o Broadly speaking, EFAMA supports the limited approach taken by the EBA in considering the requirements on the K-Factors in the IFR are clear and often do not require further specification. We also welcome the approach of no double counting (AuM of fund portfolios that an investment firm managers by way of outsourcing are not taken into account for K-Factor calculation (Art. 17(2) IFR. We would however like to clarify a few points regarding the proposed method for the calculation of the K-factor AUM (Assets under Management) and the explanations made by the EBA:
o Art 3 (b) should be amended to clarify that derivatives instruments should be included at market value. This is consistent with current market practices and clients’ expectations for discretionary portfolio management, and it would be very burdensome to implement a new, different methodology
o Article 8 (Methods for measuring cash trades for the purpose of COH): the drafting of this article should make clear that repos and securities lending are not included in cash trades
o EFAMA would also like to call for a clarification that where an AIF or UCITS ManCo delegates functions such as portfolio management to an investment firm on a contractual basis than they are out of scope of prudential consolidation
 Rationale - Articles 2 and 3 of the Draft RTS on prudential consolidation of investment firm groups could be understood in a way that such a contract would qualify as a significant influence without participation or capital ties. This would lead to the situation that the investment firm and the management company would be qualified as an investment firm group with the effect that the investment firm must carry out consolidation of the management company although this case is already comprehensively covered by the UCITS and AIFM Directives.
o In general, we disagree with the scope of group constellations in Articles 2 to 5 of the Draft RTS as the approach taken by EBA goes beyond the scope of delegation. Such an extension of the scope is not covered by the mandate given in Article 7(5) IFR which states that the EBA shall develop draft RTS to specify ‘the details of the scope and methods for prudential consolidation of an investment firm group, in particular for the purpose of calculating the fixed overheads requirement, the permanent minimum capital requirement, the K-factor requirement on the basis of the consolidated situation of the investment firm group, and the method and necessary details to properly implement paragraph 2’ of Article 7 IFR. That mandate limits the EBA to develop details on the scope for prudential consolidation within the given definitions provisions of the IFR. Article 7(5) IFR does not provide for a mandate to define a scope that is – in contrast to Article 18 CRR – not within the scope provided for under the IFR.
o Moreover, the new proposals in Articles 2 to 5 of the Draft RTS are in considerable contradiction to the approach taken by the IFR definition of an investment firm group with reference to Article 22 of Directive 2013/34/EU. In particular, the cases defined in Article 22 of that Directive would be undermined by the proposed Articles 2 to 5 of the Draft RTS.
o In addition, constellations referred to in Articles 3 and 4 of the Draft RTS go even beyond the scope of Article 22 of Directive 2013/34/EU and thus outside the defined scope of a “consolidated situation” and an investment firm group under the IFR. Furthermore, 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) according to Article 98 CRR II. This is not in line with the purpose described in Recital 12 of the IFR to mirror the existing treatment of such investment firm groups under the CRR and CRD. The EBA itself states the need to ensure such a consistency in Recitals 3 and 4 of the Draft RTS. In this context, it is not appropriate to copy a draft RTS established under the CRR in 2017 with divergent legal basis that did not enter into force - also due to the justified criticism of the banking industry.
Furthermore, according to Article 7(2) and Recital 12 of the IFR, the parent undertaking of an investment firm group should be required to comply with the requirements of the IFR based on the consolidated situation of the group. We therefore strongly disagree with defining new responsibilities such as that an investment firm being a subsidiary in an investment firm group (for instance as part of a holding structure) should ensure that other entities within the group that are not subject of the IFR implement arrangements, processes and mechanisms to ensure proper consolidation. Notwithstanding the above, we urge the EBA to clarify that such obligation for the parent undertaking of an investment firm group pursuant to Article 7(1) sentence 3 IFR does not go beyond and is limited by the boundaries applicable to a subsidiary under the laws of the country it is established under (e.g. data protection or corporate law rules of such country).
o EFAMA disagrees with the approach that ‘the MiFID part of the AUM of asset management companies and of third country entities that would have been asset management companies had they been authorised in the Union’ would count towards the AUM of the group as it is proposed in Article 11(3)(c) of the Draft RTS.
 Rationale – The approach would contradict the objective of the new framework to simplify the prudential requirements: Asset management companies are themselves not covered by the scope of application of the IFD/IFR framework, even if they provide additional MiFID services. The approach proposed by the EBA would, however, result in an (indirect) obligation of asset managers being part of an investment firm group to calculate the MiFID part of AUM based on the K-factor approach established in the investment firm regime although this approach does not apply to them in particular. The objective of the new framework was that the rules on own funds introduced by the IFR will remain largely unchanged compared with the current CRR ones and that their implementation should therefore not represent a challenge for the industry.
• Draft RTS on prudential consolidation of investment firm groups (Article 7(5) of the IFR)

Chiara Sandon