Prudential regulation of investment firms in the European Union (ZIFO nr. 32) 2021/1.1:1.1 Research topic & questions

Prudential regulation of investment firms in the European Union (ZIFO nr. 32) 2021/1.1

1.1 Research topic & questions

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3. In this study an overview of the applicable prudential rules for investment firms in the European Union is provided. To fully understand the nature of prudential risks for an investment firm a description is given of what an investment firm is, which activities or services it can provide and which prudential risks can be associated with these activities and services. The main question to answer is: How should prudential regulation in the European Union be formulated to capture the specific (financial) risks of investment firms?

4. To further guide the investigation and to address this main question the following sub-questions will be addressed:

i.

What is the definition of an investment firm in European legislation? What are the activities these investment firms are allowed to perform, and which risks can be expected to occur when an investment firm provides these activities? What are the differences and commonalities between banks1 and investment firms?

ii.

What are the prudential requirements for investment firms in European legislation that apply until 26 June 2021 when the new regime based on the IFR and IFD will come into force? Which shortcomings in that regime can be identified?

iii.

Does the way in which asset segregation is applied by investment firms influence the (financial) risk profile of an investment firm?

iv.

Is the final legislative text of IFR and IFD appropriately addressing the risks accruing within the business of investment firms and has the ambition to adopt a prudential regime for investment firms that is less complex, more proportional and more risk sensitive than the CRR and CRD 2013 regime, been achieved?

v.

Is the mixture of own risk and account trading versus client activities within a single investment firm desirable? Should certain activities, such as trading for own risk and account, be performed within one investment firm or a group of investment firms together with client oriented activities such as asset management? Should investment firms also be subject to a rule similar to the Volcker rule?

vi.

Is the hypothesis that investment firms should be supervised on a gone-concern basis appropriate? Would there be benefits for the supervision of investment firms if the prudential regime were built on a going-concern basis, as opposed to a gone-concern basis?

vii.

Is the current application of the resolution framework in the European Union to certain investment firms relevant? Given the identified risks accruing within the business of investment firms, does the resolution framework offer useful tools for the prudential supervision of investment firms?

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