The question is whether IFR Article 21(4) brings firms that do not deal on their own account into the scope of K-NPR or whether this provision concerns an additional requirement only for firms that deal on own account.

As IFR Article 21(4) is positioned under Part Three, Title II, Chapter 3 of the IFR that determines the own funds requirements under the Risk-to-Market (RtM) K-factor, the question is therefore more generally whether investment firms other than those dealing on own account are subject to the RtM K-factor requirement.

A first clarification of the applicable scope for the RtM K-factor requirement is provided by IFR recital 25, establishing the link between the RtM K-factor and investment firms which deal on own account. That recital explains that “the K‐factor for RtM for investment firms which deal on own account is based on the rules for market risk for positions in financial instruments, in foreign exchange, and in commodities in accordance with Regulation (EU) No 575/2013”.

Then, in Part Three, Title II, Chapter 3 of the IFR, Article 21(1) explicitly addresses investment firms dealing on own account when providing for the methodologies that have to be used to calculate the RtM K-factor requirements. That Article states that “the RtM K-factor requirement for the trading book positions of an investment firm dealing on own account, whether for itself or on behalf of a client shall be either K-NPR calculated in accordance with Article 22 or K-CMG calculated in accordance with Article 23”.

This interpretation is further reinforced by the reading of the first paragraph of IFR Articles 22 and 23, both explicitly referring to “the own funds requirement for the trading book positions of an investment firm dealing on own account, whether for itself or on behalf of a client”.

Finally, in IFR Article 21(4) itself, it is specified that an investment firm should “include positions other than trading book positions where those give rise to foreign exchange risk or commodity risk” for the specific purpose of calculating the RtM K-factor requirement. Yet, based on the above, it is made clear that the latter only applies to investment firms dealing on own account.

Therefore, it can be concluded that the requirement in Article 21(4) applies only to investment firms subject to the RtM K-factor which is only applicable to investment firms dealing on own account. Article 21(4) should not be understood as broadening the scope of the RtM K-factor provisions to other investment firms.

At the same time, it can be pointed out that any risk not covered or not adequately covered under the Pillar 1 (i.e. K-factor requirements) needs to be adjusted through the supervisory review process and the Pillar 2.

Therefore, if a competent authority considers that investment firms that do not deal on own account are exposed to potential foreign exchange risk or commodity risk of positions other than trading book positions, they may apply appropriate Pillar 2 measures.

Disclaimer:

The answer clarifies provisions already contained in the applicable legislation. It does not extend in any way the rights and obligations deriving from such legislation; nor does it introduce any additional requirements for the concerned operators and competent authorities. The answer is merely intended to assist natural or legal persons; including competent authorities and Union institutions and bodies in clarifying the application or implementation of the relevant legal provisions. Only the Court of Justice of the European Union is competent to authoritatively interpret Union law. The views expressed in the internal Commission Decision cannot prejudge the position that the European Commission might take before the Union and national courts.