Response to discussion on a new prudential regime for investment firms
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- Sub-par. a): we agree with the need of providing different levels of assurance for systemic IFs and non-systemic ones;
- Sub-par. b) and e): our members have some concerns about the proposal of calibrating the prudential regime predominantly on the negative effects for clients and/or markets of IFs’ misconducts. Potential violations of the applicable rules of conduct are dealt with within the legal risk category (belonging to operational risks) that represents a part of the broader risk exposure of an IF. The proposal would lead to an overestimation of the legal risks giving rise to methodological issues (coherence between exposure and capital), also considering the above-mentioned uncertainty of its relative impact on capital requirements.
- Sub-par. c): please, note that the Italian IFs (i.e. Sim) cannot hold clients’ money as it must be mandatorily deposited with a bank within 1 business day since the same money is received from the client. To this regard, according to Italian insolvency laws and BRRD implementing discipline, it is worthy considering that clients’ money deposited with a bank by an IF is protected in case i) the IF is subject to a bankruptcy or resolution procedure; and ii) the bank is subject to a bankruptcy or resolution procedure. Therefore, in our framework, there is not a risk of potential harm associated with “holding” clients’ money by IFs.
As regard securities, once again we see no risk in our system as they are (i) subject to a severe discipline which demands the application of strict segregation criteria between clients’ securities and IF’s own securities, and (ii) expressly protected in case the IF is subject to a bankruptcy/resolution procedure or in case the custodian bank is subject to a bankruptcy/resolution procedure.
- Sub-par. f): we agree with the principle expressed therein.
That said, our current view is in favor of having a simplified CRR regime modeled on the proportionality principle. This solution would have the positive effect to maintain the same general prudential framework for banks, systemic IFs and, with the necessary adjustments, for different IFs, with the further advantage of preserving the level playing field between IFs belonging to banking groups and different IFs.
Finally, in respect of a simplified application of the CRR to IFs, please consider that we are strongly in favor of i) a full disapplication of both the LCR and the NSFR requirements; ii) a reduction of the percentage applied according to the BIA methodology.
Furthermore, we are in favor of a CVA simplification.
Finally, should a simplified CRR regime be adopted, we would propose that such regime takes into account the need of excluding capital requirements in relation to IFs clients’ money and securities, where national laws provide protection for such assets.
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?
We believe that in the new framework Class 1 (with full application of CRR) should include systemic IFs only in order to have an easier classification method.Question 2: What are your views on the principles for the proposed prudential regime for investment firms?
As regards the set of overarching principles set out in par. 12 of the DP, we note the following:- Sub-par. a): we agree with the need of providing different levels of assurance for systemic IFs and non-systemic ones;
- Sub-par. b) and e): our members have some concerns about the proposal of calibrating the prudential regime predominantly on the negative effects for clients and/or markets of IFs’ misconducts. Potential violations of the applicable rules of conduct are dealt with within the legal risk category (belonging to operational risks) that represents a part of the broader risk exposure of an IF. The proposal would lead to an overestimation of the legal risks giving rise to methodological issues (coherence between exposure and capital), also considering the above-mentioned uncertainty of its relative impact on capital requirements.
- Sub-par. c): please, note that the Italian IFs (i.e. Sim) cannot hold clients’ money as it must be mandatorily deposited with a bank within 1 business day since the same money is received from the client. To this regard, according to Italian insolvency laws and BRRD implementing discipline, it is worthy considering that clients’ money deposited with a bank by an IF is protected in case i) the IF is subject to a bankruptcy or resolution procedure; and ii) the bank is subject to a bankruptcy or resolution procedure. Therefore, in our framework, there is not a risk of potential harm associated with “holding” clients’ money by IFs.
As regard securities, once again we see no risk in our system as they are (i) subject to a severe discipline which demands the application of strict segregation criteria between clients’ securities and IF’s own securities, and (ii) expressly protected in case the IF is subject to a bankruptcy/resolution procedure or in case the custodian bank is subject to a bankruptcy/resolution procedure.
- Sub-par. f): we agree with the principle expressed therein.
Question 4: What are your views on the criteria discussed above for identifying ‘Class 3’ investment firms?
Regarding items f) and g), we would like to focus the attention on the distinction between IFs operating a MTF and the ones operating an OTF, since only the latter can carry out transactions on own account to facilitate trading.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)?
Please, see above our answers under Q2, second and third items. Moreover, we do not fully agree with the potential effects on own funds of a temporary dislocation in market access or market liquidity, as (save for market abuse cases) such effects occur (or not), depending on the contractual provisions in force between the relevant trading venue and the market participants. In addition, we deem that the liquidity contribution cannot be merely measured by the number of trades as only a part of the orders entered provides liquidity to the market. Finally, it is not specified whether only IFs acting as brokers would be subject to RtM exposure.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?
About the proposal for a separate k-factor for client money and financial instruments, please see our answer under Q2, third item. In line with our view expressed therein, we would propose to insert a reference to national disciplines in the new legislative framework, excluding a capital requirement where clients’ money/securities are protected under the relevant domestic laws (as in Italy).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?
With reference to the deductions from capital, we agree with the issue raised by the EBA Report (as defined in the DP) regarding the calculation of the net long positions in order to determine the level of investment in a financial sector entity. Such calculation creates the difficulties described therein, particularly for market makers. Please consider that, in the Italian framework, such issue is particularly relevant because of the importance of the banking sector within the listed securities.Question 16: What are your views overall on the options for the best way forward for the definition and quality of capital for investment firms?
We think that it is preferable to use the CRR own funds definition and quality in order to ensure a general consistency across prudential regimes.Question 20: Do you see any common stress scenario for liquidity as necessary for investment firms? If so, how could that stress be defined?
Considering the various types of activities (and relevant features) performed by IFs across the UE, we do not see the possibility to provide a common stress scenario for liquidity.Question 21: What is your view on whether holding an amount of liquid assets set by reference to a percentage of the amount of obligations reflected in regulatory capital requirements such as the FOR would provide an appropriate basis and floor for liquidity requirements for ‘non-systemic’ investment firms? More specifically, could you provide any evidence or counter-examples where holding an amount of liquid assets equivalent to a percentage of the FOR may not provide an appropriate basis for a liquidity regime for very small and ‘non-interconnected’ investment firms?
We don’t agree with the proposal of holding an amount of liquid assets equal to a percentage of the regulatory capital requirement because, given the activities carried out by IFs (which do not entail financial liabilities to be met on demand, as for banks), it would be disproportionate to ask the IFs to “freeze” liquidity without a sound rationale (considering also the current interest rates scenario).Question 22: What types of items do you think should count as liquid assets to meet any regulatory liquidity requirements, and why? (Please refer to Annex 4 for some considerations in determining what may be a liquid asset).
As regards the definition of liquid assets, without any prejudice to our answer to Q 21 above, we do not understand the reasons why the list provided in Annex 4 does not clearly include deposits with banks that are a fundamental liquid asset for IFs.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?
As set out in the General Comments above (please see attached file), Assosim is not in the position to express a conclusive opinion on the proposed model because of its incompleteness (i.e. lack of parameters).That said, our current view is in favor of having a simplified CRR regime modeled on the proportionality principle. This solution would have the positive effect to maintain the same general prudential framework for banks, systemic IFs and, with the necessary adjustments, for different IFs, with the further advantage of preserving the level playing field between IFs belonging to banking groups and different IFs.
Finally, in respect of a simplified application of the CRR to IFs, please consider that we are strongly in favor of i) a full disapplication of both the LCR and the NSFR requirements; ii) a reduction of the percentage applied according to the BIA methodology.
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.
Please, see our answer to Q34 above.Furthermore, we are in favor of a CVA simplification.
Finally, should a simplified CRR regime be adopted, we would propose that such regime takes into account the need of excluding capital requirements in relation to IFs clients’ money and securities, where national laws provide protection for such assets.
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