1.2 Research methodology

5. In this study the relevant aspects of investment firms’ risk profiles have been studied and the way these risks have been addressed within the European Union, in both the current legislation and the final IFR and IFD text.

6. The second Chapter will define what an investment firm is, based on the definition applied in the European legislation. In this Chapter the activities will be discussed that an investment firm is allowed to perform, or more precisely: which activities or services performed by an investment firm lead to the obligation to be authorised as an investment firm within the European Union. This study will discuss the (financial) risks that can be attributed to these activities performed by investment firms. This Chapter will provide a common understanding of what an investment firm is and what (financial) risks it is exposed to when performing its activities, to fully analyse the possible risks the investment firm is exposed to. This chapter will also include a framework to assess the risks of investment firms. This provides the basis for the analysis in the other Chapters.

7. Chapter 3 will compare the risk profile of an investment firm with the risk profile of a bank. To highlight the differences in the financial risk profiles of banks and investment firms this study will compare the (stylised) balance sheets of both types of companies and discuss the impact these differences could have on the prudential regulatory frameworks.

8. To further highlight the differences between banks and investment firms, Chapter 4 will discuss the requirements of asset segregation for investment firms in the European Union. Which requirements are applicable? Which effect does this asset segregation have on the (financial) risks of an investment firm? How does this compare to a bank? And does asset segregation itself lead to other or additional risks for an investment firm? This Chapter gives a short description of the requirements for asset segregation as included in the European legislation. The Chapter will conclude with an economic assessment of the impact of the various forms of asset segregation regimes on the (financial) risk profile of an investment firm.

9. Chapter 5 will take a step back and gives an overview of the global standards for the prudential regulation of investment firms. This study will analyse the standards set by IOSCO and discusses the differences between the US and the EU in the translation of these international standards into national standards. This Chapter will conclude with a short analysis of the risk concepts included in the Basel Accords for the supervision of banks, which have been applied in the European Union as a basis for the prudential regime for investment firms that applies until the 26 June 2021 until it is replace with the new regime based on the IFR and IFD. Taking this step back and looking at the different prudential regimes at a global level will help in the analysis of the choices made in the prudential regime for investment firms in the European Union and in responding to the question as to whether it is indeed the most effective way to deal with the financial risks of investment firms.

10. Chapter 6 will include a discussion on the genesis of the prudential framework in the European Union. What reasons did the European legislator give when drafting the first directives on the prudential treatment of investment firms? This study will also discuss the differences in financial systems within the European Union and the impact these had on the common European standards for the prudential treatment of investment firms.

11. Chapter 7 of this study will analyse the current prudential framework for investment firms in the European Union, included in the CRD 2013 and the CRR. This study will discuss which requirements are applicable and which derogations to the banking rules apply for investment firms. This Chapter will also discuss the aspects of the current regime that do not adequately address the financial or operational risks of investment firms.

12. After discussing the prudential framework for investment firms applied from the early nineties up to June 2021, this study will discuss, in Chapter 8, certain other applicable requirements for investment firms in the European Union, such as the recovery and resolution requirements, the principles of gone-concern and going-concern regulation, the Volcker rule and a means of assessing systemic risks of investment firms.

13. Chapter 9 of this study will analyse the new prudential framework for investment firms included in the IFR and IFD which were published on 5 December 2019. This Chapter will discuss the legislative texts and whether these do indeed capture the financial and operational risks of an investment firm in a more appropriate and proportional manner as was intended by the European legislators.

14. The final Chapter of this study will determine whether the new prudential regime for investment firms is indeed capturing the financial risks of investment firms identified in the first Chapters of this study and will make recommendations after a critical analysis of the new regime that applies from June 2021 on whether and how it could be amended to reflect the (financial) risk profile of an investment firm in a more appropriate, proportional and increased risk sensitive way.