Position on the Review of the Prudential Framework for Investment Firms

We welcome the underlying objective followed in the Commission’s legislative proposals on designing a new prudential regime for investment firms, i.e. to categorise investment firms into three classes based on the risks they pose and to attach different capital and prudential requirements to the respective classes.

However, we have strong concerns regarding the potential impact of the proposals on market makers and liquidity providers, as they do not appropriately accommodate risks associated with investment firms’ business activities; in particular, they do not fully recognise that investment firms may positively contribute to market liquidity and transparency. In effect, this may result in wrongly calibrated capital requirements which may – by the very design and calibration of the calculation method – disincentivise respective investment firms from providing liquidity. Furthermore, it should be kept in mind that the proposals are clearly linked to other regulatory dossiers and political projects, such as the Capital Markets Union, MiFID II and EMIR.

Should the legislation be adopted in the current form, it would result in a large overstatement of risks and disproportionate capital requirements for market makers. As a result, market quality and resilience will be adversely affected by possibly forcing a large group of market makers to retreat from the markets. In short, the proposed approach would thus have adverse implications on the stability, resilience, security and effective functioning of EU financial markets. We, therefore, urge the Commission and the co-legislators to consider amendments that should appropriately reflect the limited risk market makers pose to the market, and the benefits they provide, especially in cleared derivatives markets. They should also be consistent with provisions and obligations established under other EU legislation (in particular MiFID II and EMIR), and with the objectives of the CMU project.