The supervision of investment firms is already part of existing European and national regulatory frameworks. However, investment firms are subject, to varying degrees, to the rules on their prudential treatment and supervision of the CRR and CRD IV. The existing supervision is essentially based on the international regulatory standards that the Basel Committee on Banking Supervision (BCBS) has set for large credit institutions. The specific risks associated with the different activities of a large number of investment firms are only partially reflected in the existing rules.
At the end of November 2019, the European Union adopted new regulatory requirements for investment firms with the aim of creating risk-adequate and tailored prudential requirements for investment firms that depend on the business model and scope of the activities of the individual investment firm. The new Investment Firm Regulation (IFR - (EU) 2019/2033) and the new Investment Firm Directive (IFD - (EU) 2019/2034) create for the first time a dedicated reporting framework for all investment firms authorised and supervised under MiFID.
The risks incurred by most investment firms differ significantly from the risks incurred by credit institutions. This difference will therefore be clearly reflected in the supervisory framework and will be regulated by the division of investment firms into three groups. All investment firms with a balance sheet total in excess of EUR 30 billion (Group 1) will still have to comply with the CRR/CRD requirements, while all other investment firms will be subject to changes in capital, liquidity and capital requirements which will have to be analysed and prepared accordingly. For example, in the area of capital requirements, new measures known as K-factors are used to measure client, market and corporate risk, which will require a gradual adjustment in the quantity, complexity and granularity of the reporting data required.
If you would like to find out more about the functional requirements of IFR/IFD and how our reporting software Abacus360 Banking can help you, please watch our webinar from September 29, 2020.