Response to consultation on RTS on Simplified Obligations
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1. First, we approve of the fact that the criteria are based on indicators that are already defined and reported under FINREP. This is positive as it ensures that the indicators are unambiguous and defined in the same way throughout all EU jurisdictions.
2. Second, the ‘total assets’ and ‘total liabilities’ indicators, as they are defined in FINREP are by definition equal to one another: they equal the total balance sheet size of the institution. Therefore, our opinion is that they duplicate one another and, therefore, that one of them should be removed. For clarity purposes, we suggest keeping ‘Total assets’ and removing ‘Total liabilities’ from the list of indicators.
3. Our third comment is that all of the four criteria suggested seek to reflect a size criterion, as opposed to the criteria suggested for credit institutions (mentioned in Annex I), which also seek to capture interconnectedness, scope and complexity of activities and nature of business. We believe that such criteria as also relevant for investment firms and that they can also be captured by quantitative indicators.
More precisely, we suggest adding the following classification indicators for investment firms:
Criterion Indicator Proposed Definition (CF table in the attached file)
We consider interconnectedness as a relevant criterion for the assessment of the risk borne by the financial system in case of failure, as it determines the extent of a potential contagion to other institutions. Therefore, in our views, a measure of exposures to other financial institutions should be taken into account when assessing whether an investment firm could benefit from a simplified resolution regime or not. This can be captured via the indicators ‘intra-financial system liabilities’ and ‘intra-financial system assets’.
Scope and complexity of activities is another criterion that we consider relevant, especially in the case if investment firms that are active on financial markets and hold a portfolio of trading exposures. The following indicators could be used:
- Financial Assets held for trading: this indicator provides information on the size of the trading book. This indicator appears relevant for most investment firms that act as investment service providers, e.g. via market making, emission and hedging of structured products, etc.
- Value of OTC derivatives (notional): this indicator is suggested for credit institutions in the consultation paper, and we believe it would also be relevant for investment firms, a large number of which hold OTC derivatives positions.
4. Our final comment is to highlight current reflections aimed at a global revision of the prudential regime applicable to investment firms in the EU . According to current EBA proposals, and subject to possible changes in the final future framework, the new regime would classify EU investment firms into 3 groups: (i) class 1 for systemic investment firms, (ii) class 2 for other, non-systemic firms, (iii) class 3 for small, non-interconnected firms. Revised solvency and liquidity rules would apply differently to each of these three classes of investment firms.
In this context, one could envisage to align the application of a simplified regime under article 4(6) of BRRD on the same classification as solvency and liquidity rules. In this context, we support the principle whereby the classification of an investment firm (as class 1, class 2 or class 3 firm) as regards solvency and liquidity would also determine its recovery and resolution regime; this principle could be applied as follows:
- For class 1 investment firms, the application of the simplified regime under article 4(6) would not be possible;
- For class 2 firms, the potential application of the simplified regime would depend on a number of quantitative criteria such as size, interconnectedness and scope/complexity of activities (cf. criteria mentioned above);
- All class 3 firms would be applied the simplified regime under article 4(6) of BRRD.
The benefits would be the following:
(i) consistency with the classification rules of the new prudential regime for investment firms,
(ii) greater clarity and simplicity in assessing whether a firm is eligible to the simplified recovery and resolution regime (no additional assessment would be required for class 1 firms and class 3 firms),
(iii) application of the proportionality principle.
This raises the issue of timeliness in applying the EU Commission delegated regulation proposed in the consultation paper. In our views, its application for investment firms should be scheduled so as to enter into force at the same time as the future prudential regime for investment firms in the EU.
Such qualitative criteria provide additional discretion for the national resolution authority to decide whether to apply a simplified resolution regime to a given institution. However, allowing too much discretion to national authorities would conflict with the purpose of greater harmonisation, throughout the EU, in the application of article 4(6) of the BRRD Directive. We therefore favour the definition of a set of quantitative criteria for which thresholds can help ensure that investment firms can define
We can understand the existence of such qualitative criteria in a context where size is the only quantitative criterion taken into consideration (as it is in the EBA’s proposal), as qualitative criteria would capture relevant criteria other than size. However, in a situation where a multi-criteria, multi-indicator approach would be adopted, taking into account size, interconnectedness and activity, we believe that additional qualitative criteria would add complexity and arbitrary to the criteria for applying a simplified regime.
Our opinion is therefore that no qualitative criterion should prevent an investment firm from benefiting from the simplified resolution regime if, based on multiple quantitative criteria mentioned under question 4, it was declared eligible.
This option appears reasonable as is combines greater harmonisation through a specific list of criteria that resolution authorities must consider, while allowing some discretion in the way such criteria are assessed. Such discretion is required given the high degree of diversity between the investment firms markets of each EU jurisdiction.
Regarding costs and benefits, our comments are the following:
1) The main source of costs for investment firms lies in reporting workload. Sticking to FINREP indicators allows avoiding any additional reporting cost for investment firms.
2) The main source of costs for resolution authorities would be due to the workload required for determining all investment firms’ eligibility to simplified obligations. Making a set of relevant quantitative indicators the only source for this (and, therefore, removing qualitative criteria, as suggested in our answer under question 5) would ensure this workload is reduced to its minimum level.
3) Benefits of the principles discussed would essentially lie in:
a) symmetric information and approaches between supervision authorities;
b) a even playing field, that is similar application of a single set of rules across the EU;
c) reduction of regulatory arbitrage opportunities.
Question 1: Do you agree with the list of quantitative indicators for credit institutions provided in Annex I?
As this question regards credit institutions only, we do not have any comments.Question 2: Do you agree with the calibration of the total quantitative threshold for credit institutions? Do you expect any unintended consequences arising from applying that threshold? If yes, please provide details on these consequences.
As this question regards credit institutions only, we do not have any comments.Question 3: Do you agree with the list of qualitative considerations for credit institutions?
As this question regards credit institutions only, we do not have any comments.Question 4: Do you agree with the list of quantitative indicators for investment firms provided in Annex II?
Annex II of the consultation paper lists four quantitative indicators for determining whether an investment form may or may not be eligible to the simplified regime. These indicators are based on data already reported as part of FINREP. They are: (i) total assets, (ii) total liabilities, (iii) total fees and commission income, and (iv) assets under management. This list inspires various comments on our side.1. First, we approve of the fact that the criteria are based on indicators that are already defined and reported under FINREP. This is positive as it ensures that the indicators are unambiguous and defined in the same way throughout all EU jurisdictions.
2. Second, the ‘total assets’ and ‘total liabilities’ indicators, as they are defined in FINREP are by definition equal to one another: they equal the total balance sheet size of the institution. Therefore, our opinion is that they duplicate one another and, therefore, that one of them should be removed. For clarity purposes, we suggest keeping ‘Total assets’ and removing ‘Total liabilities’ from the list of indicators.
3. Our third comment is that all of the four criteria suggested seek to reflect a size criterion, as opposed to the criteria suggested for credit institutions (mentioned in Annex I), which also seek to capture interconnectedness, scope and complexity of activities and nature of business. We believe that such criteria as also relevant for investment firms and that they can also be captured by quantitative indicators.
More precisely, we suggest adding the following classification indicators for investment firms:
Criterion Indicator Proposed Definition (CF table in the attached file)
We consider interconnectedness as a relevant criterion for the assessment of the risk borne by the financial system in case of failure, as it determines the extent of a potential contagion to other institutions. Therefore, in our views, a measure of exposures to other financial institutions should be taken into account when assessing whether an investment firm could benefit from a simplified resolution regime or not. This can be captured via the indicators ‘intra-financial system liabilities’ and ‘intra-financial system assets’.
Scope and complexity of activities is another criterion that we consider relevant, especially in the case if investment firms that are active on financial markets and hold a portfolio of trading exposures. The following indicators could be used:
- Financial Assets held for trading: this indicator provides information on the size of the trading book. This indicator appears relevant for most investment firms that act as investment service providers, e.g. via market making, emission and hedging of structured products, etc.
- Value of OTC derivatives (notional): this indicator is suggested for credit institutions in the consultation paper, and we believe it would also be relevant for investment firms, a large number of which hold OTC derivatives positions.
4. Our final comment is to highlight current reflections aimed at a global revision of the prudential regime applicable to investment firms in the EU . According to current EBA proposals, and subject to possible changes in the final future framework, the new regime would classify EU investment firms into 3 groups: (i) class 1 for systemic investment firms, (ii) class 2 for other, non-systemic firms, (iii) class 3 for small, non-interconnected firms. Revised solvency and liquidity rules would apply differently to each of these three classes of investment firms.
In this context, one could envisage to align the application of a simplified regime under article 4(6) of BRRD on the same classification as solvency and liquidity rules. In this context, we support the principle whereby the classification of an investment firm (as class 1, class 2 or class 3 firm) as regards solvency and liquidity would also determine its recovery and resolution regime; this principle could be applied as follows:
- For class 1 investment firms, the application of the simplified regime under article 4(6) would not be possible;
- For class 2 firms, the potential application of the simplified regime would depend on a number of quantitative criteria such as size, interconnectedness and scope/complexity of activities (cf. criteria mentioned above);
- All class 3 firms would be applied the simplified regime under article 4(6) of BRRD.
The benefits would be the following:
(i) consistency with the classification rules of the new prudential regime for investment firms,
(ii) greater clarity and simplicity in assessing whether a firm is eligible to the simplified recovery and resolution regime (no additional assessment would be required for class 1 firms and class 3 firms),
(iii) application of the proportionality principle.
This raises the issue of timeliness in applying the EU Commission delegated regulation proposed in the consultation paper. In our views, its application for investment firms should be scheduled so as to enter into force at the same time as the future prudential regime for investment firms in the EU.
Question 5: Do you agree with the list of qualitative considerations for investment firms?
As we understand article 4 of the proposed draft RTS, even if an investment firm is not likely to have a significant negative effect on financial markets based on quantitative criteria, this firm would still be submitted to a qualitative assessment and could finally be declared not eligible to the simplified resolution regime.Such qualitative criteria provide additional discretion for the national resolution authority to decide whether to apply a simplified resolution regime to a given institution. However, allowing too much discretion to national authorities would conflict with the purpose of greater harmonisation, throughout the EU, in the application of article 4(6) of the BRRD Directive. We therefore favour the definition of a set of quantitative criteria for which thresholds can help ensure that investment firms can define
We can understand the existence of such qualitative criteria in a context where size is the only quantitative criterion taken into consideration (as it is in the EBA’s proposal), as qualitative criteria would capture relevant criteria other than size. However, in a situation where a multi-criteria, multi-indicator approach would be adopted, taking into account size, interconnectedness and activity, we believe that additional qualitative criteria would add complexity and arbitrary to the criteria for applying a simplified regime.
Our opinion is therefore that no qualitative criterion should prevent an investment firm from benefiting from the simplified resolution regime if, based on multiple quantitative criteria mentioned under question 4, it was declared eligible.
Question 6: Do you agree with our analysis of costs and benefits of the proposals in this Consultation Paper? If not, can you provide data to justify your position or further inform our analysis of the likely impact of the proposals?
We agree with the EBA’s preferred option on how to specify the criteria for determining investment firms’ eligibility to simplified obligations. The EBA’s preferred option is, where possible, specifying eligibility criteria through a set of quantitative indicators, however without specifying any calculation methodology or threshold.This option appears reasonable as is combines greater harmonisation through a specific list of criteria that resolution authorities must consider, while allowing some discretion in the way such criteria are assessed. Such discretion is required given the high degree of diversity between the investment firms markets of each EU jurisdiction.
Regarding costs and benefits, our comments are the following:
1) The main source of costs for investment firms lies in reporting workload. Sticking to FINREP indicators allows avoiding any additional reporting cost for investment firms.
2) The main source of costs for resolution authorities would be due to the workload required for determining all investment firms’ eligibility to simplified obligations. Making a set of relevant quantitative indicators the only source for this (and, therefore, removing qualitative criteria, as suggested in our answer under question 5) would ensure this workload is reduced to its minimum level.
3) Benefits of the principles discussed would essentially lie in:
a) symmetric information and approaches between supervision authorities;
b) a even playing field, that is similar application of a single set of rules across the EU;
c) reduction of regulatory arbitrage opportunities.