The Danish Association of Asset Management and Investment Firms

In our general opinion, application of the same criteria, as provided for G-SIIs and O-SIIs, for the identification of ‘systemic and bank-like’ investment firms seem reasonable. 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, can be used.
We very much welcome EBA’s proposal for not applying CRDIV requirements to non-systemically important firms that are not bank-like as we support designing a regime with a starting point in the risk relevant to investment firms.

Moreover, we believe that the prudential regime should target the risk for clients only, unless it is assessed that the failure of the firm may have a systemic impact. I.e. we do not view it as necessary to protect professional counterparties in the market who may before entering into transactions make an assessment of the risk posed to them by the investment firm. We do not regard switching cost – if an investment firm is closed down – as a significant issue, and we do not see the need to address it in the capital requirement.

We support making appropriate differences in the regulatory burden posed on smaller and larger firms and encourage EBA to take into consideration the need for a simple regime in order not to enhance the regulatory burden, especially to those investment firms which are not today within the scope of CRDIV.

We find that a different regime for investment firms should reflect that investment firms differ from banks by not having bank-like client deposits or providing credit facilities to clients.
Identification of and the creation of a separate prudential treatment for very small and non-interconnected investment firms would be very welcome. Today the operational requirements are too comprehensive compared to the size of the firms, their organizational set-up and the risk they impose to clients and markets.
When determining which investment firms should be subject to the separate prudential treatment such as a Fixed Overhead Requirements only, emphasis should be on quantitative thresholds.

An investment firm, dealing on own account to a minor extent, does not as a result of these dealings add any significant risk to the clients that justify a more burdensome prudential treatment. Therefore, when determining whether or not an investment firm is non-interconnected, focus should be on quantitative thresholds and some degree of flexibility should be given with regard to the activities performed.

Considering the risks entailed in the activities listed, only items a), b), d) and e) should exclude an investment firm who are below the quantitative thresholds from benefitting from the simplest prudential treatment. Items h) and i) have no risk implications for clients and as such should not exclude an investment firm from the simplest prudential regime.

With regard to dealings on own account as listed under item c), a distinction should be made. An investment firm dealing on own account infrequently with the purpose of managing its capital, e.g. by investing in sovereign bonds or similar, should not influence the prudential treatment whereas dealings on own account pursuing a highly speculative investment strategy might entail as a consequence that the investment firm is excluded from the simplest prudential treatment.
With regard to the risk to firm (RtF), we find this to be an excessive regulation, taking into consideration the risks already assessed in relation to customers and markets. We believe that a prudential regime should be kept simple and focus on the issues relevant in the field of non-systemically important firms, namely the need to protect clients.

Furthermore, we do not find it justified to make an unparalleled inclusion of legally separate entities as tied agents.

Please also refer to our general comments under Question 2.
The K-factors AUA and AUM are not relevant risk factors to the extent that such client money and securities are not held by the investment firm. Risk to the clients are not necessarily correlated with the investment firm’s AUA or AUM. Furthermore, the risk that clients are harmed due to incorrect discretionary management or unsuitable advice should not be addressed through the prudential treatment but rather through indemnification based on the contractual obligation towards the client and prudential rules in MiFID and MiFID II. The risk that an investment firm cannot honor its contractual obligations should remain a competitive resource.

We acknowledge that it can be relevant, to what extent the investment firm hold client money and securities, and hence that K-Factors ASA and CMH can be relevant. However, we note that K-Factor ASA and CMH to some extent capture the same risk - at least in the typical Danish Investment firm set-up. We also note that when considering K-Factors ASA and CMH, it is important to reflect that investment firms differ from banks by not having bank-like client deposits. Thus, if the actual set-up does not pose any risk for the client related to loss of client money or securities, the K-Factor should be reduced accordingly.

We find it important that the K-Factor LtC is limited to particular liabilities, such as the mentioned guarantees, security-lending, contract for difference, to avoid that the LtC captures risks already captured by K-Factors AUM and AUA. Apart from these specific situations, we find that the prudential rules in MIFID and MiFID II address this factor.

Furthermore, we note that K-Factor COH to some extent capture the same risk as the K-Factor AUM - at least in the typical Danish Investment firm set-up.

In relation to K-Factors for RtM, please refer to our comments under Question 5.

Separate RtM for securitization risk-retentions is not considered relevant for non-systemically important firms that are not bank-like. This is also considered the case in respect of investment firms dealing on own account, as loss on such trading will affect only the investment firm itself, but not neither directly nor indirectly the client’s money or securities, to the extent that such client money and securities are not held by the investment firm.
We find that a lift-up measure is less relevant for investment firms, as investment firms differ from banks by not having bank-like client deposits or providing credit facilities to clients. Thus, we do not see the need for a lift-up measure, if it is not limited to a specific risk of loss of client money or securities.
We prefer a separate regime for Class 3 investment firm. Simplicity should be the priority and with the built-in approach there is an inherent risk that Class 3 investment firms will have to obtain detailed knowledge and make qualified assessments simply to determine if they can benefit from the proportionality in the built-in approach which will negate the main objective of a simple prudential regime.

In line with the purpose of keeping it simple we suggest implementing a ceiling as an option whereby Class 3 investment firms can choose to fulfill the requirements in the prudential regime by reaching the ceiling at all times.
Yes, the FOR should remain part of the capital regime.
We find that specific capital requirements for larger firms that trade financial instruments being derivatives should only be applied for systemically important firms or investment firms that are bank-like.
N/A
N/A
N/A
Please refer to our comments under Question 15.
As explained in para 93 of the discussion paper, any deduction in the own funds of an investment firms for holding capital instruments in other financial institutions should be omitted, as it happens in the course of the normal business.

Furthermore, we find that it should be considered to omit subordinated loans to financial institutions as well as any holdings in UCITS.
A new standard specifically tailored for investment firms should be introduced.
In our opinion, the rules governing initial capital and regulatory capital should be as simple and easy to handle as possible.
Please refer to the answer provided to Question 17.
The concept of eligible capital is not needed. We do not see a need for this separate concept with regard to investments firms’ capital structure.
Referring to our general comments to Question 2, we find it very important to limit any liquidity requirements to any obligation the investment firm may have towards clients. If no liquidity requirements exist towards any clients (as part of trading obligations, loss of client money or securities etc.), the investments firm should be unrestricted in handling its liquidity.

Therefore, as a general principle, we find that any common stress scenario for liquidity is not necessary, as that is a risk related to granting loans and taking deposits. Hence, if the business model of the investment firms does not pose any risk for the client related to loss of client money or securities, we see no need for common stress scenario for liquidity.

We do not find that liquidity requirements are the right way to provide for a measurement of appropriate management of an investment firm. Such prudential measures are sufficiently provided for in MiFID and MiFID II.
Please refer to our general comments under Question 20.
Please refer to our general comments under Question 20.
Please refer to our general comments under Question 20.
Please refer to our general comments under Question 20.
Large exposures arising from temporary receivables from client should not be included in large exposures. Receivables from clients is not a risk for the investment firms and is normally linked to a positive impact on the own funds (which may not be included right away). Receivables should only be considered a risk when payments are overdue and/or only if the income has been included in the own funds.

This can in general be a very cumbersome regulation, and we would strongly encourage any removal of bank-line exposure regulation.
We believe that a group approach to investment firms should only be applied to the extent that a systemic impact of the investment firm group’s is likely. If no systemic impact is likely, we do not see the need to apply a burdensome regime where the group’s entities are already under supervision and regulated on an individual basis.
In our opinion, it is too early to make an assessment on this matter.
We find that the general principle of proportionality is key for a prudential regime, as investment firms in some regions include very small entities.

Prudential regimes providing for specific requirements on organizational set-up, separate functions, obligatory whistleblower set-up may be very cumbersome and less relevant in respect of small entities.

In general, we find that additional prudential measures are not needed as appropriate prudential measures are sufficiently provided for in MiFID and MiFID II.
The Gearing (CRR Article 329) reporting is not a valid indicator of an investment firm’s risk. The calculation and reporting should not be included in a new prudential regime. Investment firms do not have the same complicated balance sheet as banks and generally investment firms – especially asset managers – do not have the same need to leverage the balance sheet.

The disclosure requirements (CRR Article 431) are made for banks and is by large not relevant for investment firms and therefore an unnecessary reporting burden. The information is generally not demanded by or relevant for clients.

Apart from the reporting regime, we also want to draw attention to the following regulatory approval procedures, etc.:

The approval procedure that applies to investment firms according to art. 77 and 78 in Regulation 575/2013, cf. article 11.2, is also made in respect of banks providing credit facilities and deposits. The procedures could without any risk towards clients or market be eased in respect of investment firms, and would furthermore provide needed flexibility in relation to smaller non-public investment firms. The present rules are burdensome for the investment firms as well as national authorities.

Furthermore, the requirement that there may be no exposures towards entities in which the management are either part of the Board of Directors or daily management seems well reasoned in respect of loans and credits, but is by large not relevant for investment firms. Such restrictions should not apply in relation to ordinary expenses, such as costs and expenses to be paid by such entity.

Finally, the requirements on organizational set-up, especially the qualification of risk takers (Regulation 604/2014) are made for banks and entities of a certain size and is by large not scaled to smaller investment firms.
We believe that the approach to a prudential regime is already provided by MiFID and MiFID II. This existing regime already provides for an appropriate set-up of investment firms and their services, providing a focus on the interests of clients to be the relevant and sufficient.
We believe that the approach to governance requirements already provided by MiFID and MiFID II in order to prevent payments with incentives contrary to the interests of clients to be the relevant and sufficient. Please refer to the general answer provided to Question 2.
For other investment firms than those systemic and bank-like we support not applying CRDIV requirements which do not seem relevant to the types of risks inherent in this business. We believe the approach to payment structures already provided by MiFID and MiFID II in order to prevent payments with incentives contrary to the interests of clients to be the relevant and sufficient.
Please refer to the answer provided to Question 32.
Please refer to answers provided above.
Please refer to answers provided above.
Kristian Aagaard Bach Mortensen
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