Response to discussion on a new prudential regime for investment firms
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We agree with the EBA that “only a very small sub-set of investment firms” would meet the “systemic and bank-like” test, and we agree that this outcome is appropriate. Any extension of the test that brings more investment firms into scope of the CRD4/CRR regime would counteract the desire to have a new prudential regime for investment firms, because it would lead to a multi-tier and fragmented system of prudential regulation of investment firms.
In our view, the “Designated Firms List” maintained by the UK Prudential Regulation Authority (PRA) is a good indicator of the types of firms that should be considered as systemic and bank-like in terms of this Discussion Paper. Although this list is a UK-only list, we think that if the principles are extended to firms in other EU jurisdictions, the total number of so-called “Class 1” firms across the EU would (and should) remain a very small sub-set of the total number of investment firms in the EU.
Impact on the New Prudential Regime for Investment Firms
In November 2016, the European Commission published its legislative proposal for the Capital Requirements Directive 5 (CRD5). One of the proposals in CRD5, i.e., Article 21b, includes a requirement for certain non-EU banking groups (including all non-EU G-SIBs) to use an “intermediate EU parent undertaking”. BNY Mellon is impacted by this proposal. We refer to this proposal in this response as the “EU IHC proposal”.
Under the EU IHC proposal, impacted non-EU banking groups must ensure that all EU-domiciled credit institutions and EU-domiciled “investment firms” be direct or indirect subsidiaries of the intermediate EU parent undertaking (if not the intermediate parent undertaking itself).
We note that in the context of the EU IHC proposal, the definition of “investment firms” is narrower than the definition of “investment firms” in the EBA Discussion Paper. Nevertheless, the EU IHC proposal will apply to a wide range of investment firms covered under the EBA Discussion Paper - in particular it would apply to many of the investment firms currently subject to CRD4/CRR requirements that would otherwise benefit from the proposals in the Discussion Paper.
By requiring such investment firms to be within an EU IHC corporate structure, these investment firms will remain subject to CRD4/CRR requirements (or CRD5/CRR2 requirements), instead of moving to the new prudential regime for investment firms envisaged by the Discussion Paper.
It would also result in discriminatory outcomes in that standalone EU investment firms and investment firms that are part of EU groups would benefit from the new prudential regime, whereas investment firms that are part of groups subject to the EU IHC proposal would not.
This would of course be a poor outcome. Firstly, it would to a large extent counteract the intention of the European Commission that a new prudential regime for investment firms should be created. This is because the new prudential regime would only benefit a much narrower range of investment firms than envisaged.
Secondly, the work of the EBA in the context of the Discussion Paper is pursuant to the Call for Advice that the European Commission issued to the EBA to design a new prudential regime. It is therefore contradictory for the European Commission to pursue a new prudential regime for investment firms on the one hand, and then to limit its application by way of the EU IHC proposal on the other hand. It is clear from the Discussion Paper that the new prudential regime for investment firms should apply to all but the “systemic and bank-like” investment firms.
Accordingly, we would urge the EBA to engage with the European Commission, European Parliament and European Council in order to explain the adverse impact that the EU IHC proposal would have in achieving the objectives of implementing a new prudential regime for investment firms that the European Commission desires, and the broader impact on European Commission initiatives such as the Capital Markets Union, and the creation of jobs and growth.
Impacts on Recovery & Resolution
The impact on the new prudential regime for investment firms is not the only concern posed by the EU IHC proposal. The EU IHC proposal cuts across the objective of having a globally consistent recovery and resolution regime underpinned by FSB principles, such as those expressed in the FSB’s Key Attributes of Effective Resolution Regimes for Financial Institutions. This is because the EU IHC proposal gives primacy to geographic factors. Rather than simplifying corporate structures, the EU IHC proposal would make corporate structures more complex.
Furthermore, it will encourage other jurisdictions around the world to introduce similar requirements – if this occurs, then this would counteract substantial international efforts to develop credible cross-border resolution regimes, as well as future international cooperation on financial policymaking. Accordingly, the efforts to have a globally consistent recovery and resolution regime underpinned by FSB principles could be seriously undermined.
Given the significant work that the EBA has conducted to design an effective recovery and resolution regime in the EU, and to develop Level 2 text in support of the EU Bank Recovery and Resolution Directive (BRRD) - including in relation to cooperation between jurisdictions - it would be unfortunate for this work to be counteracted by the EU IHC proposal.
Furthermore, as a general (but not universal) rule, investment firms are smaller than credit institutions, and are less systemically important. The application of CRD4/CRR requirements to a significant number of investment firms (such as “MiFID investment firms”) creates a disproportionate burden upon such investment firms. Many of the CRR4/CRR requirements are not relevant or useful for investment firms. The economic and administrative burdens of CRR4/CRR upon investment firms, limits the ability of such investment firms to support jobs and growth in the EU.
In our view, having a separate prudential regime for investment firms would be consistent with and support the development of the Capital Markets Union (CMU), because investment firms (rather than credit institutions) must play a key role in the CMU to support jobs and growth.
Harmonising the existing system of national prudential regimes for investment firms not subject to CRD4/CRR would also help to build the CMU.
We support the response of The Investment Association.
Question 1: What are your views on the application of the same criteria, as provided for G-SIIs and O-SIIs, for the identification of ‘systemic and bank-like’ investment firms? What are your views on both qualitative and quantitative indicators or thresholds for ‘bank-like’ activities, being underwriting on a firm commitment basis and proprietary trading at a very large scale? What aspects in the identification of ‘systemic and bank-like’ investment firms could be improved?
Broadly speaking, BNY Mellon is supportive. In our view, it is appropriate that the CRD4/CRR regime (or in future, the CRD5/CRR2 regime) applies to systemic AND bank-like investment firms.We agree with the EBA that “only a very small sub-set of investment firms” would meet the “systemic and bank-like” test, and we agree that this outcome is appropriate. Any extension of the test that brings more investment firms into scope of the CRD4/CRR regime would counteract the desire to have a new prudential regime for investment firms, because it would lead to a multi-tier and fragmented system of prudential regulation of investment firms.
In our view, the “Designated Firms List” maintained by the UK Prudential Regulation Authority (PRA) is a good indicator of the types of firms that should be considered as systemic and bank-like in terms of this Discussion Paper. Although this list is a UK-only list, we think that if the principles are extended to firms in other EU jurisdictions, the total number of so-called “Class 1” firms across the EU would (and should) remain a very small sub-set of the total number of investment firms in the EU.
Question 2: What are your views on the principles for the proposed prudential regime for investment firms?
BNY Mellon is broadly supportive of the overarching principles expressed in paragraph 12 of the Discussion Paper. BNY Mellon, however, would want to more closely evaluate more detailed proposals. We also support the comments of The Investment Association.Question 5: Do you have any comments on the approach focusing on risk to customers (RtC), risk to markets (RtM) and risk to firm (RtF)?
BNY Mellon is generally supportive of these concepts, but subject to review of detailed proposals.Question 27: In the case of an investment firm which is a subsidiary of a banking consolidation group, do you see any difficulty in the implementation of the proposed capital requirements on an individual firm basis? If so, do you have any suggestion on how to address any such difficulties?
The European Commission’s “intermediate EU parent undertaking proposal”Impact on the New Prudential Regime for Investment Firms
In November 2016, the European Commission published its legislative proposal for the Capital Requirements Directive 5 (CRD5). One of the proposals in CRD5, i.e., Article 21b, includes a requirement for certain non-EU banking groups (including all non-EU G-SIBs) to use an “intermediate EU parent undertaking”. BNY Mellon is impacted by this proposal. We refer to this proposal in this response as the “EU IHC proposal”.
Under the EU IHC proposal, impacted non-EU banking groups must ensure that all EU-domiciled credit institutions and EU-domiciled “investment firms” be direct or indirect subsidiaries of the intermediate EU parent undertaking (if not the intermediate parent undertaking itself).
We note that in the context of the EU IHC proposal, the definition of “investment firms” is narrower than the definition of “investment firms” in the EBA Discussion Paper. Nevertheless, the EU IHC proposal will apply to a wide range of investment firms covered under the EBA Discussion Paper - in particular it would apply to many of the investment firms currently subject to CRD4/CRR requirements that would otherwise benefit from the proposals in the Discussion Paper.
By requiring such investment firms to be within an EU IHC corporate structure, these investment firms will remain subject to CRD4/CRR requirements (or CRD5/CRR2 requirements), instead of moving to the new prudential regime for investment firms envisaged by the Discussion Paper.
It would also result in discriminatory outcomes in that standalone EU investment firms and investment firms that are part of EU groups would benefit from the new prudential regime, whereas investment firms that are part of groups subject to the EU IHC proposal would not.
This would of course be a poor outcome. Firstly, it would to a large extent counteract the intention of the European Commission that a new prudential regime for investment firms should be created. This is because the new prudential regime would only benefit a much narrower range of investment firms than envisaged.
Secondly, the work of the EBA in the context of the Discussion Paper is pursuant to the Call for Advice that the European Commission issued to the EBA to design a new prudential regime. It is therefore contradictory for the European Commission to pursue a new prudential regime for investment firms on the one hand, and then to limit its application by way of the EU IHC proposal on the other hand. It is clear from the Discussion Paper that the new prudential regime for investment firms should apply to all but the “systemic and bank-like” investment firms.
Accordingly, we would urge the EBA to engage with the European Commission, European Parliament and European Council in order to explain the adverse impact that the EU IHC proposal would have in achieving the objectives of implementing a new prudential regime for investment firms that the European Commission desires, and the broader impact on European Commission initiatives such as the Capital Markets Union, and the creation of jobs and growth.
Impacts on Recovery & Resolution
The impact on the new prudential regime for investment firms is not the only concern posed by the EU IHC proposal. The EU IHC proposal cuts across the objective of having a globally consistent recovery and resolution regime underpinned by FSB principles, such as those expressed in the FSB’s Key Attributes of Effective Resolution Regimes for Financial Institutions. This is because the EU IHC proposal gives primacy to geographic factors. Rather than simplifying corporate structures, the EU IHC proposal would make corporate structures more complex.
Furthermore, it will encourage other jurisdictions around the world to introduce similar requirements – if this occurs, then this would counteract substantial international efforts to develop credible cross-border resolution regimes, as well as future international cooperation on financial policymaking. Accordingly, the efforts to have a globally consistent recovery and resolution regime underpinned by FSB principles could be seriously undermined.
Given the significant work that the EBA has conducted to design an effective recovery and resolution regime in the EU, and to develop Level 2 text in support of the EU Bank Recovery and Resolution Directive (BRRD) - including in relation to cooperation between jurisdictions - it would be unfortunate for this work to be counteracted by the EU IHC proposal.
Question 34: What are your views on having a separate prudential regime for investment firms? Alternatively, should the CRR be amended instead to take into account a higher degree of proportionality? Which type of investment firms, if any, apart from systemic and bank-like investment firms, would be better suited under a simplified CRR regime?
The CRR regime is already very complex and is not tailored to investment firms. Adding proportionality into the regime would make the CRR even more complex and harder to navigate. We would strongly recommend that the EBA continue with the approach of developing a separate prudential regime for investment firms. We support the response of The Investment Association.Question 35: What are the main problems from an investment firm perspective with the current regime? Please list the main problems with the current regime.
The rationale for a new prudential regime for investment firms is that investment firms are fundamentally different from credit institutions in terms of their function, authorisations and risk profile. Accordingly, there should be a prudential regime that is tailored to investment firms.Furthermore, as a general (but not universal) rule, investment firms are smaller than credit institutions, and are less systemically important. The application of CRD4/CRR requirements to a significant number of investment firms (such as “MiFID investment firms”) creates a disproportionate burden upon such investment firms. Many of the CRR4/CRR requirements are not relevant or useful for investment firms. The economic and administrative burdens of CRR4/CRR upon investment firms, limits the ability of such investment firms to support jobs and growth in the EU.
In our view, having a separate prudential regime for investment firms would be consistent with and support the development of the Capital Markets Union (CMU), because investment firms (rather than credit institutions) must play a key role in the CMU to support jobs and growth.
Harmonising the existing system of national prudential regimes for investment firms not subject to CRD4/CRR would also help to build the CMU.
We support the response of The Investment Association.