Question ID:
2018_3663
Legal Act:
Regulation (EU) No 575/2013 as amended by Regulation (EU) 2019/876 – CRR2
Topic:
Other topics
Article:
4
Paragraph:
1
Subparagraph:
2(c)
COM Delegated or Implementing Acts/RTS/ITS/GLs:
Not applicable
Article/Paragraph:
N/A
Type of submitter:
Competent authority
Subject Matter:
CRR's definition of an investment firm
Question:

Article 4(1)(2)(c) CRR contains three conditions for an investment firm, as defined by MiFiD I, to be excluded from the CRR definition of an investment firm. What is the difference between the first and the third condition set in this article?

Under what circumstances can you have an investment firm that is permitted to hold money or securities belonging to its clients that has not been authorised to provide safekeeping and administration of financial instruments for the account of its clients?

Background on the question:

Article 4(1)(2)(c) of Regulation (EU) No 575/2013 (CRR) contains three conditions for an investment firm, as defined by MiFiD I, to be excluded from the CRR definition of an investment firm.

The first condition is that the firms are not authorized to provide “Safekeeping and administration of financial instruments for the account of clients, including custodianship and related services such as cash/collateral management”.

The third condition is that the firms “are not permitted to hold money or securities belonging to their clients and which for that reason may not at any time place themselves in debt with those clients”.

What is the difference between these two conditions?

There does not appear to be a difference between the two conditions as firms, in order to be permitted to hold money or securities belonging to clients need to be authorised to provide safekeeping and administration of financial instruments for the account of clients. The third condition could be a reference to investment firms borrowing securities e.g. in order to take a short position. However, this does not explain the reference to the investment firms "holding money" belonging to their clients.

Date of submission:
12/01/2018
Published as Final Q&A:
13/12/2019
EBA Answer:

There is indeed some overlap in the first and third legs of the cumulative conditions in point (c) of Article 4(1)(2) of CRR which an investment firm authorised under Directive 2014/65/EU (MiFID) must meet in order to be excluded from the CRR definition of investment firm.

This arises from the cross-reference in the first leg to point 1 of Section B of Annex I of Directive 2014/65/EU (MiFID) regarding the ancillary activity of safekeeping and administering financial instruments and, in the third leg, from the spelling out of holding client money or securities belonging to clients. The overlap concerns notably the reference in point 1 of Section B of Annex I of MiFID to “cash management” (which could include holding client money), and the reference in the third leg of point (c) of Article 4(1)(2) of CRR to “holding […] securities belonging to their clients” (which could include safekeeping of financial instruments).

However, Point 1 of Section B of Annex I indicates that cash management/holding client money is not a necessary feature of safekeeping and administering financial instruments, but rather that these can also be mere “related services”. Further, the third leg specifically refers to firms “not permitted to hold money […] belonging to their clients”, which can relate to a specific permission granted by a competent authority under national law, and which is distinct from the ancillary activity of safekeeping and administering financial instruments in point 1 of Section B of Annex I. 

Thus, managing/holding client cash can be part of an asset safekeeping service offered by a firm but is not, on its own, the same thing. Moreover, as the conditions are cumulative – i.e. a firm has to meet all of the conditions to be excluded from the CRR definition of investment firm – there should be no practical impact of any overlap.

Finally, it is recalled that the CRR definition of investment firm is set to be amended by the entry into application of the revised prudential framework for investment firms. This change will delete both points (b) and (c) from the CRR definition.

 

Disclaimer:

This question goes beyond matters of consistent and effective application of the regulatory framework. A Directorate General of the Commission (Directorate General for Financial Stability, Financial services and Capital Markets Union) has prepared the answer, albeit that only the Court of Justice of the European Union can provide definitive interpretations of EU legislation. This is an unofficial opinion of that Directorate General, which the European Banking Authority publishes on its behalf. The answers are not binding on the European Commission as an institution. You should be aware that the European Commission could adopt a position different from the one expressed in such Q&As, for instance in infringement proceedings or after a detailed examination of a specific case or on the basis of any new legal or factual elements that may have been brought to its attention.

Status:
Final Q&A