Prudential regulation of investment firms in the European Union (ZIFO nr. 32) 2021/9.2.1.3:9.2.1.3 Class 1a and 1b investment firms

Prudential regulation of investment firms in the European Union (ZIFO nr. 32) 2021/9.2.1.3

9.2.1.3 Class 1a and 1b investment firms

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377. With the Presidency Compromise versions of the IFR and IFD (the IFR PC 1 and IFD PC 1 respectively), two new thresholds have been included with regard to those investment firms that the European legislators think should also be subject to the requirements of the CRD 2013 and the CRR.

378. The first threshold is what we could call Class 1a. Investment firms that have a consolidated balance sheet that exceeds €15 billion1 will be subject to the requirements of the CRR. Although these Class 1a investment firms will be subject to the requirements of the CRR, they will not be included in the new definition of credit institution like the Class 1 investment firms. These firms will thus remain authorised as investment firms under MiFID II. The IFR contains the following definition of Class 1a:

“2.

By way of derogation from paragraph 1, an investment firm authorised and supervised under [MiFID II], which carries out any of the activities [of dealing on own account or underwriting], shall apply the requirements of [the CRR] where the undertaking is not a commodity and emission allowance dealer, a collective investment undertaking or an insurance undertaking, and any of the following conditions apply:

(a)

the total value of the consolidated assets of the investment firm is equal to or exceeds EUR 15 billion, calculated as an average of the previous 12 months excluding the value of the individual assets of any subsidiaries established outside the Union that carry out any of the activities [of dealing on own account or underwriting];

(b)

the total value of the consolidated assets of the investment firm is less than EUR 15 billion, and the investment firm is part of a group in which the total value of the consolidated assets of all undertakings in the group that individually have total assets of less than EUR 15 billion and that carry out any of the activities [of dealing on own account or underwriting] is equal to or exceeds EUR 15 billion, all calculated as an average of the previous 12 months, excluding the value of the individual assets of any subsidiaries established outside the Union that carry out either of the activities referred to in this subparagraph; or

(c)

the investment firm is subject to a decision by the competent authority in accordance with Article 5 of [the IFD]”.2

379. Article 1(5) of the IFR provides for a further discretion for an investment firm to apply the requirements of the CRR, the so-called “opt-in” Class 1a investment firms. If an investment firm complies with all the criteria of Article 1(5) of the IFR,3 then it may apply the CRR requirements:

“5.

By way of derogation from paragraph 1, competent authorities may allow an investment firm authorised and supervised under [MiFID II] that carries out any of the activities [of dealing on own account or underwriting] to apply the requirements of [the CRR] where all of the following conditions are fulfilled:

(a)

the investment firm is a subsidiary and is included in the supervision on a consolidated basis of a credit institution, a financial holding company or a mixed financial holding company, in accordance with the provisions of Chapter 2 of Title II of Part One of [the CRR];

(b)

the investment firm notifies the competent authority under this Regulation and the consolidating supervisor, if applicable;

(c)

the competent authority is satisfied that the application of the own funds requirements of [the CRR] on an individual basis to the investment firm and on a consolidated basis to the group, as applicable, is prudentially sound, does not result in a reduction of the own funds requirements of the investment firm under this Regulation, and is not undertaken for the purposes of regulatory arbitrage”.4

380. These “opt-in” Class 1a investment firms should then comply with the full requirements of the CRR, without any of the investment firm specific exemptions or exclusions as discussed in Chapter 7. This “opt-in” Class 1a is, however, a discretion for the supervisory authority and will therefore not apply automatically.

381. In the IFD, the European legislator introduced a second threshold for investment firms within Class 1, the so-called Class 1b investment firms. Competent authorities may choose to apply the CRD 2013 and CRR requirements to investment firms that have consolidated assets exceeding €5 billion.5 This supervisory discretion to apply CRR and CRD 2013 requirements to investment firms is bound by three criteria,6 one of which the investment firm needs to meet, before the competent authority can exercise its discretion.

“1.

Competent authorities may decide to apply the requirements of [the CRR] pursuant to point (c) of the first subparagraph of Article 1(2) of [the IFR] to an investment firm that carries out any of the activities [of dealing on own account or under writing], where the total value of the consolidated assets of the investment firm is equal to or exceeds EUR 5 billion, calculated as an average of the previous 12 months, and one or more of the following criteria apply:

(a)

the investment firm carries out those activities on such a scale that the failure or the distress of the investment firm could lead to systemic risk;

(b)

the investment firm is a clearing member as defined in point (3) of Article 4(1) of [the IFR];

(c)

the competent authority considers it to be justified in light of the size, nature, scale and complexity of the activities of the investment firm concerned, taking into account the principle of proportionality and having regard to one or more of the following factors:

(i)

the importance of the investment firm for the economy of the Union or of the relevant Member State;

(ii)

the significance of the investment firm’s cross‐border activities;

(iii)

the interconnectedness of the investment firm with the financial system”.7

382. As in the case of Class 1a and opt-in Class 1a, these Class 1b investment firms will not be included in the new definition of credit institution but should, via the changes made to article 2(5) of the CRR, be treated as CRR institutions by the competent authorities. These Class 1a and 1b investment firms will also remain authorised under MiFID II as investment firms.

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