Response to discussion on a new prudential regime for investment firms

Go back

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?

In our opinion the application of same criteria, as provided for G-SIIs and O-SIIs, for the identification of “systemic and bank-like” investment firms is reasonable. The definition of “bank-like” investment firm should be precisely defined and it should be clarified does investment firm needs to be systemic and bank-alike at the same time in order not to be exempted or it needs to be either bank-alike or systemic.

Question 2: What are your views on the principles for the proposed prudential regime for investment firms?

We do agree with principles set out in Discussion Paper. However we think that new regulation needs to have conditions that will determine which investment firms is “bank-like” and “significant” in terms of their trading activity. If there will be created tailored rule that would capture exposure risk s for those kind of investment firms, then into consideration should be taken collateral received ( securities financing transactions, OTC transactions etc.)

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?


Question 4: What are your views on the criteria discussed above for identifying ‘Class 3’ investment firms?


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)?


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?


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?

We believe that the inverse of the leverage ratio factor would not be a good proxy for the uplift factor.
The reason is that leverage ratio calculation does not take collateral into consideration as stated in Article 1 of Commission Delegated Regulation (EU) 2015/62.

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)?


Question 9: Should a fixed overhead requirement (FOR) remain part of the capital regime? If so, how could it be improved?


Question 10: What are your views on the appropriate capital requirements required for larger firms that trade financial instruments (including derivatives)?


Question 11: Do you think the K-factor approach is appropriate for any investment firms that may be systemic but are not ‘bank-like’?


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)?


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?


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?


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?

If EBA plans to keep prudent valuation deductions as defined in Article 105 of CRR, then only simplified approach for the determination of AVAs should be in place in order to simplify the current CRR approach. The Core approach for the determination of AVAs would be cumbersome and would not contribute to the simplification. But our view is that deduction for prudent validation should be excluded from the definition of capital because of the simpler nature of most investment firms.

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?

The definition of eligible capital should be the same as the definition of regulatory capital.

Question 29: What examples do you have of any excessive burden for investment firms arising from the current regulatory reporting regime?

One of the burdens is classifying credit exposures by classes. In our opinion there is too many classes and some of them are so detailed. Such a level of detail makes it hard to automate the process of template population and requires also a lot of manual work to make sure that classification is correct. Also in our opinion there is too many templates that requires a high level of detail which requires a lot of time for an analyst to make sure that data are correct.

Also reporting in XBRL makes company dependant on third party (conversion software providers). Moreover, updating software and taxonomies incur costs for the company. We think that reporting in excel would be simpler and reduce the dependence of the institution on third parties.

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?

Remuneration, in particular variable remuneration is a reward for individuals and groups in recognition for work done and projects completed that contribute to the value and stability of the firm and its shareholders.
The current remuneration regime applies a maximum ratio between fixed and variable remuneration, this fixed ratio has had the effect of increasing fixed compensation and reducing variable compensation with the same net expense to a firm as not having a prescribed ratio. The negative effect coming from this is twofold:
• Firms have higher base salary expense, therefore making it difficult to reduce expenses during a time of crisis. Firms therefore have less flexibility on cutting expenses during a time of crisis which could lead to increased firm failures (that could exacerbate a crisis). Whereas the option of a nil variable compensation expense during a crisis could give firms greater flexibly during a crisis

• The higher costs from an increase to base salaries has added to the barriers of entry for new and smaller firms that would like to enter/or expand their operation. This could lead to decreased competition and greater monopolisation in banking/finance.
To find a balance between allowing expense-cutting flexibility to firms and discouraging excessive/unnecessary risk taking, a framework of no fixed ratio along with a longer term compensation scheme that ties to the value of the firm (such as Restricted Stock Units) would be the best approach. This would discourage excessive/unnecessary risk taking and would give firms cost cutting flexibility during a time of crisis. The result would be lower risk of firm failures during a crisis and a lower risk tolerance for investment firm employees, along with the added benefit of reducing barriers to entry/expansion for smaller firms. All of which would be an ultimate benefit to consumers and the economy as a whole.

Question 34: What are your views on having a separate prudential regime for investment firms? Alternatively, should the CRR be amended instead to take into account a higher degree of proportionality? Which type of investment firms, if any, apart from systemic and bank-like investment firms, would be better suited under a simplified CRR regime?

A separate regime for Investment firms would be better suited to the varied activities that investment firms undertake.
Barring the implementation of a separate regime for Investment firms then proportionality of a firm’s activity should be the leading indication of what elements of a CRR would apply to the firm’s activities
Investment Firms such as subsidiaries from smaller groups or start-up investment firms (that do not hold client asses/or hold below a prescribed threshold) would be bettered suited under a simplified or tiered CRR regime – this would allow these firms to focus on the growing of their business and contributing to the economy.

Question 35: What are the main problems from an investment firm perspective with the current regime? Please list the main problems with the current regime.

The regime applies a structure of “one-size-fits-all” where as many investment firms operate at significantly different levels from a proportionality perspective

Current problems:
• Continuous change and increasing complexity of the regime make it difficult for Investment Firms to remain compliant to all the rules.
• Proportionality need to be applied to:
o Capital Reporting
o Compensation Rules
o Reporting
 Trade Reporting
 Transaction reporting
• Clarity of regulations
o Allow firms clear guidance on what is expected from them and when it is expected
o Allow local regulators to set up a stable monitoring system and create a stronger knowledge base to better regulate and challenge Investment Firms.
 This has been very difficult for the competent authorities to set up a framework to regulate Investment Firms because in many cases the authorities are facing resource challenges that hinder the ability to monitor changing complex and unclear regulation.

Upload files

Name of organisation

NBC Global Finance Ltd