CRD IV – how the MiFID II shake-up might affect it
MiFID II has barely been unrolled and the European Commission is already considering further legislation on prudential requirements. Some of the proposals affect the Capital Requirements Directive IV (CRD IV). Any legislative changes are unlikely to happen before the next European parliamentary elections in 2019, but could be in place the following year. By then, firms will have had two years or more to get used to implementing the hefty regulatory requirements of MiFID II.
But why more legislation? MiFID II is meant to simplify the rulebook, but at more than 1.4 million words for many firms the changes are anything but simple. And it could be argued that the move to MiFID II has not made anything simpler at all where CRD IV or the Capital Requirements Regulation (CRR) are concerned. The Commission has therefore reviewed the CRR and proposed amendments. Let’s take a look at what might be in store.
Under the new legislative proposals, firms will be categorised into Category 1 (mainly large investment banks controlling assets above €30 billion), Category 2 (mainly asset managers) or Category 3 (mainly very small firms with limited interconnectivity). Category 1 firms are unlikely to see any change to their obligations under CRD IV and CRR and most Category 3 firms won’t be affected. The vast majority of firms fall into Category 2.
Under the proposed changes on capital requirements, firms will have a transition period of up to five years to enable them to build up the new required amounts of capital, and their capital requirement will vary depending on whether the firm was established before or after the changes.
There are also new proposals for liquidity requirements on the table for Category 2 and Category 3 firms, which will both have to hold liquid assets that are equal to a minimum of a third of their fixed overhead requirement. Here, liquid assets means those assets defined in the CRR’s liquidity coverage requirement, such as corporate debt or covered bonds. Category 3 firms will also be permitted to have a third of their liquidity requirement defined as receivables payable within 30 days. Category 2 firms will have to run a regular internal capital adequacy assessment process (ICAAP) – this does not currently apply to all MiFID II-compliant firms. How regular will depend on a firm’s size, scope and other operational factors.
And in future, under the proposals, all Category 2 firms will have to abide by the public reporting rules that currently apply only to those firms within the CRR scope.
The proposals also aim to address issues under MiFIR pertaining to third country firms, such as assessing equivalence regarding the provision of cross-border services – firms will be inspected to ensure their prudential requirements are equivalent to the requirements for EU-domiciled firms under CRD IV and CRR and that they are sufficiently regulated in their home country to be EU-compliant. This would significantly affect UK investment firms should Brexit go ahead, if they are to continue providing cross-border services to firms in EU member states.