Article 17 (2) of the IFR states that:

Where the investment firm has formally delegated the management of assets to another financial entity, those assets shall be included in the total amount of AUM measured in accordance with paragraph 1.

and

Where another financial entity has formally delegated the management of assets to the investment firm, those assets shall be excluded from the total amount of assets under management measured in accordance with paragraph 1.

The rationale behind the provision is to avoid double-counting of risk within the financial system, as well as to keep the calculation of capital requirements that cover the risk resulting for the client from the asset management service on the entity directly responsible to the client.

Point 130 of the document: "ANNEX TO THE EBA OPINION EBA-OP-2017-11" (constituting the theoretical basis for the IFR) states:

„The metric includes assets under management that the firm in question has formally delegated to another firm, but at the same time excludes assets under management that another firm has formally delegated to it – irrespective of whether the firm delegating the management of the assets or fund portfolio is a management company/manager submitted to the UCITS and AIFM Directive or an investment firm.”

The above-mentioned provision limits the scope of entities that can entrust asset management to investment firms and asset management companies, i.e. entities that can provide the service in question based on a specific license (MiFID/UCITS/AIFM) (and maintain capital requirements for it), but for some reason entrust it to another investment firm/asset manager.

However, the final provision of the IFR introduces a less specific wording – “another financial entity”, which causes interpretation issues.

Taking into account the rationale for article 17 (2) of the IFR, for the purposes of  the identification of "another financial entitiy" formally delegating asset management to an investment firm, the following seem necessary to be taken into account:

a) the possibility of providing asset management services independently, pursuant to applicable legal provisions (i.e. specific license),

b) the existence of prudential standards regulating the issues of capital requirements/risk management in relation to the asset management service provided.

Otherwise, any financial entity that enters into an agreement with an investment firm for asset management could potentially be considered “another financial entity" and be subject to the exclusion despite the lack of adequate prudential safeguards for the risk arising from the service provided by the investment firm, which would be contrary to the rationality of the above-mentioned provision.

More interpretation issues arise however, when one is trying to verify the adequacy of the prudential safeguards for the asset management service, such as those reflected in 3 real-life examples (below).

Example 1. Government related entities (public sector entities)

Central government has entrusted the management of country X’s government pension fund to its central bank. An entity XYZ has been established by the central bank of country X. XYZ manages the portfolio based on a specific mandate issued by the ministry of finance of country X. Based on the provisions governing the fund, XYZ partly delegates the asset management of the fund to various asset managers, including investment firm A.

The mandate requires the central bank to adhere to various principles, including those related to risk management and investment management, however any specific capital requirements related to the asset management service seem not to be present.

Question 1. Should investment firm A exclude the assets entrusted to A by XYZ (XYZ formally delegated the service to A) from the total amount of assets under management? In particular should XYZ be considered as “another financial entity”?

Example 2. Insurer

An insurer Y sells unit linked life insurance policies to its clients. Y delegates the asset management of the funds to investment firm B.

Insurers seem not to have any specific capital requirements related to the asset management service.

Question 2. Should investment firm B exclude the assets entrusted to B by Y (Y formally delegated the asset management service to B) from the total amount of assets under management? In particular should insurer Y be considered as “another financial entity”?

Example 3. Bank

Bank D (CRR credit institution) has a MiFID license for the provision of asset management services. However, asset management of part of the managed portfolios of its clients is formally delegated to investment firm C.

Banks seem not to have any specific capital requirements related to the asset management service.

Question 3. Should investment firm C exclude the assets entrusted to C by D (D formally delegated the asset management service to C) from the total amount of assets under management? In particular should bank D be considered as “another financial entity”?