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    EC on Proportionate and Risk-Sensitive Rules for Investment Firms

    December 20, 2017

    EC proposed a two-track overhaul to make life simpler for smaller investment firms, while bringing the largest, systemic ones under the same regime as European banks. The proposal includes new and simpler prudential rules for the large majority of investment firms which are not systemic, without compromising financial stability. It also covers amended rules to ensure that it large, systemic investment firms that are involved in bank-like activities and pose similar risks as banks are regulated and supervised like banks. Consequently, ECB, in its supervisory capacity (under the Single Supervisory Mechanism) would supervise such systemic investment firms in the Banking Union. This will ensure level playing field between the large and systemic financial institutions.

    The proposals amend the Capital Requirements Regulation (CRR), the Capital Requirements Directive (CRD IV), the revised Markets in Financial Instruments Directive (MiFID II), and the Markets in Financial Instruments Regulation (MiFIR). Under these proposals, the vast majority of investment firms in the EU would no longer be subject to rules that were originally designed for banks. This will reduce administrative burden, boost competition, and increase investment flows, all of which are priorities of the Capital Markets Union, without compromising financial stability. Meanwhile, the largest and most systemic investment firms would be subject to the same rules and supervision as banks.

    The new rules split non-systemic investment firms into two groups. The capital requirements for the smallest and least risky investment firms will be set in a simpler way. The rules will be comprehensive and robust enough to capture the risks of investment firms, yet flexible enough to cater to various business models and ensure that these firms can remain commercially viable. These firms would not be subject to any additional requirements on corporate governance or remuneration. For larger firms, the rules introduce a new way of measuring their risks based on their business models. For firms which trade financial instruments, these will be combined with a simplified version of existing rules. As part of its work to strengthen capital markets, EC had announced, in its Mid-Term Review of the Capital Markets Union Action Plan, that it would propose a more effective prudential and supervisory framework for investment firms. This proposal is part of the the EC Regulatory Fitness and Performance (REFITprogram. 

     

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    Keywords: Europe, EU, Banking, Securities, CRR/CRD, MiFID/MiFIR, Proportionality, Capital Markets Union, EC

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