7.2.2.2 Article 96 of the CRR

263. Investment firms which have an initial capital requirement of € 730.000 are subject to the capital requirements included in Article 92 of the CRR insofar as they do not fall under one of the regimes of Article 951 or 962 of the CRR. Article 96 of the CRR contains an alternative calculation of the risk exposure for certain investment firms. In this alternative calculation of the risk exposure, an investment firm has to calculate its ‘fixed overhead requirement’3 instead of its capital requirement for operational risk.4 The investment firms which are subject to this alternative calculation are firms “(i) [that] do not hold client money or securities, (ii) [that] undertake only dealing on own account, (iii) [that] have no external customers,(iv) [for which the] execution and settlement transactions take place under the responsibility of a clearing institution and are guaranteed by that clearing institution”.5 The investment firms which qualify under these conditions are firms which are also known as ‘proprietary traders’. To be complete: this replacement of the operational risk assessment based on the ordinary CRR provisions, with the fixed overhead requirement is without prejudice to the applicability of other components of the risk exposure amount, such as market risk.

264. The Liikanen proposal6 of (legally and functionally) separating the proprietary trading desks of credit institutions from their ‘other’ activities might lead to an increase in investment firms which would qualify under this alternative calculation in Article 96 of CRR if credit institutions decided to ‘move’ their proprietary trading activities into a ‘new’ investment firm. Credit institutions might also decide to have their proprietary trading activities in a ‘new’ banking entity. Which type of entity a bank might incorporate for its trading activities will most likely be influenced by the applicable prudential regime for that new subsidiary and the way this will influence the bank’s consolidated capital requirements.

265. Article 96 of the CRR also contains a second set of criteria7 for investment firms to qualify under the alternative calculation. Investment firms “that deal on own account only for the purpose of fulfilling or executing a client order or for the purpose of gaining entrance to a clearing and settlement system or a recognised exchange when acting in an agency capacity or executing a client order”8 are also subjected to the alternative calculation of Article 96. Although these investment firms are authorised to perform the investment activity of ‘dealing on own account’, to qualify under Article 96, Paragraph 1, point B9 the investment firm has to limit its trading on own account to those instances where it can be related to executing a client order or where it is intended to “gain access to a clearing and settlement system or a recognized exchange when acting in an agency capacity or executing a client order”. The investment firm that qualifies under Article 96, 1, B is therefore authorized pursuant to its licence to perform the ‘dealing on own account’ investment activity but does so only where necessary to execute its clients orders.