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The Investment Association

The IA welcomes the overall approach by the EBA to not provide further specification from the IFR, which in most cases are already clear. However, there are some areas where further clarity is still required in order to ensure that the RTS reflects generally accepted methods for calculating and reporting AUM and properly reflect the inclusion or exclusion of discretionary and non-discretionary services. The IA would like the EBA to amend the RTS to clarify that the valuation basis for AUM and ASA should be net asset value.

According to paragraph 3.6.1 in the CP, the relevant amount of metric (AUM) should be included within the total K-AUM of the investment firm using a tied agent. Where this ‘tied agent’ is also a MiFID investment firm and subject to the same regulation, clarification is sought on whether this would be deemed as a double count.

No further guidance has been provided in the consultation paper for K-NPR as market requirements are set out in the CRR and Regulation (EU) 2019/876 (CRRII). However, we believe there is still ambiguity as to whether this relates solely to firms that have permissions to deal on own account and have trading book positions. IFR article 21 (4) indicates that RtM k factor requirement shall include positions other than trading book positions where those give rise to foreign exchange risk or commodity risk. For firms that do not have permissions to trade on own account, this could potentially significantly increase the scope of reporting.
While clarity has been added on the definition of a segregated account, it is not clear what is held in a non-segregated account. Currently in the UK, holding client money in a non-segregated account would be a regulatory breach so the IA is keen that the EBA provide further clarity on the proposed use of segregated vs. non segregated accounts.
The IA would like further clarity on the exclusion of the 2 highest daily amounts of total margin required by the clearing member during a 3-month period as there is potential ambiguity in the where an investment firm uses multiple clearing members. For example, should it be the third highest combined daily total of margin given on a single day, or be the sum of the third highest amounts of margin given to each clearer, even if those amounts for each clearer occur on different trading days.

Article (3) of the CP clarifies that this should be done by first determining the third highest amount of total margins required on a daily basis by each clearing member separately over the preceding three months, then adding those amounts. The IA view is that it would be more consistent with the overall concept of clearing margin given for an investment firm to first add up, across all clearing members used, the margins for each day. Essentially, that is the amount that was there at the end of that day, as the margin call made at the end of the day is typically what is ‘given’ to the clearer the next morning. The third highest such amount across the relevant observation period would then be taken. The alternative approach of adding margins from different clearing members from different trading days could be more prudent, but this is less likely to reflect how the underlying risk is managed in practice.
The IA do not agree with the approach taken by the EBA in defining a completely new scope of group constellations in Articles 2 to 5 of the Draft RTS, which appear to contradict the approach taken by the IFR definition of an investment firm group with reference to Article 22 of Directive 2013/34/EU. In addition, Articles 2 to 5 of the Draft RTS considerably deviate from the current regulations on own funds on a consolidated basis for groups consisting of investment firms only (i.e. without any credit institutions) as detailed in the Capital Requirements Regulation (CRR2) Article 98.
Currently, the wording in Article 7 suggests that a firm is obligated to obtain permission from the competent authority if it follows the default treatment for joint control by using proportional consolidation. The IA assumes that, because it is the default treatment, firms in the first instance would apply proportional consolidation without obtaining prior approval from the group supervisor. It would then be for the competent authority to challenge the position taken by the investment group.

It is requested that the EBA provide clarification that, given it is the default treatment, proportional consolidation may be applied by the investment firm group in the first instance. The competent authority may require another accounting treatment on a case-by-case basis.
It is not clear what is the correct treatment of cross-holdings between two entities within the same consolidation group or which have the same ultimate parent company where both of these entities are required to calculate an AUM-based capital requirement. Specific clarity on this point within the RTS would be welcomed.

Without further clarity, holdings that have shared ownership may not be correctly applied to the relevant entities which will impact the accuracy of the K-AUM calculation. It is recommended that the EBA clarifies the correct treatment of cross-holdings between entities that are part of the same parent group. This is just as relevant to K-COH as it is to K-AUM.

In addition, it would be helpful to clarify whether the intention of Article 11(3)(a) is to apply to all undertakings in a consolidation group. The IA understand that the overall aim is to ensure that all AUM is captured but ensure that none is captured twice. In the situation where there is a ManCo in the group then, for the purposes of the consolidated K-AUM, the full value of the ManCo AUM should be included in the calculation. However, the K-AUM calculation methodology should not be applied to the individual ManCo capital calculation under the terms of the AIFMD rules. Any other interpretation would create an unlevel playing field as an AIFM / UCITS entity could be subject to significantly higher capital requirements (via K-AUA and K-CMH in particular) than an AIFM / UCITS entity that is not within an Investment Firm Group. The IA believes the EBA should clarify that these K-factors should only apply to MiFiD business within the group in order to avoid this.

IFR article 4 (11) defines the consolidated situation as parent entity, investment firms, financial institutions, ancillary services undertakings and tied agents, however there is uncertainty around the treatment of AIFMs/UCITS that do not have additional MiFID permissions, should they be included within the scope of the consolidated K-factor? For K-factors that are relevant to both investments firms within scope of the regulation and AIFMs/UCITS/CPMs it would appear appropriate to include them, for example AUM, however where AIFMs/UCITs have specific permissions not relevant to firms in scope of this regulation, should they also be calculated? For example, where a Collective Portfolio Management firm that does not have MiFID permission but does have restricted box trading permissions, is included within the consolidated situation, this could potentially give rise to RtM K-factors such as K-DTF for the group significantly increasing the reporting burden on activities that are not undertaken by entities within scope of this regulation.

The consultation paper provides extensive detail on the 4 elements of Customer orders handled, however we would appreciate clarification on the exclusion of orders handled that, according to article 20 (IFR) “.. arise from the servicing of a client’s investment portfolio where the investment firm already calculates K-AUM in respect of that client’s investments.” Is it the EBA’s intention that for investment firm groups that have a single dealing entity within the group that this investment firm will report a K-CoH on a solo basis (for all clients within the group that are not contracted with this entity for investment management) but upon consolidation this K-factor will disappear as all orders are part of servicing a client’s investment?
The Investment Association