Big capital changes on the horizon for investment firms

20 October 2017

In October, we hosted a briefing on the proposed new capital requirements for investment firms. It was standing room only! Although, across Europe, the majority of impacted firms are in the UK, this has yet to make headline news. During our briefing, we gave an overview of what is happening and why, as well as the key impacts and changes for firms and what they need to do next. We also introduced our new fixed-price support package for exempt CAD firms who will see the biggest increase in the regulatory burden under the new rules.

Currently, investment firms are subject to capital and liquidity requirements that were actually designed with banks in mind. Recognising this, the European Commission asked for advice from the EBA. On 29 September 2017, the EBA published over 140 pages of recommendations for a single capital and liquidity rulebook for all MiFID II investment firms.

One key change will be the categorisation of all MiFID II investment firms according to their size and activities, which will determine how the new prudential regime is applied. Changes are also being proposed to reporting, capital and liquidity requirements, regulatory supervision, consolidation requirements, governance and remuneration. The most significant of these changes includes a completely new approach to calculating capital (the k-factor formula) for many firms and the introduction of ICAAPs for many more.

Whilst the new regime has been developed with investment firms in mind, a number of these firms will see a significant increase in their capital requirements. Other firms, such as exempt CADs, commodity investment firms and ‘local’ firms will be subjected to a raft of new prudential requirements. This means that there is much work for firms to do in order to make sure they’re prepared for the new rules.

We expect the European Commission to respond very soon and that implementation could therefore be on the cards for as early as 2018. In the meantime, we recommend you:

  • Work out what category you fall into
  • Model the capital you will need and plan for any shortfall
  • Review the impact on your group

Let us help you do this!

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