On Tuesday evening, European Parliament, Council of Member States and EU Commission reached a political agreement on a new framework for the supervision of investment firms in the EU („Ferber Report“). Largely unnoticed by the public, the Capital Markets Union and its joint regulation have taken a major step forward. In the future, the more than 6,000 companies registered in the EU with a MiFID licence will be subject to common European requirements regarding capital, liquidity and reporting. So far, MiFID investment firms were subject to no or only national regulatory requirements, depending on the respective business model of the firm. Certain activities have required the calculation of capital requirements in accordance with banking rules (CRR/CRD), even though investment firms hardly take any credit risks but are exposed to high operational risks.
The new framework will require investment firms with a balance sheet total exceeding EUR 100 million to calculate their capital requirements on the basis of the actual risks of their business activities measured by so-called K-factors (“Class 2”). The smallest firms may apply simplified rules, but are also subject to the new European prudential regime (“Class 3”). Investment firms with a balance sheet total of more than €15 billion will have to fully apply the banking rules (“Class 1-”). The largest firms such as Barclays Capital Securities Limited, Goldman Sachs International, Merrill Lynch International and Morgan Stanley International Plc having a balance sheet total of more than €30 billion will additionally be supervised by the Single Supervision Mechanism (SSM) within the ECB (“Class 1”).
Based on the political agreement reached among co-legislators, the details will be sorted out in technical meetings in the following weeks. Before entering into force, the final text needs to be adopted first by the Committee on Economic and Monetary Affairs (ECON) and afterwards by the plenary of the European Parliament.
Sven Giegold, shadow rapporteur and financial and economic policy spokesperson of the Greens/EFA group, commented:
„This is substantial progress for a European regulation of Blackrock and other investment firms. The new rules for investment firms are a big step forward for a strong European Capital Markets Union. In future, all investment firms registered in the EU will have to abide by European rules on capital, liquidity and reporting. The new uniform set of rules not only overcome the patchwork of national legislation, but also aligns capital requirements with the actual risks of investment firms. The smallest firms may apply simplified rules, but are also subject to the new European prudential regime. Unfortunately, the final text falls short of the tougher Commission proposals particularly with regard to capital and liquidity requirements. This may be justified as investment firms are non-banks which do have no role in money creation and thus pose less systemic risk than banks.
On Green initiative, co-legislators agreed to require large MiFID investment firms such as Blackrock, State Street and Vanguard to make their investment policies more transparent to the public. This is a first step towards regulating in a more European manner the ever-increasing power of large asset managers in the corporate governance of many EU corporates. They are now asked to make public in which companies they hold shares of more than 5% and how they vote at general meetings. Additionally, the EU Commission will assess whether to subject also alternative investment firms managers (AIFM), banks (CRD/CRR) and undertakings for collective investments in transferable securities (UCITs) to the new transparency rules.
Like the banking package, the new legislation for investment firms contains requirements for the consideration and disclosure of environmental, social and governance (ESG) risks. This will allow the financial markets to become greener again and strengthen sustainable investment. Likewise, the investment firms package will extend the requirement for public country-by-country tax transparency to all Class 2 investment firms. Finally, the Parliament prevailed against the Council and made the equivalence regime for third country firms stricter. The European Securities and Markets Authority (ESMA) will ensure that consumer protection rules also apply to third country firms offering services to EU consumers.“
The draft text of the most important issues can be found below. The draft texts might be subject to minor changes in the upcoming technical meetings: