EC has extended, by an additional year, the current transitional regime for the capital requirements that EU banks and investment firms must maintain when exposed to non-EU central counterparties (CCPs). This transitional regime will thus continue to apply until June 28, 2022. This is the last and final extension possible under the Capital Requirements Regulation (CRR). Exposures to the non-EU CCPs that will not be recognized by ESMA by June 28, 2022 will no longer be eligible for lower capital requirements after that date. EC suggests stakeholders to start preparing for this possibility. In addition, EC announced that CRR2 and Investment Firms Directive/Regulation (IFD/IFR) will apply from June 28, 2021 and June 26, 2021, respectively.
The CRR regime establishes the prudential requirements for banks and large investment firms, in particular for capital and liquidity, as well as requirements on reporting of prudential information to supervisors and on disclosing prudential information to the markets. The new CRR2 rules will introduce more proportionality into EU rules for smaller financial institutions and increase resilience of the banking sector by including new requirements for leverage and stable funding. The rules also introduce more risk-sensitive rules for calculating capital requirements. Additionally, the new prudential framework for investment firms set out in the IFR and the IFD is designed to reflect better the nature, size, and complexity of investment firms’ activities compared to the CRR/Capital Requirements Directive (CRD) framework. IFD and IFR will introduce a new tailored, targeted set of rules that will make life simpler for smaller investment firms while the largest, systemic investment firms will remain under the same prudential regime as European banks. The capital requirements set in the IFR comprise three items:
- Fixed overhead requirement, equal to a quarter of the annual fixed overheads of the firm
- Permanent minimum capital requirement of EUR 75,000, EUR 150,000, or EUR 750,000, depending on the activities of the investment firm
- Overall “K-factor” capital requirement, which is the sum of “K-factor requirements” grouped into three categories: Risk-to-Client, Risk-to-Market, and Risk-to-Firm
The IFR and IFD apply to investment firms deemed sufficiently small and non-interconnected (class 3 firms) and to investment firms not falling under any of the other categories (class 2 firms). The large majority of EU investment firms fall in these two categories. Class 3 firms are subject to lighter requirements than class 2 firms. However, some investment firms remain subject to the CRR/CRD rules. This is the case for investment firms that perform dealing on account or underwriting of financial instruments and/or placing of financial instruments on a firm commitment basis and meet a EUR 30 billion threshold for their consolidated assets (class 1 firms). It is also the case for investment firms that perform dealing on account or underwriting of financial instruments and/or placing of financial instruments on a firm commitment basis and meet a EUR 15 billion threshold in terms of their consolidated assets or meet a EUR 5 billion threshold and are designated by their competent authorities following specific criteria (“class 1 minus” firms).
- Notifications on CRR and IFR Regimes
- Press Release on Extension of Transitional Regime
- CRR2 Regulation
- Prudential Rules for Investment Firms
Keywords: Europe, EU, Banking, Securities, Investment Firms, CCPs, CRR, IFD, IFR, Basel, Transitional Regime, Regulatory Capital, Qualifying CCPs, CRR2, ESMA, EC
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