Should the proprietary positions of the investment firm in the financial instrument in order to invest own funds of the investment firn which are held until maturity (for long-term) be recorded in the non-trading book and thus for such cases the investment firm would not need to have licence for dealing on own account?
The question aims at the legal interpretation of trading book according to new IFD/IFR regime and the amended CRD, and asks for clarification of the definition in the context of new prudential regime for investment firms.
The issue with the interpretation primarily stems from the amendment of the CRD. One of the amendments made by the IFD to CRD was deletion of the Title IV, which included regulation of the requirements for initial capital for investment firms. This Title included Article 29, containing details and exceptions from the general requirements on the initial capital for investment firms based on the investment services provided. Specifically, Article 29 (4), which is now deleted and not reflected explicitly in the IFD, stated that “The holding of non-trading-book positions in financial instruments in order to invest own funds shall not be considered as dealing for its own account in relation to the services set out in paragraph 1 or for the purposes of paragraph 3.”. Based on this exception, National Bank of Slovakia accepted holding of non-trading book positions in financial instruments by the investment firm when investing its own funds, without the necessity to hold the licence for dealing on own account.
This exception, as stated above, was deleted from the CRD (with the deletion of Title IV) and was not explicitly reflected in the new prudential regime under IFD/IFR.
Moreover, the IFR now provides definition of trading book (Article 4 point 54) stating that “‘trading book’ means all positions in financial instruments and commodities held by an investment firm, either with trading intent or in order to hedge positions held with trading intent”; while the definition of positions held with trading intent are provided in point 55 of the said Article, stating that „‘positions held with trading intent’ means any of the following:
The above definitions may be interpreted in a way that any proprietary positions of the investment firm (positions of the investment firm when investing own funds) are position held with the trading intent irrespective of the fact whether they are held for long term (i. e. until maturity) and thus should not be recorded in the non-trading book. While for such cases we would tend to interpret the situation as dealing on own account with the need of the relevant licence for the investment firm.
On the other hand, EBA provided Q&A providing interpretation of the definition of the trading book, which goes in slightly different direction and is more specific in the interpretation of the trading intent:
definition of the trading book
Are we right that the scope of the trading book according to Art 11 of Directive 2006/49/EC is the same as the scope of the trading book according to Art 4 1. (85) Capital Requirements Regulation (CRR)?
Background on the question:
The wording of Art 1. (85) CRR could suggest a wider scope of the trading book. One could think that Art 4 1. (85) CRR makes all proprietary positions and all positions arising from client servicing and market making trading book positions - no matter if they are held for trading or not. Art 11 of Directive 2006/49/EC is more precise here. Its wording makes it very clear that proprietary positions and positions arising from client servicing and market making are trading book positions only if they are held for trading, i.e. if they are held with the intention "to be resold short term" or with the intention "to benefit from actual or expected short-term price differences between buying and selling prices or from other price or interest rate variations".
Based on the above interpretation, we would tend to interpret this Q&As and thus the definition of trading book that the positions in the financial instruments in order to invest own funds of the investment firms held until maturity (for long-term) should be recorded in the non-trading book and thus for such cases the investment form would not need to have the licence for dealing on own account.
However, this particular Q&A results from the previous regulation and specificaly from the regulation under CRD/CRR. Therefore, in the abovementioned context we would like to ask you for advice and guidance on how to interpret the definition of the trading book. Since the interpretation would have impact on the licence and capital requirement of the investment firms in our market, we would be grateful for any early guidance from your side.
This question has been rejected because it is out of scope of the Q&A process /tool and does not relate to the legislative acts referred to in Article 1(2) of the EBA Regulation and their associated delegated and implementing acts, guidelines and recommendations. The Single Rule Book Q&A tool has been established to provide explanations and non-binding interpretations on questions relating to the practical application or implementation of the provisions of legislative acts referred to in Article 1(2) of the EBA’s founding Regulation, as well as associated delegated and implementing acts, and guidelines and recommendations, adopted under these legislative acts. For further information on the purpose of this tool and on how to submit questions, please see 'Additional background and guidance for asking questions'.