Prudential requirements for dealers in securities

In December 2019, new regulations dealing with prudential requirements for dealers in securities were published in the EU Official Journal, introducing a new categorisation of dealers in securities and rules for the remuneration of their employees, and specifying prudential requirements that will have to be adhered to by dealers in securities from mid-2021. Most dealers in securities will then have to substantially change their risk management systems and assess their internal regulations’ compliance with the new legislation.

The first regulation at issue is a directive on the prudential supervision of investment firms (IFD), which should be transposed into national legislations by 26 June 2021. The second regulation is a regulation on the prudential requirements of investment firms (IFR), which will enter into effect on the same date.

Dealers in securities will be divided into three categories based on their size, systemic importance, and interconnectedness with other companies of the group.

The first category will include large dealers in securities that will remain subject to the CRD IV and CRR regime (or approved CRD V and CRR II). The first category will also include a special category of systemic companies defined as credit institutions under CRR. These dealers in securities will have to obtain a new permit to provide investment services, despite  already having a permit under MiFID II.

The second category will include dealers in securities who exceed some of the limits set for the third category. Companies will have to assess the risks of K-factors to determine the relevant capital requirements. K-factors represent various capital requirements regulated by IFR in relation to the risks that dealers in securities represent for customers, markets and for themselves (risk-to-client, risk-to-market and risk-to-firm).

The third category will include small and non-interconnected dealers in securities who do not represent any major risks. Whether a specific company falls into the third category will be determined based on the calculation of K-factors.

Following the new capital requirements, dealers in securities will have to adjust their risk management systems. Changes will involve, among other things, concentration risk and liquidity requirements. IFR and IFD also introduce remuneration principles, in part deriving from the requirements under CRD IV and CRR. One of the main requirements specified in IFD concerns variable components of remuneration, at least one half of which will have to be non-monetary (consisting typically of shares) and deferred over three to five years. 

The duties arising from IFD and IFR will start to apply from mid-2021. The ball is now in the Czech legislators’ court. However, concerned companies should already start investigating into which category they will fall and what duties they will have to fulfil to accommodate the new rules sufficiently in advance.

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