’s proposals in the Discussion Paper require to address a very broad population of investment firms active in all the EU-Member States having very different business models and propositions to the markets and customers. Although APT has not analysed the applicability of the proposed risk factors for other types of businesses in a detailed way, it appears that, in balance, the proposed bespoke regime seems to adequately address the requirements for prudential supervision of investment firms.
None of the APT-Members have or build up exposures with external customers. Proprietary trading firms do not have access to client funds or assets, nor may these firms utilise customer funds or assets for their own trading business (for instance there is no securities lending business). Therefore, there is a strong case to consider capital requirements’ objectives to only focus on the orderly winding down of the proprietary trading firm. In the event a proprietary trading firm (suddenly) exits the market and terminates its operations, the only stakeholders affected by such event would be the corporate stakeholders of the firm.
Further details of the viewpoints of APT can be found in paragraph 4.3 and 4.4 of its Feedback and Responses Memorandum dated 1 February 2017.
Question 3: What are your views on the identification and prudential treatment of very small and non-interconnected investment firms (‘Class 3’)? If, for example, such class was subject to fixed overheads requirements only, what advantages and drawbacks would have introducing such a Class 3? Conversely, what advantages and drawbacks could merging Class 3 with other investment firms under one single prudential regime with ‘built-in’ proportionality have?
In view of the organisation of the businesses of proprietary trading firm who are member of APT, APT establishes that the K-Factors designed for the RtC and RtM risk categories are not relevant weighing factors for proprietary trading firms. From this it follows that there will be no reason to apply the K-Factor prudential requirements to proprietary traders’ member of APT. Consistent with this viewpoint would be to use the FOR as the absolute floor for proprietary trading firms’ capital requirements, as the scoring on RtC and RtM K-Factors is likely to result in zero amounts. The FOR requirement would then serve to establish in any event a capital floor, notwithstanding the minimal impact of RtC and RtM factors. This prudential regime would be suitable for proprietary trading firms that fall in Class 3.APT acknowledges that for the larger proprietary trading firms there may be a need to consider an uplift of the FOR capital requirement. These firms would classify as Class 2 proprietary trading firms. Such an uplift should serve to address potential
market participant concerns and perceptions as regards the risks that could be caused by such larger proprietary trading firms. Such market participant concern would transmit to the supervisory authorities as well, which absent a suitable mandatory requirement applicable to the larger firms, would not be constrained to use all of the available discretionary powers (such as the powers set forth in article 104 CRD IV in the context of the Supervisory review and Evaluation process). APT-Members also have an interest in legal certainty as regards the capital requirements regime that applies to all of the types of the firms.
For this reason, APT suggests that for any of the proprietary trading firm that exceeds a certain threshold an uplift of the FOR capital requirement would be an appropriate capital requirement regime for the larger firms. Such uplift capital requirement would then be aligned to the level of the charges to the proprietary trading firms for the exposures (which would be close to a tail risk number at the end of the distribution scale of unexpected losses) existing upon assignment of all trade positions to the clearing infrastructure occurring on a daily basis. This charge would be the comprehensive assessment of the entire range of risks that may be construed in theoretical models, including settlement risk, interest rate risk, operational risk, credit valuation adjustment risk and any other relevant risk areas.
The relevant uplift numbers could be derived from the daily calculated aggregated margin numbers in the relationship between the proprietary trading firm and its clearing member. This is what is referred to by APT as the Risk Margin measure, which is quantified by applying the risk assessment models of the clearing member. An uplift of the FOR requirement for the larger proprietary trading firms would therefore result in the requirement to hold capital against the Risk Margin calculated on a daily basis.
APT suggests that this uplift of the FOR requirement should apply to the larger firms being part of its member population. In order to establish a sufficiently objective and strong threshold number that is not subject to discretion or interpretation issues, APT proposes to use a threshold based on the FOR-numbers calculated in four quarters on an average basis in the relevant measurement year.
The uplift factor in the form of the Risk Margin should apply to proprietary trading firms that may be considered to be perceived as being a significant participant to the markets. We expect that an appropriate threshold would lead to three to four of the current APT-Members to be subject to the uplift factor in the form of the Risk Margin measure.
In order to avoid that in view of volatility swings in the financial markets, larger firms subject to the Risk Margin measure would at any time be undercapitalised depending on market circumstances, APT proposes to impose the objective capital floor of the FOR requirement as the safeguard against undercapitalisation.
Further details of the viewpoints of APT can be found in paragraph 4.3 and 4.4 of its Feedback and Responses Memorandum dated 1 February 2017.
Question 4: What are your views on the criteria discussed above for identifying ‘Class 3’ investment firms?
APT respectfully wishes to propose an alternative for the categorisation of Class 3 firms deviating from the proposals in the Discussion Paper that it believes are not suitable for proprietary trading firms. APT disagrees with the observation that investment firms that are conducting the investment activity of dealing on own account should be precluded from being categorised as a Class 3 firm as a general principle. APT proposes for the categorisation to become a Class 3 proprietary trading firms, to use an objective quantitative threshold to be developed in close discussion between the legislator and the industry.Further details of the viewpoints of APT can be found in paragraph 6 of its Feedback and Responses Memorandum dated 1 February 2017.
Question 5: Do you have any comments on the approach focusing on risk to customers (RtC), risk to markets (RtM) and risk to firm (RtF)?
APT believes that neither the RtC nor the RtM as they have been analysed in the Discussion Paper are relevant to proprietary trading firms that are neither systemically important, nor systemic nor bank like.Particularly the fact that none of the RtC K-Factors are relevant for proprietary trading firms as they are organised in the way APT-Members are, would be the most important reason why the potential damages that a firm would incur in view of its business model or firm-specific characteristics, are not impacting third parties. Therefore, there is no direct or indirect risk that the rights, assets or position of third parties could be damaged or prejudiced if it turns out that a proprietary trading firm would be inadequately capitalised. This may only be different for the risk borne by the clearing member with whom proprietary trading firms have a dependent and important relationship.
APT points out that proprietary trading firms are without exception organised as firms whose shareholders/owners are exclusively exposed to the risks borne by the firm. RtF is equal to the risk of its shareholders. There is no rationale whatsoever to be found, why prudential requirements should be imposed on firms whose shareholders are exclusively exposed to the firm’s risks.
The fact that shareholders are exclusively bearing the risks of the firm does not prevent the firm being subject to capital requirements. Effectively the capital requirements which apply to the firm will further constrain the shareholders’ rights vis-à-vis the firm. This is related to the qualitative requirements applicable for the firm’s capital to be held, also in the regime that APT proposes for its members.
Further details of the viewpoints of APT can be found in paragraph 3, 5 and 5 of its Feedback and Responses Memorandum dated 1 February 2017
Question 6: What are your views on the initial K-factors identified? For example, should there be separate K-factors for client money and financial instruments belonging to clients? And should there be an RtM for securitisation risk-retentions? Do you have any suggestions for additional K-factors that can be both easily observable and risk sensitive?
APT has assessed that none of the following K-Factors for the RtC risk category are or may be relevant for APT-Members or for any proprietary trader having a similar business model exclusively focusing on dealing on own account and not having external customers:- Assets under management (AUM): none of the APT-Members manages customer portfolios or implements (whether or not discretionary) investment mandates for and on behalf of customers;
- Assets under advice (AUA): APT-Members do not have external relations with customers and therefore never render investment advice;
- Assets safeguarded and administered (ASA): APT-Members’ business operations does not require safeguarding and administration of assets of third parties. For most APT-Members being holders of MiFID permits, safeguarding and administration activities within the meaning of MiFID Annex I Part B (1) is not in scope of their authorisation. Such firms would, consequently, even not be allowed to conduct assets safeguarding and administration activities;
- Client money held (CMH): Under no circumstances will APT-Members have access to third parties’ money (not in the form of own balance sheet liabilities or by means of access to asset segregation structures) and consequently this important K-Factor as outlined in paragraph 38(d) of the Discussion Paper does not apply for such businesses;
- Liabilities to customers (LTC): APT-Members will not engage with customers to issue guarantees or indemnities to the benefit of such customers or any other arrangements (whether it be contractual, quasi-contractual or tort law type of relations) that would bring APT-Members into the position of being indebted to external customers. This K-Factor consequently does not apply for APT-Members’ businesses;
- Customer orders handled (COH): The trading activities of APT-Members does not involve or relate to, directly or indirectly, the processing of customer orders in whatsoever form. APT-Members have no responsibilities towards customers for the proper, timely and adequate processing of securities’ orders or comparable transactions in other financial instruments. Any trading activity of APT-Members is for own account and always against their own proprietary capital. APT-Members also do not form part of a chain of intermediaries responsible for the processing of securities orders on behalf or for external customers. In this respect there is also no indirect exposure to external customers.
With its comprehensive analysis as regards the RtM K-Factor approach as contained in the Discussion Paper, APT wishes to demonstrate that the proposed metrics and proxies to establish the K-Factor for this risk area are not fit for purpose. APT concludes as follows:
- Absent evidentiary support to the need to establish a complete new risk category in the prudential supervision regime for investment firms, it should be generally concluded that it should be avoided to impose the RtM measure to proprietary firms;
- Applying the assessment methodology of article 131 CRD IV for GSIIs and OSIIs and incorporating the EBA guidelines for application of the leverage ratio disclosure requirements for global systemically important firms and other large institutions, it can be concluded that, in view of size and importance (even if this is expressed in terms of the non-risk weighted balance sheets of all APT-Members) none of the APT-Members qualify as systemically important institutions or large institution, not on a domestic scale, not on a European scale and not on a global scale;
- APT also respectfully rejects the analysis that size or importance of investment firms should be measured taking the commercial (IFRS) balance sheet as focus point. The economic balance sheet of proprietary trading firms, does not represent the actual accruals of legal obligations of firms that exclusively operate on regulated markets or otherwise submit their trades to central clearing. Eventually and in any event each time as per the close of a trading day, open positions are assigned via the clearing member to the central counterparty. Settlement risk is therefore reduced to zero for all categories of financial instruments, whether it be straightforward securities, exchange traded funds, derivatives or any other product in which the APT-Members trade;
- Furthermore, and notwithstanding the zero score as regards the size or importance, if a proprietary firm would raise high scores on the scoring categories of interconnectedness or substitutability within the meaning of the GSII/OSII assessment methodology, such a firm could be considered to be “systemic” and in such case the proprietary trading firm should be made subject to the CRR/CRD IV prudential supervision regime. None of the APT-Members have high scores on either one of the scoring categories and therefore there is no need to analyse or address as to whether or not the risk of interconnectedness or cluster-risk could accrue in respect of proprietary trading firms towards other investment firms (where these firms are themselves proprietary trading firms or investment firms with customers);
- From this analysis it follows, that if a proprietary trading firm is not to be categorised as systemically important, such a firm would also not be “systemic”. APT respectfully rejects the analysis of the Discussion Paper that there is a need or rationale to assess whether firms that are not systemically important, could nevertheless qualify as being “systemic”;
- None of the APT-Members are performing “bank-like” activities, which APT interprets as the (high risk) combination of conducting investment activities (f.i. dealing on own account) with other investment services (f.i. brokerage, investment advice or portfolio management). Consequently, there is no risk of comingling of customer monies or financial instruments with those of the investment firm;
- The number and frequency of trades is an inappropriate proxy for the establishment of K-Factors for the RtM risk area. The number and frequency of trades carried out by proprietary trading firms is carried out to prevent mispricing, and is driven by market circumstances, and is therefore most important in volatile markets as a risk mitigation tool in order to be able to provide liquidity under challenging circumstances. Penalising proprietary trading firms with capital requirements that are raised depending the number or frequency of transactions, would form a significant impediment for the fulfilment of the important roles as market makers and liquidity providers. Such roles require proprietary trading forms to perform transaction with high frequency and in large numbers of transactions. APT reiterates, however, that proprietary traders never act on an exclusive basis.
APT cannot concur with the viewpoints included in the Discussion Paper as regards the need to impose the uplift factor for RtF to proprietary trading firms. Such firms are managed entirely at the risk of the owners/shareholders of the firm and there is no justification nor need to impose mandatory capital requirements for the RtF.
In addition, APT believed that the RtF measure as it has been designed in the Discussion Paper, does not effectively address the actual risks borne by proprietary trading firms. Those risks are towards the clearing member that requires, as part of the clearing arrangements, proprietary trading firms to cover the Risk Margin with capital. Any other risks are transferred and/or mitigated through the operation of the clearing arrangements, in which positions are assigned to the clearing member and subsequently contributed to the central counterparty.
Further details of the viewpoints of APT can be found in paragraphs 3, 4 and 5 of its Feedback and Responses Memorandum dated 1 February 2017.
Question 7: Is the proposed risk to firm ‘up-lift’ measure an appropriate way to address the indirect impact of the exposure risk a firm poses to customers and markets? If not, what alternative approach to addressing risk to firm (RtF) would you suggest?
First question:APT points out that proprietary trading firms are without exception organised as firms whose shareholders/owners are exclusively exposed to the risks borne by the firm. RtF is equal to the risk of its shareholders. There is no rationale whatsoever to be found, why prudential requirements should be imposed on firms whose shareholders are exclusively exposed to the firm’s risks. APT therefore recommends that the RtF uplift factor should not apply to proprietary trading firms.
Second question:
APT therefore does not propose an alternative for the RtF, but wishes to address capital requirements in line with the proposed approach as set forth in paragraph 79 of the Discussion Paper, in which a risk margin model is considered as al alternative way forward.
Further details of the viewpoints of APT can be found in paragraph 6 of its Feedback and Responses Memorandum dated 1 February 2017.
Question 8: What are your views on the ‘built-in’ approach to delivering simpler, proportionate capital requirements for Class 3 investment firms, (compared to having a separate regime for such firms)?
APT believes that the Categorisation of firms in Class 2 and Class 3 firms is a sensible approach. In its proposals in this feedback, APT suggests that for Class 3 firms FOR should serve as the capital adequacy floor. For larger firms an uplift is recommended in the form of a Risk Margin measure, where the FOR requirement would serve as absolute floor for those firms.Further details of the viewpoints of APT can be found in paragraph 6 of its Feedback and Responses Memorandum dated 1 February 2017.
Question 9: Should a fixed overhead requirement (FOR) remain part of the capital regime? If so, how could it be improved?
Imposing FOR as a standard measure for Class 3 proprietary trading firms would be a suitable measure to address the unwinding costs of the firm in the event of a failure or exit from the markets. The FOR would in any event cover for all fixed overhead costs for a survival period of three months. APT believes that this period is sufficient to organise an orderly winding down of the firm and to settle any claims with the corporate creditors of the firms concerned. APT reiterates its viewpoint that a proprietary trading firm that is exiting, will have no exposures to external customers or counterparties in the financial markets after two to three days after the termination of activities as trader. In any event FOR serves to wind down the firm’s corporate business operations and, to a certain limited extent, it will serve to settle any claims with the clearing member(s). APT therefore does not recommend any changes to the capital measure of FOR.Further details of the viewpoints of APT can be found in paragraph 6 of its Feedback and Responses Memorandum dated 1 February 2017.
Question 10: What are your views on the appropriate capital requirements required for larger firms that trade financial instruments (including derivatives)?
APT acknowledges that for the larger proprietary trading firms there may be a need to consider an uplift of the FOR capital requirement. These firms would classify as Class 2 proprietary trading firms. Such an uplift should serve to address potential market participant concerns and perceptions as regards the risks that could be caused by such larger proprietary trading firms. Such market participant concern would transmit to the supervisory authorities as well, which absent a suitable mandatory requirement applicable to the larger firms, would not be constrained to use all of the available discretionary powers (such as the powers set forth in article 104 CRD IV in the context of the Supervisory review and Evaluation process). APT-Members also have an interest in legal certainty as regards the capital requirements regime that applies to all of the types of the firms.For this reason, APT suggests that for any of the proprietary trading firm that exceeds a certain threshold an uplift of the FOR capital requirement would be an appropriate capital requirement regime for the larger firms. Such uplift capital requirement would then be aligned to the level of the charges to the proprietary trading firms for the exposures (which would be close to a tail risk number at the end of the distribution scale of unexpected losses) existing upon assignment of all trade positions to the clearing infrastructure occurring on a daily basis. This charge would be the comprehensive assessment of the entire range of risks that may be construed in theoretical models, including settlement risk, interest rate risk, operational risk, credit valuation adjustment risk and any other relevant risk areas.
The relevant uplift numbers could be derived from the daily calculated aggregated margin numbers in the relationship between the proprietary trading firm and its clearing member.
This is what is referred to by APT as the Risk Margin measure, which is quantified by applying the risk assessment models of the clearing member. An uplift of the FOR requirement for the larger proprietary trading firms would therefore result in the requirement to hold capital against the Risk Margin calculated on a daily basis.
APT suggests that this uplift of the FOR requirement should apply to the larger firms being part of its member population. The uplift factor in the form of the Risk Margin should apply to proprietary trading firms that may be considered to be perceived as being a significant participant to the markets. APT suggests that an objective threshold should be developed to differentiate between Class 2 and Class 3 proprietary trading firms in close consultation between the legislator and the industry. APT believes that when the appropriate metric would be applied that about three to four of the current APT-Members will be subject to the uplift factor in the form of the Risk Margin measure.
Further details of the viewpoints of APT can be found in paragraph 6 of its Feedback and Responses Memorandum dated 1 February 2017.
Question 11: Do you think the K-factor approach is appropriate for any investment firms that may be systemic but are not ‘bank-like’?
If an investment firm that has significant trading activity, does not exceed the thresholds of the methodology of assessing whether firms are systemically important, such an investment firm should not be subject to specific and extraordinary prudential supervision rules. Such a firm is not systemically important and cannot (consequently) cause systemic risk.Further details of the viewpoints of APT can be found in paragraph 4.3 and 4.4 of its Feedback and Responses Memorandum dated 1 February 2017.
Question 12: Does the definition of capital in the CRR appropriately cater for all the cases of investment firms that are not joint stock companies (such as partnerships, LLPs and sole-traders)?
APT concurs with the viewpoints included in points 88 to 90 of the Discussion Paper as to the qualitative requirements for capital to be held by investment firms. The applicable system for banks pursuant to the rules of CRR is not fit for purpose for the investment firm industry in view of complexity and misalignment of the purpose of capital to be held by such firms.Further details of the viewpoints of APT can be found in paragraph 9 of its Feedback and Responses Memorandum dated 1 February 2017.
Question 13: Are the cases described above a real concern for the investment firms? How can those aspects be addressed while properly safeguarding applicable objectives of the permanence principle?
APT does not have members that are organised in other legal form than limited liability companies (joint stock companies). The LLP or partnership model is not utilised in the recent history of the Dutch proprietary trading firm industry. APT therefore responds to this question that it does not believe it is relevant.Further details of the viewpoints of APT can be found in paragraph 9 of its Feedback and Responses Memorandum dated 1 February 2017.
Question 14: What are your views on whether or not simplification in the range of items that qualify as regulatory capital and how the different ‘tiers’ of capital operate for investment firms would be appropriate? If so, how could this be achieved?
In balance, APT proposes a significant simplification of the qualitative capital requirements regime that should apply to proprietary traders and concurs with the viewpoints in the Discussion Paper that such a simplified regime would be appropriate for the industry.Most of the APT-Members apply the capital requirements by means of the raising of fully paid in ordinary capital from its shareholders and prudent policies as regards retained earnings distribution. Retained earnings reserves are in many instances utilised to support the further growth of the firm and serve as buffer for future expansion of the business. Shareholders waive in such cases their rights for full dividend distribution.
APT does see the advantage of a second tier of capital that may qualify as regulatory capital in the form of medium term subordinated debt. Such “Tier 2” regulatory capital instrument should be properly aligned to the requirements of proprietary trading firms however. APT notes that regulatory capital requirements for proprietary trading firms should serve to support the orderly winding down of the firm applying a maximum horizon of three months.
In view of the limited horizon where regulatory capital serves to wind down the firm’s affairs and to liquidate the business operations, any provisions in the qualitative requirements for Tier 2 capital instruments, should take into account that restrictions on repayment of the principal amount borrowed upon the issue of the Tier 2 instrument should be sufficiently flexible to cater for a winding down of the Tier 2 instrument as well, simultaneously with the process of liquidating the firm.
Further details of the viewpoints of APT can be found in paragraph 9 of its Feedback and Responses Memorandum dated 1 February 2017.
Question 15: In the context of deductions and prudential filters, in which areas is it possible to simplify the current CRR approach, whilst maintaining the same level of quality in the capital definition?
As regards the subject matter of prudential filters and deductions, APT briefly notes that particularly the deductions from capital for the holding in intangible assets do restrict the possibilities for starting firms that have capitalised the development costs of software and automated platforms. Therefore, as has been the case for comparable developments in the FinTech industry, the deduction form capital as a generic measure might create impediments for the market entry of newcomers.APT concurs that any prudential filters related to accounting values might not be relevant for the investment firm industry and in a revised prudential supervision regime, the abolishment of the larger majority of the prudential filters and deductions would contribute to the further simplification of the rules, without frustrating the general concepts of the risk sensitive approach.
Further details of the viewpoints of APT can be found in paragraph 9 of its Feedback and Responses Memorandum dated 1 February 2017.
Question 16: What are your views overall on the options for the best way forward for the definition and quality of capital for investment firms?
In balance, APT proposes a significant simplification of the qualitative capital requirements regime that should apply to proprietary traders and concurs with the viewpoints in the Discussion Paper that such a simplified regime would be appropriate for the industry.Most of the APT-Members apply the capital requirements by means of the raising of fully paid in ordinary capital from its shareholders and prudent policies as regards retained earnings distribution. Retained earnings reserves are in many instances utilised to support the further growth of the firm and serve as buffer for future expansion of the business. Shareholders waive in such cases their rights for full dividend distribution.
APT does see the advantage of a second tier of capital that may qualify as regulatory capital in the form of medium term subordinated debt. Such “Tier 2” regulatory capital instrument should be properly aligned to the requirements of proprietary trading firms however. APT notes that regulatory capital requirements for proprietary trading firms should serve to support the orderly winding down of the firm applying a maximum horizon of three months.
In view of the limited horizon where regulatory capital serves to wind down the firm’s affairs and to liquidate the business operations, any provisions in the qualitative requirements for Tier 2 capital instruments, should take into account that restrictions on repayment of the principal amount borrowed upon the issue of the Tier 2 instrument should be sufficiently flexible to cater for a winding down of the Tier 2 instrument as well, simultaneously with the process of liquidating the firm.
Further details of the viewpoints of APT can be found in paragraph 9 of its Feedback and Responses Memorandum dated 1 February 2017.
Question 17: What are your views on the definition of initial capital and the potential for simplification? To what extent should the definition of initial capital be aligned with that of regulatory capital used for meeting capital requirements?
Minimum capital requirements could be abolished as in any event FOR capital requirements for proprietary trading firms will exceed any number that will be set for minimum capital requirements for investment firms, even if the legislator would consider to increase the 50,000-125,000-730,000 euro numbers to take inflation into account.For market entrants an upfront FOR requirement would be a sufficient high threshold to avoid the market entrance by firms insufficiently capitalised. A firm that wishes to enter the market, will be subject to severe scrutiny by the supervisory authorities in the license application process in any event. Such firms are likely to be required to properly budget costs and forecast the financial condition of the firm as a requirement to obtain the license. In line with this process it will not be too burdensome to calculate upfront a FOR for such a firm which will also serve as the “entrance” capitalisation level.
Further details of the viewpoints of APT can be found in paragraph 9 of its Feedback and Responses Memorandum dated 1 February 2017.
Question 18: What aspects should be taken into account when requiring different levels of initial capital for different firms? Is there any undesirable consequence or incentive that should be considered?
Minimum capital requirements could be abolished as in any event FOR capital requirements for proprietary trading firms will exceed any number that will be set for minimum capital requirements for investment firms, even if the legislator would consider to increase the 50,000-125,000-730,000 euro numbers to take inflation into account.For market entrants an upfront FOR requirement would be a sufficient high threshold to avoid the market entrance by firms insufficiently capitalised. A firm that wishes to enter the market, will be subject to severe scrutiny by the supervisory authorities in the license application process in any event. Such firms are likely to be required to properly budget costs and forecast the financial condition of the firm as a requirement to obtain the license. In line with this process it will not be too burdensome to calculate upfront a FOR for such a firm which will also serve as the “entrance” capitalisation level.
Further details of the viewpoints of APT can be found in paragraph 4.3 and 4.4 of its Feedback and Responses Memorandum dated 1 February 2017.
Question 19: What are your views on whether there is a need to have a separate concept of eligible capital, or whether there is potential for simplification through aligning this concept with the definition of regulatory capital used for meeting capital requirements?
In balance, APT proposes a significant simplification of the qualitative capital requirements regime that should apply to proprietary traders and concurs with the viewpoints in the Discussion Paper that such a simplified regime would be appropriate for the industry.Most of the APT-Members apply the capital requirements by means of the raising of fully paid in ordinary capital from its shareholders and prudent policies as regards retained earnings distribution. Retained earnings reserves are in many instances utilised to support the further growth of the firm and serve as buffer for future expansion of the business. Shareholders waive in such cases their rights for full dividend distribution.
APT does see the advantage of a second tier of capital that may qualify as regulatory capital in the form of medium term subordinated debt. Such “Tier 2” regulatory capital instrument should be properly aligned to the requirements of proprietary trading firms however. APT notes that regulatory capital requirements for proprietary trading firms should serve to support the orderly winding down of the firm applying a maximum horizon of three months.
In view of the limited horizon where regulatory capital serves to wind down the firm’s affairs and to liquidate the business operations, any provisions in the qualitative requirements for Tier 2 capital instruments, should take into account that restrictions on repayment of the principal amount borrowed upon the issue of the Tier 2 instrument should be sufficiently flexible to cater for a winding down of the Tier 2 instrument as well, simultaneously with the process of liquidating the firm.
Further details of the viewpoints of APT can be found in paragraph 9 of its Feedback and Responses Memorandum dated 1 February 2017.
Question 20: Do you see any common stress scenario for liquidity as necessary for investment firms? If so, how could that stress be defined?
APT respectfully points out that in the current supervisory practice most (if not all) investment firms (no matter which business they conduct) are excepted from the liquidity supervision requirements as set forth in Part 6 CRR. The supervisory authorities have widely applied their discretion to exempt the investment firm sector from being subject to liquidity requirements. In this context, APT respectfully challenges that there is a convincing and evidentiary supported case to introduce a liquidity supervision scheme for investment firms.In addition, it should be noted that the risk management model applied by clearing member firms in respect of their clients, already incorporates a stress tested liquidity and concentration risk factor in the charges of capital and requirements to post high quality liquid assets as collateral by proprietary trading firms. For example, illiquid positions held in the trading book are made subject to stricter stress tests and more severe shocks and accounted for in the Risk Margin charged to the proprietary trading firm.
Introducing a supplemental regime to manage liquidity risk for proprietary trading firms utilising the Risk Margin model would result in double counting of liquidity measures and should be avoided.
Further details of the viewpoints of APT can be found in paragraph 7 of its Feedback and Responses Memorandum dated 1 February 2017.
Question 21: What is your view on whether holding an amount of liquid assets set by reference to a percentage of the amount of obligations reflected in regulatory capital requirements such as the FOR would provide an appropriate basis and floor for liquidity requirements for ‘non-systemic’ investment firms? More specifically, could you provide any evidence or counter-examples where holding an amount of liquid assets equivalent to a percentage of the FOR may not provide an appropriate basis for a liquidity regime for very small and ‘non-interconnected’ investment firms?
Introducing a supplemental regime to manage liquidity risk for proprietary trading firms utilising the Risk Margin model would result in double counting of liquidity measures and should be avoided.If a liquidity supervision scheme is to be introduced, APT would be in favour of keeping such regime very simple. In this respect the minimum liquidity standard for investment firms should be in the form of a simple metric, for instance by imposing the requirement that a significant percentage of the capital requirement applicable to the firm is to be held in the form of liquid assets.
Further details of the viewpoints of APT can be found in paragraph 7 of its Feedback and Responses Memorandum dated 1 February 2017.
Question 22: What types of items do you think should count as liquid assets to meet any regulatory liquidity requirements, and why? (Please refer to Annex 4 for some considerations in determining what may be a liquid asset).
The requirements for the assets to be maintained to fulfil the liquidity requirement should be kept simple as well. APT suggests to adapt the eligibility criteria to the standards set forth in the DR Risk Management OTC Derivatives for eligible collateral for Initial Margin and Variation Margin.Further details of the viewpoints of APT can be found in paragraph 7 of its Feedback and Responses Memorandum dated 1 February 2017.
Question 23: Could you provide your views on the need to support a minimum liquidity standard for investment firms with the ability for competent authorities to apply “supplementary” qualitative requirements to individual firms, where justified by the risk of the firm’s business?
Introducing a supplemental regime to manage liquidity risk for proprietary trading firms utilising the Risk Margin model would result in double counting of liquidity measures and should be avoided.Further details of the viewpoints of APT can be found in paragraph 7 of its Feedback and Responses Memorandum dated 1 February 2017.
Question 24: Do you have any comment on the need for additional operational requirements for liquidity risk management, which would be applied according to the individual nature, scale and complexity of the investment firm’s business?
Introducing a supplemental regime to manage liquidity risk for proprietary trading firms utilising the Risk Margin model would result in double counting of liquidity measures and should be avoided.Further details of the viewpoints of APT can be found in paragraph 7 of its Feedback and Responses Memorandum dated 1 February 2017.
Question 25: What are your views on the relevance of large exposures risk to investment firms? Do you consider that a basic reporting scheme for identifying concentration risk would be appropriate for some investment firms, including Class 3 firms?
APT notes that the risk management model applied by clearing member firms in respect of their clients, already incorporates a stress tested liquidity and concentration risk factor in the charges of capital and requirements to post high quality liquid assets as collateral by proprietary trading firms. For example, illiquid positions held in the trading book are made subject to stricter stress tests and more severe shocks and accounted for in the Risk Margin charged to the proprietary trading firm. Therefore, APT does not recommend that there is a rationale to impose additional rules to address concentration risk for proprietary trading firms.Further details of the viewpoints of APT can be found in paragraph 6 of its Feedback and Responses Memorandum dated 1 February 2017.
Question 26: What are your views on the proposed approach to addressing group risk within investment firm-only groups? Do you have any other suggested treatments that could be applied, and if so, why?
APT acknowledges the need and rationale to include a chapter on supervision on consolidated basis in the future prudential supervision regime for investment firms. Such a regime should particularly enable supervisory authorities to identify any intragroup positions and intragroup transactions that may undermine or dilute the quality of the capital to be held by regulated investment firms subject to supervision of the European supervisory authorities. Any such intragroup positions and intragroup transactions affecting the quality of the regulatory capital base of regulated investment firms, should result in appropriate deduction and/or impairment rules and similar measures to enhance the quality of the regulatory capital base of the investment firms concerned.APT does not support any rules on supervision on consolidated basis that would introduce regulatory capital requirements on a solo basis for unregulated firms. The principle to restrict capital requirements to regulated firms only also applies for the consolidated supervision regime for credit institutions (banks) and the supplementary supervision regime for insurance groups. There is no convincing reason to introduce rules for groups of investment firms that would deviate from general principles of group supervision as adopted in Europe.
Unregulated subsidiaries in the group of which an investment firm forms part, should neither be exposed to regulatory capital requirements on a solo basis nor should these requirements be created indirectly and at the level of the parent company on a consolidated basis. Unregulated subsidiaries’ values should be accounted for in the consolidated financial statements of the (European) parent, applying ordinary valuation principles and applying ordinary accounting principles (IFRS or local GAAP applicable to the parent company).
Constraints imposed on unregulated subsidiaries in the group of which one or more investment firms form part, should be restricted to the deduction and/or impairment for the purposes of regulatory consolidation of financial indebtedness relations or cross-capital holdings among the group members. These rules should support the avoidance of double gearing of regulatory capital and dilution of the quality of the capital of regulated investment firms in the group. Such rules should be without prejudice to the ability and permissibility of the inclusion (and therefore non-impairment) of certain intragroup debt or equity positions and values for ordinary accounting purposes if permitted under the IFRS or local-GAAP frameworks.
Any rules on consolidated supervision requiring regulated firms to hold regulatory capital levels should be restricted to firms established in the EEA. In this respect, APT is in favour of the territorial scope of application of the mitigated consolidated supervision regime for groups of investment firms as laid out in article 15 CRR. APT therefore suggests that this territorial restriction to EEA-investment firms as this is prevailing in the article 15 CRR provision, is to be confirmed in the new prudential supervision regime as well.
Further details of the viewpoints of APT can be found in paragraph 8 of its Feedback and Responses Memorandum dated 1 February 2017.
Question 27: In the case of an investment firm which is a subsidiary of a banking consolidation group, do you see any difficulty in the implementation of the proposed capital requirements on an individual firm basis? If so, do you have any suggestion on how to address any such difficulties?
APT does not see impediments to combine solo capital requirements imposed on proprietary traders with the consolidated supervision rules for heterogeneous groups. APT notes, however, that none of the proprietary traders which are its members, form part of a banking group.Further details of the viewpoints of APT can be found in paragraph 8 of its Feedback and Responses Memorandum dated 1 February 2017.
Question 28: What other aspects should the competent authorities take into account when addressing the additional prudential measures on an individual firm basis under the prudential regime for investment firms?
In 2013 CRR/CRD IV amalgamated the Capital Adequacy Directive of 2006 setting forth market risk rules for banks and investment firms with the provisions of the Capital Requirements Directive of 2006 containing the banking credit and operational risk rules. As result of this process, significant out of scope, incompatibilities with business models, disproportional effects and improper alignment of the rules for investment firms occurred in supervisory practice. There is, therefore, a convincing case that the broader group of European investment firms will be made subject to an own prudential supervision regime.EBA’s Discussion Paper proposes such separate prudential supervision regime for investment firms. APT agrees with the viewpoints of EBA as regards the alignment of risk factors to the typical business models of investment firms who operate in a different way as opposed to banks. In this manner incompatibilities of the current CRR/CRD IV regime with such business models will be removed and the risk sensitivity of the prudential supervision regime will be improved.
EBA’s proposals in the Discussion Paper require to address a very broad population of investment firms active in all the EU-Member States having very different business models and propositions to the markets and customers. Although APT has not analysed the applicability of the proposed risk factors for other types of businesses in a detailed way, it appears that, in balance, the proposed bespoke regime seems to adequately address the requirements for prudential supervision of investment firms.
None of the APT-Members have or build up exposures with external customers. Proprietary trading firms do not have access to client funds or assets, nor may these firms utilise customer funds or assets for their own trading business (for instance there is no securities lending business). Therefore, there is a strong case to consider capital requirements’ objectives to only focus on the orderly winding down of the proprietary trading firm. In the event a proprietary trading firm (suddenly) exits the market and terminates its operations, the only stakeholders affected by such event would be the corporate stakeholders of the firm.
Further details of the viewpoints of APT can be found in paragraph 4.3 and 4.4 of its Feedback and Responses Memorandum dated 1 February 2017.
Question 29: What examples do you have of any excessive burden for investment firms arising from the current regulatory reporting regime?
One example that poses an excessive burden concerns the format and composition of the prudential reporting (COREP) for investment firms. Most templates for such reporting are designed for banks and banking groups and a very significant part of such templates are inappropriately addressing the business (models) of investment firms generally, and proprietary trading firms specifically. The workload concerned with completing these COREP supervisory reporting is considerable and would be reduced if solvency supervisory reporting could be made based on tailored templates.Further details of the viewpoints of APT can be found in its Feedback and Responses Memorandum dated 1 February 2017.
Question 30: What are your views on the need for any other prudential tools as part of the new prudential regime for investment firms? And if required, how could they be made more appropriate? In particular, is there a need for requirements on public disclosure of prudential information? And what about recovery and resolution?
In 2013 CRR/CRD IV amalgamated the Capital Adequacy Directive of 2006 setting forth market risk rules for banks and investment firms with the provisions of the Capital Requirements Directive of 2006 containing the banking credit and operational risk rules. As result of this process, significant out of scope, incompatibilities with business models, disproportional effects and improper alignment of the rules for investment firms occurred in supervisory practice. There is, therefore, a convincing case that the broadergroup of European investment firms will be made subject to an own prudential supervision regime.EBA’s Discussion Paper proposes such separate prudential supervision regime for investment firms. APT agrees with the viewpoints of EBA as regards the alignment of risk factors to the typical business models of investment firms who operate in a different way as opposed to banks. In this manner incompatibilities of the current CRR/CRD IV regime with such business models will be removed and the risk sensitivity of the prudential supervision regime will be improved.
EBA’s proposals in the Discussion Paper require to address a very broad population of investment firms active in all the EU-Member States having very different business models and propositions to the markets and customers. Although APT has not analysed the applicability of the proposed risk factors for other types of businesses in a detailed way, it appears that, in balance, the proposed bespoke regime seems to adequately address the requirements for prudential supervision of investment firms.
None of the APT-Members have or build up exposures with external customers. Proprietary trading firms do not have access to client funds or assets, nor may these firms utilise customer funds or assets for their own trading business (for instance there is no securities lending business). Therefore, there is a strong case to consider capital requirements’ objectives to only focus on the orderly winding down of the proprietary trading firm. In the event a proprietary trading firm (suddenly) exits the market and terminates its operations, the only stakeholders affected by such event would be the corporate stakeholders of the firm.
APT does not concur that there is a convincing need to introduce a separate and bespoke recovery and resolution regime for proprietary trading firms, in view of the very limited relevance of such a regime in the event a proprietary exits the markets or fails. As has been established in more detail in its Feedback and Responses Memorandum dated 1 February 2017, APT takes the position that an exiting or failing proprietary trading firm should and can be dissolved in a very short time period, without damages to external stakeholders. In such an event, positions of the firm will be wound down in a number of days as a result of the running clearing and settlement processes. Such positions are furthermore fully secured by a guarantee of the clearing member.In turn, the clearing member or clearing members would have an appropriate coverage for the risks it or they run on the exiting or failing proprietary trading firm. Clearing member(s) are not exposed in such circumstances to risks that may impact their own business. The exiting or failing proprietary trading firm will be resolved and only claims from its corporate stakeholders will need to be settled. APT does not believe that there is a rationale for a prudential supervision regime to address recovery or resolution.
Question 31: What are your views on the relevance of CRD governance requirements to investment firms, and what evidence do you have to support this?
None of the APT-Members have or build up exposures with external customers. Proprietary trading firms do not have access to client funds or assets, nor may these firms utilise customer funds or assets for their own trading business (for instance there is no securities lending business). Therefore, there is a strong case to consider capital requirements’ objectives to only focus on the orderly winding down of the proprietary trading firm. In the event a proprietary trading firm (suddenly) exits the market and terminates its operations, the only stakeholders affected by such event would be the corporate stakeholders of the firm. With a view on this perspective, no reasons or rationale exists to introduce specific governance arrangements akin to the CRD IV banking governance chapter to proprietary trading firms.Further details of the viewpoints of APT can be found in its Feedback and Responses Memorandum dated 1 February 2017.
Question 32: As regards ‘systemic and bank-like’ investment firms, do you envisage any challenges arising from the full application of the CRD/CRR remuneration requirements, and if so, what evidence do you have to support this? For all other investment firms, what are your views on the type of remuneration requirements that should be applied to them, given their risk profiles, business models and pay structures?
Non-systemically important investment firms that are not (potential) perpetrators of systemic risk should not be subject to specific prudential supervision rules. There is no convincing rationale to introduce specific remuneration rules for investment firms that are not to be considered systemically important.Further details of the viewpoints of APT can be found in paragraph 10 of its Feedback and Responses Memorandum dated 1 February 2017.
Question 33: What is your view on a prudential remuneration framework for other than ‘systemic and bank-like’ investment firms that should mainly aim to counteract against conduct related operational risks and would aim at the protection of consumers?
APT recommends that if remuneration rules are to be introduced for investment firms in the new prudential supervision regime, similar carve outs and proportional application as currently exists under the currently applicable rules should be continue to apply in the future. To reiterate the position of APT in this respect the following main principles should form part of the new regime on remuneration as regards proprietary trading firms:(i) Setting the limitation on levels of variable remuneration should be left at the discretion of the proprietary trading firms and no mandatory statutory law limits should apply. This measure allows proprietary firms to expose their employees and contractors trading on the markets to the full effects of risk management and subject such individuals fully to the upside but also downside of the business of the firm, co-sharing risks as if the individuals are shareholders;
(ii) Retention and vesting rules regarding variable remuneration should allow for implementing of vesting schemes and distribution schemes with shorter time horizons and intervals, permitting sufficient flexibility in the recruiting and employee redundancy schemes of proprietary trading firms whilst fully accommodating claw back arrangements for underperforming individuals;
(ii) Profit distribution and retention rules regarding variable remuneration should be aligned to the time horizon of the necessary survival period of proprietary trading firms, being a briefer period to enable the orderly winding down of the firm with no need to resurrect or recover the business to serve the interests of external stakeholders. Therefore, there is in any event no convincing reason to include Pillar2-capital requirements into the calculation of maximum distributable reserves for proprietary trading firms.
Further details of the viewpoints of APT can be found in paragraph 10 of its Feedback and Responses Memorandum dated 1 February 2017.