In our opinion the application of same criteria, as provided for G-SIIs and O-SIIs, for the identification of “systemic and bank-like” investment firms is reasonable. The definition of “bank-like” investment firm should be precisely defined and it should be clarified does investment firm needs to be systemic and bank-alike at the same time in order not to be exempted or it needs to be either bank-alike or systemic.
We do agree with principles set out in Discussion Paper. However we think that new regulation needs to have conditions that will determine which investment firms is “bank-like” and “significant” in terms of their trading activity. If there will be created tailored rule that would capture exposure risk s for those kind of investment firms, then into consideration should be taken collateral received ( securities financing transactions, OTC transactions etc.)
We believe that the inverse of the leverage ratio factor would not be a good proxy for the uplift factor.
The reason is that leverage ratio calculation does not take collateral into consideration as stated in Article 1 of Commission Delegated Regulation (EU) 2015/62.
If EBA plans to keep prudent valuation deductions as defined in Article 105 of CRR, then only simplified approach for the determination of AVAs should be in place in order to simplify the current CRR approach. The Core approach for the determination of AVAs would be cumbersome and would not contribute to the simplification. But our view is that deduction for prudent validation should be excluded from the definition of capital because of the simpler nature of most investment firms.
The definition of eligible capital should be the same as the definition of regulatory capital.
One of the burdens is classifying credit exposures by classes. In our opinion there is too many classes and some of them are so detailed. Such a level of detail makes it hard to automate the process of template population and requires also a lot of manual work to make sure that classification is correct. Also in our opinion there is too many templates that requires a high level of detail which requires a lot of time for an analyst to make sure that data are correct.
Also reporting in XBRL makes company dependant on third party (conversion software providers). Moreover, updating software and taxonomies incur costs for the company. We think that reporting in excel would be simpler and reduce the dependence of the institution on third parties.
Remuneration, in particular variable remuneration is a reward for individuals and groups in recognition for work done and projects completed that contribute to the value and stability of the firm and its shareholders.
The current remuneration regime applies a maximum ratio between fixed and variable remuneration, this fixed ratio has had the effect of increasing fixed compensation and reducing variable compensation with the same net expense to a firm as not having a prescribed ratio. The negative effect coming from this is twofold:
• Firms have higher base salary expense, therefore making it difficult to reduce expenses during a time of crisis. Firms therefore have less flexibility on cutting expenses during a time of crisis which could lead to increased firm failures (that could exacerbate a crisis). Whereas the option of a nil variable compensation expense during a crisis could give firms greater flexibly during a crisis
• The higher costs from an increase to base salaries has added to the barriers of entry for new and smaller firms that would like to enter/or expand their operation. This could lead to decreased competition and greater monopolisation in banking/finance.
To find a balance between allowing expense-cutting flexibility to firms and discouraging excessive/unnecessary risk taking, a framework of no fixed ratio along with a longer term compensation scheme that ties to the value of the firm (such as Restricted Stock Units) would be the best approach. This would discourage excessive/unnecessary risk taking and would give firms cost cutting flexibility during a time of crisis. The result would be lower risk of firm failures during a crisis and a lower risk tolerance for investment firm employees, along with the added benefit of reducing barriers to entry/expansion for smaller firms. All of which would be an ultimate benefit to consumers and the economy as a whole.
A separate regime for Investment firms would be better suited to the varied activities that investment firms undertake.
Barring the implementation of a separate regime for Investment firms then proportionality of a firm’s activity should be the leading indication of what elements of a CRR would apply to the firm’s activities
Investment Firms such as subsidiaries from smaller groups or start-up investment firms (that do not hold client asses/or hold below a prescribed threshold) would be bettered suited under a simplified or tiered CRR regime – this would allow these firms to focus on the growing of their business and contributing to the economy.
The regime applies a structure of “one-size-fits-all” where as many investment firms operate at significantly different levels from a proportionality perspective
• Continuous change and increasing complexity of the regime make it difficult for Investment Firms to remain compliant to all the rules.
• Proportionality need to be applied to:
o Capital Reporting
o Compensation Rules
• Clarity of regulations
o Allow firms clear guidance on what is expected from them and when it is expected
o Allow local regulators to set up a stable monitoring system and create a stronger knowledge base to better regulate and challenge Investment Firms.
This has been very difficult for the competent authorities to set up a framework to regulate Investment Firms because in many cases the authorities are facing resource challenges that hinder the ability to monitor changing complex and unclear regulation.