Response to consultation on draft RTS on Pillar 2 add-ons for investment firms
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We consider that the wind-down capital requirement should be calculated based on the cost of orderly wind-down. Figure 3 on page 8 of the Consultation Paper indicates, in step 2 of the calculation, that capital should be held to cover an unorderly wind-down.
We consider that firms should be required to maintain a plan for orderly wind-down, and also maintain sufficient capital to meet the costs of orderly wind-down.
We consider that requiring capital to cover the cost of unorderly wind-down would be both excessive and difficult to determine objectively. Under the previous CRD IV regime and the new UK Investment Firms Prudential Regime, firms were/are expected to maintain capital to cover the cost of orderly wind-down.
Treatment of ‘other risks’ (as set out in Article 3):
Article 3 of the draft regulatory technical standards requires the determination of capital requirements for material risks not captured by the own funds requirements set out in Part Three and in Part Four of Regulation (EU) 2019/2033.
Article 4 (1) then requires that the amount calculated in Article 3 is added to the highest amount calculated in accordance with Articles 1 and 2 in excess of own funds requirement D.
Where the amount calculated under Article 2 exceeds the amount calculated under Article 1, we agree that the amount for risks considered in Article 3 should be added to the amount for risks considered in Article 2, as this would form an overall assessment of the capital required for risks on a going concern basis.
However, where the amount calculated under Article 1 (the wind-down cost) exceeds the amount calculated under Article 2 (material risks or elements of risks not captured by the own funds requirements set out in Part Three and in Part Four of Regulation (EU) 2019/2033), we do not agree that the amount calculated under Article 3 should be added to the assessment of additional own funds requirements.
The reasons for this are as follows:
We consider that there should be two internal assessments:
• The first should cover the aggregate of material risks not fully covered by k-factors (under Article 2) and material risks not covered by k-factors (under Article 3). This would give the total internal capital assessment on a going concern basis.
• The second should cover the wind-down cost (under Article 1).
It is not clear why the risks covered by Article 3 should be added to the wind-down costs assessed under Article 1. This would lead to a capital requirement which we would consider to be excessive, and this approach would also lead to higher capital requirements than those that were previously assessed to meet CRD IV requirements, and those assessed to meet the equivalent UK regulations (the UK Investment Firms Prudential Regime).
The assessment of risks posed to the security of the investment firm’s network & information systems to ensure confidentiality, integrity and availability of their processes, data and assets (referenced in Article 3(2)), may be partly covered by the risk assessment to meet Article 2. In practice it is difficult to separate capital required to cover these risks from capital required to covered operational process risks, which are assessed under Article 2, since information networks and systems (in Article 3) are tools used to meet the processes considered within the risk assessments under Article 2.
Question 1. Do you have any comments on the structure and elements included in this Consultation Paper for the computation of Pillar 2 add-ons?
Wind-down capital assessment:We consider that the wind-down capital requirement should be calculated based on the cost of orderly wind-down. Figure 3 on page 8 of the Consultation Paper indicates, in step 2 of the calculation, that capital should be held to cover an unorderly wind-down.
We consider that firms should be required to maintain a plan for orderly wind-down, and also maintain sufficient capital to meet the costs of orderly wind-down.
We consider that requiring capital to cover the cost of unorderly wind-down would be both excessive and difficult to determine objectively. Under the previous CRD IV regime and the new UK Investment Firms Prudential Regime, firms were/are expected to maintain capital to cover the cost of orderly wind-down.
Treatment of ‘other risks’ (as set out in Article 3):
Article 3 of the draft regulatory technical standards requires the determination of capital requirements for material risks not captured by the own funds requirements set out in Part Three and in Part Four of Regulation (EU) 2019/2033.
Article 4 (1) then requires that the amount calculated in Article 3 is added to the highest amount calculated in accordance with Articles 1 and 2 in excess of own funds requirement D.
Where the amount calculated under Article 2 exceeds the amount calculated under Article 1, we agree that the amount for risks considered in Article 3 should be added to the amount for risks considered in Article 2, as this would form an overall assessment of the capital required for risks on a going concern basis.
However, where the amount calculated under Article 1 (the wind-down cost) exceeds the amount calculated under Article 2 (material risks or elements of risks not captured by the own funds requirements set out in Part Three and in Part Four of Regulation (EU) 2019/2033), we do not agree that the amount calculated under Article 3 should be added to the assessment of additional own funds requirements.
The reasons for this are as follows:
We consider that there should be two internal assessments:
• The first should cover the aggregate of material risks not fully covered by k-factors (under Article 2) and material risks not covered by k-factors (under Article 3). This would give the total internal capital assessment on a going concern basis.
• The second should cover the wind-down cost (under Article 1).
It is not clear why the risks covered by Article 3 should be added to the wind-down costs assessed under Article 1. This would lead to a capital requirement which we would consider to be excessive, and this approach would also lead to higher capital requirements than those that were previously assessed to meet CRD IV requirements, and those assessed to meet the equivalent UK regulations (the UK Investment Firms Prudential Regime).
The assessment of risks posed to the security of the investment firm’s network & information systems to ensure confidentiality, integrity and availability of their processes, data and assets (referenced in Article 3(2)), may be partly covered by the risk assessment to meet Article 2. In practice it is difficult to separate capital required to cover these risks from capital required to covered operational process risks, which are assessed under Article 2, since information networks and systems (in Article 3) are tools used to meet the processes considered within the risk assessments under Article 2.