The European Banking Authority (EBA) has published its proposals for a new prudential framework for MiFID investment firms. The recommendations have been submitted to the European Commission (‘the Commission’), which is expected to propose legislation by the end of the year. The final proposals are in line with previous recommendations, but with minor alterations to the calibration methodology which will result in a softening of the impact on some firms.

The finalised proposal covers the following areas:

General Recommendations

  • A single consolidated rulebook, that is separate from the one applied to credit institutions, should be developed for all (non-Class 1) MiFID investment firms.
  • To aid transition, it is proposed that new capital requirements on an individual and consolidated basis should be limited to twice the level of capital requirements under the existing regime for the first three years.
  • The EBA is prepared to review and report to the Commission on the appropriateness of the calibration, and the impact of the regime after two - three years.


  • MiFID investment firms should be subject to a three tier categorisation system. Class 1 firms should be systemic investment firms which are exposed to the same types of risk as credit institutions, and should be subject to the full Capital Requirements Directive/Capital Requirements Regulation (CRD/CRR); Class 2 firms should be non-systemic firms that are above specific thresholds and subject to a tailored prudential regime based on K-factors; and Class 3 firms should be small and non-interconnected and subject to a simple regime.  
  • Further Level 2 Regulatory Technical Standards are to be developed by the EBA to identify the Class 1 firms.
  • The EBA’s current proposal is to exclude firms that meet the following criteria from Class 3:
    • a balance sheet total that is higher than €100m;
    • total gross revenues higher than €30m;
    • executed client orders (K-COH) higher than €100m a day for cash trades and/or higher than €1bn a day for derivatives. (This metric has changed from the EBA’s earlier (June) proposal that had been driven by the number of daily orders);
    • assets under management (K-AUM) higher than €1.2bn; or
    • any (higher than zero) holdings of client money (K-CMH), client assets (K-ASA) or market risks (namely, net position risk (K-NPR), clearing member guarantees (K-CMG), daily trade flows (K-DTF), or trading counterparty defaults (K-TCD)). The K-CMG and K-TCD metrics are new and were not present in the June proposal.
  • All investment firms that do not qualify for Class 1 or Class 3 should be considered as Class 2.

Consolidated Supervision

  • Consolidated supervision requirements will apply to investment firm-only groups and the ultimate parent company will be responsible for all the prudential requirements for the group at the consolidated level. The latter includes responsibility for appropriate systems and control arrangements for capital and funding of all regulated group entities, and liquidity requirements compliance.
  • Competent authorities should be granted the power to require the application of capital requirements on a consolidated basis. For example, where groups appear to have deliberately structured themselves into separate entities in order to avoid a Class 2 categorisation, or to mitigate group risk, excessive leverage or multiple gearing.


  • The capital definition should align to the CRR, and deductions (with no thresholds applied) should be made for intangible assets and deferred tax assets.
  • Common Equity Tier 1, Additional Tier 1 and Tier 2 capital should be eligible to meet regulatory capital requirements. CET1 should constitute at least 56% of the capital requirements. Additional Tier 1 should be eligible up to 44% of capital requirements, and Tier 2 capital should be eligible up to 25% of capital requirements (these ratios have been subject to change since the original proposals were submitted in June).
  • An Initial Capital threshold (to be also known as Permanent Minimum Capital – PMC) should be set at €5m for Class 1 investment firms.
  • Initial Capital thresholds for Class 2 and 3 firms should be higher than current arrangements and set at €750k, €150k or €75k depending on the services and activities of the investment firm.
  • The Fixed Overhead Requirement (FOR) remains aligned to Delegated Regulation 488/2015 at 25% of prior year fixed overheads (to ensure all investment firms have enough resources for an orderly wind down).
  • Own account dealing firms should have an initial capital requirement of €750k.
  • Class 3 firms should have a minimum capital requirement equal to the higher of the PMC or FOR.
  • Class 2 firms should be additionally subject to the K-factor assessment, and therefore required to be subject to a minimum capital requirement based on the higher of the PMC, FOR or the K-factor The proposed K-factor coefficients are calibrated as follows:

  • For firms using a General Clearing Member, market risk can be subject to an additional K-factor (clearing member guaranteed) whereby the metric will be derived from the highest total intraday margin posted by the firm in the preceding three month period.
  • The K-factors should be underpinned by ‘rolling average’ calculations to prevent cliff edge effects and promote smoothing.
  • As noted above, transition arrangements have also been proposed to facilitate a more stable transition to the new regime.


  • Liquidity coverage requirements as set out in the Commission Delegated Regulation (EU) 2015/61 should be extended to all Class 1 investment firms.
  • Class 2 and 3 firms should be required to hold an amount of liquid assets equal to one third of their FOR. They should also have procedures in place to monitor, measure and manage liquidity exposures and resources.
  • The eligible liquid assets to meet liquidity requirements should be aligned to the LCR Delegated Regulation, and supplemented by the unencumbered cash resources of the firm.
  • Haircuts should apply to the market value of assets held to meet the liquidity requirements.
  • Firms can monetise liquid assets to cover liquidity needs even if it would result in them falling below the minimum liquidity requirement, but should notify their competent authority immediately.

Concentration Risk

  • Class 2 investment firms should report to competent authorities with respect to concentration risk associated with the default of trading counterparties; risk towards institutions where client money and securities are held; risk towards institutions holding own cash deposits; and concentration risk from earnings.
  • Class 2 investment firms undertaking own account trading will be subject to additional concentration risk limits.

Pillar 2

  • Class 2 and 3 firms should undertake capital adequacy self-assessments (i.e. to assess the adequacy of the minimum requirements to their own risk profile). 
  • Competent authorities should undertake individual firm-specific assessments, and retain an ability to apply increased capital and liquidity requirements and limit concentration risk for investment firms.


  • Simplified reporting requirements should be available for Class 2 and 3 firms.
  • Class 2 firms should have Pillar 3 requirements limited to disclosing the level of capital requirements and the solvency ratio. Class 3 firms should have no Pillar 3 disclosure requirements.

 Commodity Derivatives Investment Firms

  • MiFID II Commodity Derivative Firms should be subject to a phased in tailored new framework that would allow the exemption of measurable positions that are related to commercial activities.

 Remuneration and Governance

  • MIFID II governance requirements should remain applicable to all investment firms.
  • Governance requirements should apply in full to Class 1 firms, with a lighter governance framework applied to Class 2 and Class 3 firms.
  • Additional risk management requirements will apply to Class 2 firms authorised to hold client assets.
  • Class 1 firms should remain under CRD remuneration requirements.
  • CRD remuneration requirements for Class 2 firms will apply to staff that have a material impact on a firm’s risk profile.
  • Class 3 firms should only be subject to MiFID remuneration requirements.

Macro-Prudential Considerations

  • A review should be undertaken to consider the build-up of macro-prudential risks, with a view to determining whether appropriate macro-prudential tools to address those risks should be developed across the three classes of investment firms.

Quantitative Analysis and Impact Assessment

  • A review of the framework should be undertaken three years after the date of the application of the regime.

Impact on Firms

Across the EU, the EBA’s analysis shows that 68% of firms in its sampling exercise would fall within the Class 2 categorisation and subject to the K-factor analysis. Although originally intended to be capital neutral, the impact assessment estimates an overall increase of 10% in capital requirements, depending on firm categorisation as follows: 

Impact on Firms

For investment advisors the introduction of a risk-based review will result in substantially higher pillar 1 requirements, but only 7% of firms are expected to have a capital shortfall as a result of the proposals.

It is anticipated that the new Pillar 1 capital regime is more risk sensitive, and will reduce the need for large Pillar 2 capital adjustments. However, the Pillar 2 framework is still expected to consider elements not fully covered by Pillar 1. Therefore, despite an apparent decline in the Pillar 1 requirements for custodians, the capital requirement for these firms is predominantly driven by their Pillar 2 assessment.  Consequently, for most BIPRU and IFPRU firms, this new regime will not substantially reduce their overall capital requirements.

The UK has 3,273 investment firms (57% of the EU investment firm population) and of the 95 firms that participated in the sampling exercise, 93 were categorised as Class 2. 

Firms operating within a wider banking or systemically important group will be required to report on a solo basis under the new Investment Firm Prudential regime, and additionally on a consolidated basis under the CRD.

While we expect further clarification of the definition of Class 1 Investment Firms, European Commission proposals have separately put forward a recommendation to align the regulatory and supervisory treatment of ‘large’ investment firms with large credit institutions. Therefore, if the definition of ‘Systemic Class 1 Investment Firms’ under the EBA proposals aligns to ‘Large Investment Firms’ under the European Commission Proposals, then such firms established in Member States participating in the Banking Union can become subject to supervision by the European Central Bank.

Next Steps

The Commission will consider the recommendations contained in the EBA report, and submit proposals to the European Parliament. Current industry expectation is that implementation is unlikely to occur before 2020.