(1)

Robust prudential requirements are an integral part of the regulatory conditions under which financial institutions provide services within the Union. Investment firms are, together with credit institutions, subject to Regulation (EU) No 575/2013 of the European Parliament and of the Council (4) and to Directive 2013/36/EU of the European Parliament and of the Council (5) as regards their prudential treatment and supervision, while their authorisation and other organisational and conduct requirements are set out in Directive 2014/65/EU of the European Parliament and of the Council (6).

(2)

The existing prudential regimes under Regulation (EU) No 575/2013 and Directive 2013/36/EU are largely based on successive iterations of the international regulatory standards set for large banking groups by the Basel Committee on Banking Supervision and only partially address the specific risks inherent to the diverse activities of a large number of investment firms. The specific vulnerabilities and risks inherent to those investment firms should therefore be specifically addressed by means of appropriate and proportionate prudential arrangements at Union level.

(3)

The risks which investment firms themselves incur and pose for their clients and the wider markets in which they operate depend on the nature and volume of their activities, including whether investment firms act as agents for their clients and are not party to the resulting transactions themselves, or whether they act as principals to the trades.

(4)

Sound prudential requirements should ensure that investment firms are managed in an orderly way and in the best interests of their clients. They should take into account the potential for investment firms and their clients to engage in excessive risk‐taking and the different degrees of risk assumed and posed by investment firms. Equally, such prudential requirements should aim to avoid imposing an undue administrative burden on investment firms.

(5)

Many of the prudential requirements that stem from the framework of Regulation (EU) No 575/2013 and Directive 2013/36/EU are designed to address common risks faced by credit institutions. Accordingly, the existing requirements are largely calibrated to preserve the lending capacity of credit institutions through economic cycles and to protect depositors and taxpayers from possible failure, and are not designed to address all of the different risk profiles of investment firms. Investment firms do not have large portfolios of retail and corporate loans and do not take deposits. The likelihood that their failure can have a detrimental impact on overall financial stability is lower than in the case of credit institutions. The risks faced and posed by most investment firms are thus substantially different to the risks faced and posed by credit institutions and such differences should be clearly reflected in the prudential framework of the Union.

(6)

The prudential requirements to which investment firms are subject under Regulation (EU) No 575/2013 and Directive 2013/36/EU are based on those of credit institutions. Investment firms the scope of whose authorisation is limited to specific investment services which are not targeted by the current prudential framework are subject to numerous exemptions from those requirements. Those exemptions recognise that those investment firms do not incur risks of the same nature as credit institutions. Investment firms which carry out activities that are targeted by the current prudential framework and that involve trading in financial instruments on a limited basis are subject to corresponding requirements of the framework in terms of capital but are eligible for exemptions in other areas, such as liquidity, large exposures and leverage. Investment firms the scope of whose authorisation is not subject to those limitations are subject to the same prudential requirements as credit institutions.

(7)

The trading of financial instruments, whether for the purposes of risk management, hedging or liquidity management or for taking directional positions on the value of the instruments over time, is an activity in which both credit institutions and investment firms authorised for dealing on own account may engage and which is already addressed by the prudential framework under Regulation (EU) No 575/2013 and Directive 2013/36/EU. In order to avoid an unlevel playing field which could lead to regulatory arbitrage between credit institutions and investment firms in this area, the own funds requirements resulting from those rules that address the risk should therefore also continue to apply to those investment firms. The exposures of those investment firms to their trading counterparties in specific transactions and corresponding own funds requirements are also covered by the rules and should therefore also continue to apply to investment firms in a simplified way. Finally, the rules on large exposures in the current prudential framework are also relevant when the trading exposures of those investment firms to specific counterparties are particularly large and thereby generate an excessively concentrated source of risk for an investment firm from the default of the counterparty. Those rules should therefore also continue to apply to investment firms in a simplified way.

(8)

Differences in the application of the existing prudential framework in different Member States threaten the level playing field for investment firms within the Union. Those differences stem from the overall complexity of the application of the framework to different investment firms based on the services that they provide, where some national authorities adjust or streamline such application in national law or practice. Given that the existing prudential framework does not address all the risks faced and posed by some types of investment firms, large capital add‐ons have been applied to certain investment firms in some Member States. Uniform provisions addressing those risks should be established in order to ensure harmonised prudential supervision of investment firms across the Union.

(9)

A specific prudential regime is therefore required for investment firms which are not systemic by virtue of their size and interconnectedness with other financial and economic actors. Systemic investment firms should, however, remain subject to the existing prudential framework under Regulation (EU) No 575/2013 and Directive 2013/36/EU. Those investment firms are a subset of investment firms to which the framework laid down in Regulation (EU) No 575/2013 and Directive 2013/36/EU currently applies and which do not benefit from dedicated exemptions from any of their principle requirements. The largest and most interconnected investment firms have business models and risk profiles that are similar to those of significant credit institutions. They provide ‘bank‐like’ services and underwrite risks on a significant scale. Furthermore, systemic investment firms are large enough to, and have business models and risk profiles which, represent a threat for the stable and orderly functioning of financial markets on a par with large credit institutions. Therefore it is appropriate that those investment firms remain subject to the rules set out in Regulation (EU) No 575/2013 and Directive 2013/36/EU.

(10)

The specific prudential regime for investment firms which, by virtue of their size and interconnectedness with other financial and economic actors, are not considered to be systemic should address the specific business practices of different types of investment firms. Investment firms with the highest possibility of generating risks to clients, markets or the orderly functioning of the investment firms themselves should, in particular, be subject to clear and effective prudential requirements tailored to those specific risks. Those prudential requirements should be calibrated in a manner proportionate to the type of investment firm, the best interests of the clients of that type of investment firm and the promotion of the smooth and orderly functioning of the markets in which that type of investment firm operates. They should mitigate identified areas of risk and help ensure that, if an investment firm fails, it can be wound down in an orderly manner with minimal disruption to the stability of financial markets.

(11)

The regime provided for in this Regulation should not affect the obligations of designated market makers at trading venues pursuant to Directive 2014/65/EU to provide quotes and be present in the market on a continuous basis.

(12)

The prudential regime for investment firms which, by virtue of their size and interconnectedness with other financial and economic actors, are not considered to be systemic should apply to each investment firm on an individual basis. However, in order to facilitate the application of prudential requirements for investment firms in the Union which are part of banking groups, to avoid disrupting certain business models the risks of which are already covered by the application of prudential rules, investment firms should be allowed to apply the requirements of Regulation (EU) No 575/2013 and Directive 2013/36/EU where appropriate, subject to approval by the competent authorities, provided that their decision to do so is not driven by regulatory arbitrage purposes. Further, since the risks incurred by small and non‐interconnected investment firms are limited for the most part, they should be allowed to avail themselves of an exemption from the specific prudential requirements for investment firms where they are part of a banking group or investment firm group headquartered and subject to consolidated supervision under Regulation (EU) No 575/2013 and Directive 2013/36/EU or under this Regulation and Directive (EU) 2019/2034 of the European Parliament and of the Council (7), as applicable, in the same Member State, as those prudential frameworks should adequately cover those risks in such cases. In order to mirror the existing treatment of investment firm groups under Regulation (EU) No 575/2013 and Directive 2013/36/EU, for groups consisting only of investment firms, or where consolidation under Regulation (EU) No 575/2013 does not apply, the parent undertaking in such groups should be required to comply with the requirements of this Regulation based on the consolidated situation of the group. Alternatively, instead of prudential consolidation, where such investment firm groups reflect simpler structures and risk profiles, competent authorities may allow the parent undertaking in the group to have sufficient capital to support the book value of its holdings in the subsidiaries. Where they are part of an insurance group, small and non‐interconnected investment firms should also be allowed to avail themselves of an exemption from disclosure requirements.

(13)

In order to allow investment firms to continue to rely on their existing own funds to meet their own funds requirements under the prudential framework specific to investment firms, the definition and composition of own funds should be aligned with Regulation (EU) No 575/2013. This includes full deductions of balance‐sheet items from own funds in accordance with Regulation (EU) No 575/2013, such as deferred tax assets and holdings of capital instruments of other financial sector entities. However, investment firms should be able to exempt non‐significant holdings of capital instruments in financial sector entities from deductions if held for trading purposes in order to support market making in those instruments. In order to align the composition of own funds with Regulation (EU) No 575/2013, the corresponding ratios of the types of own funds have been mirrored in the context of this Regulation. To ensure that the requirements are proportionate to the nature, scope and complexity of the activities of the investment firms and that they are readily accessible to the investment firms within this Regulation, the Commission should review the appropriateness of continuing to align the definition and composition of own funds with that of Regulation (EU) No 575/2013.

(14)

In order to ensure that investment firms always operate on the basis of the level of own funds required for their authorisation, all investment firms should, at all times, meet a permanent minimum capital requirement equal to the initial capital required for authorisation to conduct the relevant investment services set in accordance with Directive (EU) 2019/2034.

(15)

In order to ensure a simple application of the minimum own funds requirement for small and non‐interconnected investment firms, they should have own funds equal to the higher of their permanent minimum capital requirement or a quarter of their fixed overheads measured on the basis of their activity of the preceding year. Small and non‐interconnected investment firms that prefer to exercise further caution and avoid cliff effects in the case of reclassification should not be prevented from holding own funds in excess of, or applying measures stricter than, those required by this Regulation.

(16)

To account for the higher risks of investment firms which are not small and non‐interconnected, the minimum own funds requirement for such firms should be the higher of their permanent minimum capital requirement, a quarter of their fixed overheads for the preceding year, or the sum of their requirement under the set of risk factors tailored to investment firms (‘K‐factors’) which sets capital in relation to the risks in specific business areas of investment firms.

(17)

Investment firms should be considered to be small and non‐interconnected for the purposes of the specific prudential requirements for investment firms where they do not conduct investment services which carry a high risk for clients, markets or themselves and where their size means they are less likely to cause widespread negative impacts for clients and markets if risks inherent in their business materialise or if they fail. Accordingly, small and non‐interconnected investment firms should be defined as those that do not deal on own account or incur risk from trading financial instruments, hold no client assets or money, have assets under both discretionary portfolio management and non‐discretionary (advisory) arrangements of less than EUR 1,2 billion, handle less than EUR 100 million per day of client orders in cash trades or less than EUR 1 billion per day of client orders in derivatives, and have a balance sheet smaller than EUR 100 million including off‐balance‐sheet items and total gross annual revenues from the performance of their investment services of less than EUR 30 million.

(18)

In order to prevent regulatory arbitrage and to reduce the incentives for investment firms to restructure their operations to avoid exceeding the thresholds above which they do not qualify as small and non‐interconnected investment firms, the thresholds for assets under management, client orders handled, balance sheet size and total gross annual revenues should be applied on a combined basis for all investment firms that are part of the same group. The other conditions, namely whether an investment firm holds client money, administers or safeguards client assets, or trades financial instruments and incurs market or counterparty risk, are binary and leave no scope for such restructuring, and should therefore be assessed on an individual basis. In order to capture evolving business models and the risks they represent on an ongoing basis, those conditions and thresholds should be assessed on an end‐of‐day basis with the exception of holding client money, which should be assessed on an intraday basis, and balance sheet size and total annual gross revenues, which should be assessed based on the situation of the investment firm at the end of the previous financial year.

(19)

An investment firm that exceeds the regulatory thresholds or fails to meet the other conditions should not be considered small and non‐interconnected and should be subject to the requirements for other investment firms, subject to the specific transitional provisions set out in this Regulation. This should encourage investment firms to plan their business activities so as to clearly qualify as small and non‐interconnected investment firms. For an investment firm which does not satisfy the requirements to be considered small and non‐interconnected to qualify for such treatment, a monitoring phase should be provided where that investment firm meets the conditions and remains below the relevant thresholds for at least six consecutive months.

(20)

All investment firms should calculate their own funds requirement by reference to a set of K‐factors which capture Risk‐To‐Client (‘RtC’), Risk‐to‐Market (‘RtM’) and Risk‐to‐Firm (‘RtF’). The K‐factors under RtC capture client assets under management and ongoing advice (K‐AUM), client money held (K‐CMH), assets safeguarded and administered (K‐ASA), and client orders handled (K‐COH).

(21)

The K‐factor under RtM captures net position risk (K‐NPR) in accordance with the market risk provisions of Regulation (EU) No 575/2013 or, where permitted by the competent authority for specific types of investment firms which deal on own account through clearing members, based on the total margins required by an investment firm’s clearing member (K‐CMG). Investment firms should have an option to apply K‐NPR and K‐CMG simultaneously on a portfolio basis.

(22)

The K‐factors under RtF capture an investment firm’s exposure to the default of their trading counterparties (K‐TCD) in accordance with simplified provisions for counterparty credit risk based on Regulation (EU) No 575/2013, concentration risk in an investment firm’s large exposures to specific counterparties based on the provisions of that Regulation that apply to large exposures in the trading book (K‐CON), and operational risks from an investment firm’s daily trading flow (K‐DTF).

(23)

The overall own funds requirement under the K‐factors is the sum of the requirements of the K‐factors under RtC, RtM and RtF. K‐AUM, K‐ASA, K‐CMH, K‐COH and K‐DTF relate to the volume of activity referred to by each K‐factor. The volumes for K‐CMH, K‐ASA, and K‐DTF are calculated on the basis of a rolling average from the previous nine months. The volume for K‐COH is calculated on the basis of a rolling average from the previous six months, while for K‐AUM it is based on the previous 15 months. The volumes are multiplied by the corresponding coefficients set out in this Regulation in order to determine the own funds requirement. The own funds requirements for K‐NPR are derived from Regulation (EU) No 575/2013, while the own funds requirements for K‐CON and K‐TCD use a simplified application of the corresponding requirements under that Regulation for, respectively, the treatment of large exposures in the trading book and of counterparty credit risk. The amount of a K‐factor is zero if an investment firm does not undertake the relevant activity.

(24)

The K‐factors under RtC are proxies covering the business areas of investment firms from which harm to clients can conceivably be generated in case of problems. K‐AUM captures the risk of harm to clients from an incorrect discretionary management of client portfolios or poor execution and provides reassurance and client benefits in terms of the continuity of service of ongoing portfolio management and investment advice. K‐ASA captures the risk of safeguarding and administering client assets, and ensures that investment firms hold capital in proportion to such balances, regardless of whether they are on its own balance sheet or in third‐party accounts. K‐CMH captures the risk of potential for harm where an investment firm holds the money of its clients, taking into account whether they are on its own balance sheet or in third‐party accounts and arrangements under applicable national law provide that client money is safeguarded in the event of bankruptcy, insolvency, or entry into resolution or administration of the investment firm. K‐CMH excludes client money that is deposited on a (custodian) bank account in the name of the client itself, where the investment firm has access to the client money via a third‐party mandate. K‐COH captures the potential risk to clients of an investment firm which executes orders (in the name of the client, and not in the name of the investment firm itself), for example as part of execution‐only services to clients or when an investment firm is part of a chain for client orders.

(25)

The K‐factor for RtM for investment firms which deal on own account is based on the rules for market risk for positions in financial instruments, in foreign exchange, and in commodities in accordance with Regulation (EU) No 575/2013. This allows investment firms to choose to apply the standardised approach, the alternative standardised approach under Regulation (EU) No 575/2013, or the option to use internal models, once those latter two approaches become applicable to credit institutions not only for reporting purposes but also for own funds requirements purposes. In the meantime, and at least during the five years after the date of application of this Regulation, investment firms should apply the market risk framework (standardised approach or, if applicable, internal models) of Regulation (EU) No 575/2013 for the purpose of calculating their K‐NPR. If the provisions set out in Chapters 1a and 1b of Title IV of Part Three of Regulation (EU) No 575/2013 as amended by Regulation (EU) 2019/876 of the European Parliament and of the Council (8) do not become applicable to credit institutions for own funds requirements purposes, investment firms should continue to apply the requirements set out in Title IV of Part Three of Regulation (EU) No 575/2013 for the purpose of calculating K‐NPR. Alternatively, the own funds requirement of investment firms trading financial instruments with positions that are subject to clearing may, subject to the approval of the competent authority and certain conditions, be equal to the amount of total margins required by their clearing member, multiplied by a fixed multiplier. The use of K‐CMG should be predicated primarily on an investment firm’s trading activity falling entirely or substantially under this approach. However, the investment firm’s competent authority may also allow the investment firm to make partial use of the K‐CMG approach, provided that this approach is used for all positions that are subject to clearing or margining and one of the three alternative methods for K‐NPR is applied to portfolios that are not subject to clearing. In order to ensure that the requirements are proportionate to the nature, scope and complexity of the activities of the investment firms and that they are readily accessible to the investment firms within this Regulation, any review that subsequently takes place concerning the application of the methods for calculating the K‐factors should include the appropriateness of continuing to align the calculation of K‐NPR with the rules for market risk for trading book positions in financial instruments, in foreign exchange, and in commodities in accordance with Regulation (EU) No 575/2013.

(26)

For investment firms which deal on own account, the K‐factors for K‐TCD and K‐CON under RtF constitute a simplified application of the rules laid down in Regulation (EU) No 575/2013 on counterparty credit risk and large exposure risk, respectively. K‐TCD captures the risk to an investment firm by counterparties to over‐the‐counter (OTC) derivatives, repurchase transactions, securities and commodities lending or borrowing transactions, long settlement transactions, margin lending transactions, or any other securities financing transactions, as well as by recipients of loans granted by the investment firm on an ancillary basis as part of an investment service that fail to fulfil their obligations, by multiplying the value of the exposures, based on replacement cost and an add‐on for potential future exposure, by risk factors based on Regulation (EU) No 575/2013, accounting for the mitigating effects of effective netting and the exchange of collateral. In order to further align the treatment of counterparty credit risk with Regulation (EU) No 575/2013, a fixed multiplier of 1,2 and a multiplier for credit valuation adjustment (CVA) to reflect the current market value of the credit risk of the counterparty to the investment firm in specific transactions should also be added. K‐CON captures concentration risk in relation to individual or highly connected private sector counterparties with whom firms have exposures above 25 % of their own funds, or specific alternative thresholds in relation to credit institutions or other investment firms, by imposing a capital add‐on in line with Regulation (EU) No 575/2013 for excess exposures above those limits. Finally, K‐DTF captures the operational risks to an investment firm in large volumes of trades concluded for its own account or for clients in its own name in one day which could result from inadequate or failed internal processes, people and systems or from external events, based on the notional value of daily trades, adjusted for the time to maturity of interest rate derivatives in order to limit increases in own funds requirements, in particular for short‐term contracts where perceived operational risks are lower.

(27)

All investment firms should monitor and control their concentration risk, including in respect of their clients. However, only investment firms which are subject to a minimum own funds requirement under the K‐factors should report to competent authorities on their concentration risks. For investment firms specialised in commodity derivatives or emission allowances or derivatives thereof with large concentrated exposures to non‐financial counterparties, the limits for concentration risk may be exceeded without additional capital under K‐CON as long as they serve commercial, treasury or risk management purposes.

(28)

All investment firms should have internal procedures to monitor and manage their liquidity requirements. Those procedures are intended to help ensure that investment firms can function in an orderly manner over time, without the need to set aside liquidity specifically for times of stress. To that end, all investment firms should hold a minimum of one third of their fixed overheads requirement in liquid assets at all times. However, competent authorities should be allowed to exempt small and non‐interconnected investment firms from that requirement. Those liquid assets should be of high quality and aligned with those listed in Commission Delegated Regulation (EU) 2015/61 (9), together with the haircuts which apply to those assets under that Delegated Regulation. To account for the difference in liquidity profiles of investment firms compared to credit institutions, the list of appropriate liquid assets should be supplemented by the unencumbered own cash and short‐term deposits of the investment firm (which should not include any client money or financial instruments belonging to clients), and certain financial instruments for which there is a liquid market. If not exempt from liquidity requirements, small and non‐interconnected investment firms, as well as investment firms which are not licensed to carry out trading or underwriting activities, could further include items related to trade debtors and fees or commissions receivable within 30 days as liquid assets, provided that these items do not exceed one‐third of the minimum liquidity requirement, that they do not count towards any additional liquidity requirements imposed by the competent authority, and that they are subject to a haircut of 50 %. In exceptional circumstances, investment firms should be permitted to fall below the required threshold by monetising their liquid assets to cover liquidity requirements, provided that they notify their competent authority immediately. All financial guarantees provided to clients which can give rise to increased liquidity needs if triggered should reduce the amount of available liquid assets by at least 1,6 % of the total value of such guarantees. To ensure that the requirements are proportionate to the nature, scope and complexity of the activities of the investment firms and that they are readily accessible to the investment firms within the scope of this Regulation, a review should subsequently take place regarding the appropriateness of the liquid assets which are eligible for meeting the minimum liquidity requirement, including the continued alignment with those listed in Delegated Regulation (EU) 2015/61, together with the haircuts applying to those assets under that Delegated Regulation.

(29)

A proportionate corresponding regulatory reporting framework should be developed in conjunction with the new prudential regime and should be carefully tailored to the business of investment firms and the requirements of the prudential framework. Reporting requirements for investment firms should concern the level and composition of their own funds, their own funds requirements, the basis for the calculation of their own funds requirements, their activity profile and size in relation to the parameters for considering investment firms to be small and non‐interconnected, their liquidity requirements and their adherence to the provisions on concentration risk. Small and non‐interconnected investment firms should be exempt from reporting on concentration risk and should be required to report on liquidity requirements only where such requirements apply to them. The European Supervisory Authority (European Banking Authority) established by Regulation (EU) No 1093/2010 of the European Parliament and of the Council (10) (EBA) should develop draft implementing technical standards to further specify the detailed templates and arrangements for that regulatory reporting and to specify the templates for own funds disclosures. Those standards should be proportionate to the scale and complexity of different investment firms and should, in particular, take account of whether investment firms are considered to be small and non‐interconnected.

(30)

In order to provide transparency to their investors and the wider markets, investment firms which are not considered to be small and non‐interconnected should publicly disclose their levels of own funds, own funds requirements, governance arrangements, and remuneration policies and practices. Small and non‐interconnected investment firms should not be subject to public disclosure requirements, except where they issue Additional Tier 1 instruments in order to provide transparency to the investors in those instruments.

(31)

Investment firms should apply gender-neutral remuneration policies in accordance with the principle laid down in Article 157 of the Treaty on the Functioning of the European Union (TFEU). Some clarifications should be made to the remuneration disclosures. The disclosure requirements relating to remuneration set out in this Regulation should be compatible with the aims of the remuneration rules, namely to establish and maintain, for categories of staff whose professional activities have a material impact on the risk profile of investment firms, remuneration policies and practices that are consistent with effective risk management. Furthermore, investment firms benefitting from a derogation from certain remuneration rules should be required to disclose information concerning such derogation.

(32)

In order to facilitate a smooth transition for investment firms from the requirements of Regulation (EU) No 575/2013 and Directive 2013/36/EU to the requirements under this Regulation and Directive (EU) 2019/2034, it is appropriate to provide for appropriate transitional measures. In particular, for a period of five years from the date of application of this Regulation, investment firms for which own funds requirements under this Regulation would more than double compared to their own funds requirement under Regulation (EU) No 575/2013 and Directive 2013/36/EU should be able to mitigate the effects of potential increases by limiting the own funds requirement to twice their relevant own funds requirement under Regulation (EU) No 575/2013 and Directive 2013/36/EU.

(33)

In order not to disadvantage new investment firms with similar profiles to existing investment firms, investment firms which were never subject to own funds requirements under Regulation (EU) No 575/2013 and Directive 2013/36/EU should be able to limit their own funds requirements under this Regulation to twice their fixed overheads requirement for a period of five years from the date of application of this Regulation.

(34)

Equally, investment firms which were subject only to a requirement for initial capital under Regulation (EU) No 575/2013 and Directive 2013/36/EU and for which own funds requirements under this Regulation would more than double compared to their situation under Regulation (EU) No 575/2013 and Directive 2013/36/EU should be able to limit their own funds requirement under this Regulation to twice their initial capital requirement under Regulation (EU) No 575/2013 and Directive 2013/36/EU for a period of five years from the date of application of this Regulation, with the exception of local firms referred to in point (2)(b) of Article 4(1) of Regulation (EU) No 575/2013, as amended by Regulation (EU) 2019/876, which should be subject to a specific transitional own funds requirement reflecting their greater level of risk. For the purposes of proportionality, specific transitional own funds requirements should also be provided for smaller investment firms and those which provide a limited range of investment services where they would not benefit from a limitation of the own funds requirements under this Regulation to twice their initial capital requirements under Regulation (EU) No 575/2013, as amended by Regulation (EU) 2019/630 of the European Parliament and of the Council (11), and Directive 2013/36/EU, as amended by Directive (EU) 2019/878 of the European Parliament and of the Council (12), but whose binding own funds requirement under this Regulation would increase compared to their situation under Regulation (EU) No 575/2013, as amended by Regulation (EU) 2019/630.

(35)

Those transitional measures should, where applicable, also be available to investment firms referred to in Article 498 of Regulation (EU) No 575/2013, which exempts those investment firms from own funds requirements under that Regulation, whereas the requirements for initial capital with respect to those investment firms depend on the investment services or activities they provide. For a period of five years from the date of application of this Regulation, their own funds requirements under the transitional provisions of this Regulation should be calculated in view of those applicable levels.

(36)

For a period of five years from the date of application of this Regulation, or until the date of application of the changes adopted to Regulation (EU) No 575/2013 and Directive 2013/36/EU as regards own funds requirements for market risk pursuant to Chapters 1a and 1b of Title IV of Part Three of Regulation (EU) No 575/2013, as amended by Regulation (EU) 2019/876, whichever is later, investment firms subject to the corresponding provisions of this Regulation should continue to calculate their own funds requirement for the trading book in accordance with Regulation (EU) No 575/2013, as amended by Regulation (EU) 2019/630.

(37)

The largest investment firms that provide key wholesale market and investment banking services (dealing on own account in financial instruments or underwriting financial instruments or placing financial instruments on a firm commitment basis) have business models and risk profiles that are similar to those of significant credit institutions. Their activities expose them to credit risk, mainly in the form of counterparty credit risk, as well as to market risk for positions they take on own account, client related or not. As such, they present a risk to financial stability, given their size and systemic importance.

(38)

Those large investment firms present an additional challenge with regard to their effective prudential supervision by national competent authorities. Even though the largest investment firms provide cross‐border investment banking services on a significant scale, as investment firms they are subject to prudential supervision by authorities designated under Directive 2014/65/EU, which are not necessarily the same competent authorities as those designated under Directive 2013/36/EU. This may result in an unlevel playing field in the application of Regulation (EU) No 575/2013 and Directive 2013/36/EU within the Union and prevents supervisors from obtaining an overall prudential perspective which is essential for effectively addressing the risks associated with large cross‐border investment firms. As a consequence, prudential supervision may become less effective and may also distort competition within the Union. The largest investment firms should therefore be given the status of credit institutions so as to create synergies with regard to the supervision of cross‐border wholesale market activities in a peer group, promoting a level playing field, and allowing for consistent supervision across groups.

(39)

Those investment firms, by virtue of becoming credit institutions, should therefore continue to be subject to Regulation (EU) No 575/2013 and Directive 2013/36/EU and to supervision by competent authorities, including by the European Central Bank in the framework of the Single Supervisory Mechanism, in charge of credit institutions. This would ensure that the prudential supervision of credit institutions is implemented in a coherent and effective manner, and that the single rulebook for financial services is applied in the same manner to all credit institutions in light of their systemic importance. In order to prevent regulatory arbitrage and reduce the risks of circumvention, competent authorities should endeavour to avoid situations where potentially systemic groups would structure their operations in such a way as to not exceed the thresholds set out in point (1)(b) of Article 4(1) of Regulation (EU) No 575/2013 and circumvent the obligation to seek authorisation as credit institutions pursuant to Article 8a of Directive 2013/36/EU.

(40)

Large investment firms converted into credit institutions should be allowed to take deposits or other repayable funds from the public and to grant credits for their own account only once they have obtained the authorisation for those activities in accordance with Directive 2013/36/EU. Carrying out all such activities, including taking deposits or other repayable funds from the public and granting credits for their own account, should not be a necessary requirement for undertakings to be considered to be credit institutions. The change in the definition of credit institution introduced by this Regulation should therefore be without prejudice to the national authorisation regimes implemented by Member States in accordance with Directives 2013/36/EU and (EU) 2019/2034, including any provisions that Member States may consider to be appropriate for the purpose of clarifying the activities which large investment firms that fall within the amended definition of credit institutions are permitted to take up.

(41)

In addition, the supervision of credit institutions on a consolidated basis aims to ensure, inter alia, the stability of the financial system and, in order to be effective, should be applied to all groups, including those the parent undertakings of which are not credit institutions or investment firms. Therefore, all credit institutions, including those that previously had the status of investment firms, should be subject to the rules on individual and consolidated supervision of the parent undertaking by the competent authorities pursuant to Section I of Chapter 3 of Title VII of Directive 2013/36/EU.

(42)

Furthermore, it is possible that large investment firms which are not of systemic importance but which deal on own account, underwrite financial instruments or place financial instruments on a firm commitment basis have business models and risk profiles that are similar to those of other systemic institutions. Given their size and activities, it is possible that such investment firms present some risks to financial stability and, although their conversion into credit institutions is not deemed to be appropriate in light of their nature and complexity, they should remain subject to the same prudential treatment as credit institutions. In order to prevent regulatory arbitrage and reduce the risks of circumvention, competent authorities should also endeavour to avoid situations where investment firms structure their operations in such a way as to not exceed the EUR 15 billion threshold related to the total value of the assets at individual or group level, or to unduly limit the discretion of competent authorities to subject investment firms to the requirements of Regulation (EU) No 575/2013 and to compliance with the prudential requirements laid down in Directive 2013/36/EU, in accordance with Article 5 of Directive (EU) 2019/2034.

(43)

Regulation (EU) No 600/2014 of the European Parliament and of the Council (13) introduced a Union harmonised regime for granting access to third‐country firms providing investment services or activities to eligible counterparties and professional clients that are established in the Union. Access to the internal market is conditional on the Commission adopting an equivalence decision and on the European Supervisory Authority (European Securities and Markets Authority) established by Regulation (EU) No 1095/2010 of the European Parliament and of the Council (14) (ESMA) registering the third‐country firm. It is important that the assessment of equivalence is done on the basis of the relevant applicable Union law and that effective tools to monitor that the conditions under which equivalence is granted are in place. For those reasons, third‐country registered firms should be required to report annually to ESMA information concerning the scale and scope of services provided, and activities carried out, in the Union. Supervisory cooperation in relation to monitoring, enforcement and the fulfilment of the equivalence conditions should also be improved.

(44)

With the aim of guaranteeing a level playing field and promoting the transparency of the Union market, Regulation (EU) No 600/2014 should be amended to subject systemic internalisers’ quotes, price improvements and execution prices to the tick size regime when dealing in all sizes. Consequently, the currently applicable regulatory technical standards dealing with the tick size regime should also apply to the extended scope of Regulation (EU) No 600/2014.

(45)

To ensure investor protection and the integrity and the stability of financial markets in the Union, the Commission, when adopting an equivalence decision, should take into account the potential risks posed by the services and the activities that firms from that third country could carry out in the Union following that decision. Their systemic importance should be considered based on criteria such as the likely scale and scope of service provision and performance of activities by firms from the third country concerned. For the same purpose, the Commission should be able to take into account whether the third country is identified as a non‐cooperative jurisdiction for tax purposes under the relevant Union policy or as a high‐risk third country pursuant to Article 9(2) of Directive (EU) 2015/849 of the European Parliament and of the Council (15). The Commission should consider specific prudential, organisational or business conduct requirements to be equivalent only where the same effect is achieved. Furthermore, the Commission should be able, where appropriate, to adopt equivalence decisions limited to specific services and activities or categories of services and activities listed in Section A of Annex I to Directive 2014/65/EU.

(46)

EBA, with the participation of ESMA, has issued a report based on thorough background analysis, data collection and consultation for a bespoke prudential regime for all non‐systemic investment firms which serves as the basis for the revised prudential framework for investment firms.

(47)

In order to ensure the harmonised application of this Regulation, EBA should develop draft regulatory technical standards to specify the scope and methods for prudential consolidation of investment firm groups, the calculation of fixed overheads, measuring the K‐factors, specifying the notion of segregated accounts in relation to client money, adjusting the coefficients for K‐DTF in the case of stressed market conditions, the calculation for setting own funds requirements equal to the total margin required by clearing members, the templates for the public disclosures including as regards investment firms’ investment policy and regulatory reporting required under this Regulation and the information to be provided to competent authorities related to the thresholds for requiring authorisation as a credit institution. The Commission should be empowered to supplement this Regulation by adopting the regulatory technical standards developed by EBA by means of delegated acts pursuant to Article 290 TFEU and in accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010. The Commission and EBA should ensure that those regulatory technical standards can be applied by all investment firms concerned in a manner that is proportionate to the nature, scale and complexity of those investment firms and their activities.

(48)

The Commission should also be empowered to adopt the implementing technical standards developed by EBA and by ESMA by means of implementing acts pursuant to Article 291 TFEU and in accordance with Article 15 of Regulation (EU) No 1093/2010 and Article 15 Regulation (EU) No 1095/2010.

(49)

In order to ensure the uniform application of this Regulation and to take account of developments in financial markets, the power to adopt acts in accordance with Article 290 TFEU should be delegated to the Commission to supplement this Regulation by clarifying the definitions in this Regulation. It is of particular importance that the Commission carry out appropriate consultations during its preparatory work, including at expert level, and that those consultations be conducted in accordance with the principles laid down in the Interinstitutional Agreement of 13 April 2016 on Better Law‐Making (16). In particular, to ensure equal participation in the preparation of delegated acts, the European Parliament and the Council receive all documents at the same time as Member States’ experts, and their experts systematically have access to meetings of Commission expert groups dealing with the preparation of delegated acts.

(50)

In order to ensure legal certainty and avoid overlaps between the current prudential framework applicable to both credit institutions and investment firms and this Regulation, Regulation (EU) No 575/2013 and Directive 2013/36/EU should be amended in order to remove investment firms from their scope. However, investment firms which are part of a banking group should remain subject to those provisions in Regulation (EU) No 575/2013 and Directive 2013/36/EU which are relevant to the banking group, such as the provisions on the intermediate EU parent undertaking referred to in Article 21b of Directive 2013/36/EU and to the rules on prudential consolidation set out in Chapter 2 of Title II of Part One of Regulation (EU) No 575/2013.

(51)

Since the objective of this Regulation, namely to set up an effective and proportionate prudential framework to ensure that investment firms which are authorised to operate within the Union operate on a sound financial basis and are managed in an orderly way including, where relevant, in the best interests of their clients, cannot be sufficiently achieved by the Member States but can rather, by reason of its scale and effects, be better achieved at Union level, the Union may adopt measures, in accordance with the principle of subsidiarity as set out in Article 5 of the Treaty on European Union. In accordance with the principle of proportionality, as set out in that Article, this Regulation does not go beyond what is necessary in order to achieve that objective,

(1)

Robust prudential supervision is an integral part of the regulatory conditions under which financial institutions provide services within the Union. Investment firms are, together with credit institutions, subject to Regulation (EU) No 575/2013 of the European Parliament and of the Council (4) and to Directive 2013/36/EU of the European Parliament and of the Council (5) as regards their prudential treatment and supervision, while their authorisation and other organisational and conduct requirements are set out in Directive 2014/65/EU of the European Parliament and of the Council (6).

(2)

The existing prudential regimes under Regulation (EU) No 575/2013 and Directive 2013/36/EU are largely based on successive iterations of the international regulatory standards set for large banking groups by the Basel Committee on Banking Supervision and only partially address the specific risks inherent to the diverse activities of a large number of investment firms. The specific vulnerabilities and risks inherent to those investment firms should therefore be further addressed by means of effective, appropriate and proportionate prudential arrangements at Union level which help to provide a level playing field across the Union, which guarantee effective prudential supervision while keeping compliance costs in check, and which ensure sufficient capital for the risks of investment firms.

(3)

Sound prudential supervision should ensure that investment firms are managed in an orderly way and in the best interests of their clients. It should take into account the potential for investment firms and their clients to engage in excessive risk‐taking and the different degrees of risk assumed and posed by investment firms. Equally, such prudential supervision should aim to avoid imposing a disproportionate administrative burden on investment firms. At the same time, such prudential supervision should make it possible to strike a balance between ensuring the safety and soundness of investment firms and avoiding excessive costs that might undermine the viability of their business activities.

(4)

Many of the requirements that stem from the framework of Regulation (EU) No 575/2013 and Directive 2013/36/EU are designed to address common risks faced by credit institutions. Accordingly, the existing requirements are largely calibrated to preserve the lending capacity of credit institutions through economic cycles and to protect depositors and taxpayers from possible failure, and are not designed to address all of the different risk profiles of investment firms. Investment firms do not have large portfolios of retail and corporate loans and do not take deposits. The likelihood that their failure can have detrimental impacts on overall financial stability is lower than in the case of credit institutions, but investment firms nevertheless pose a risk which is necessary to address by means of a robust framework. The risks faced and posed by most investment firms are thus substantially different to the risks faced and posed by credit institutions and such differences should be clearly reflected in the prudential framework of the Union.

(5)

Differences in the application of the existing prudential framework in different Member States threaten the level playing field for investment firms within the Union, hampering the access of investors to new opportunities and better ways of managing their risks. Those differences stem from the overall complexity of the application of the framework to different investment firms based on the services that they provide, where some national authorities adjust or streamline such application in national law or practice. Given that the existing prudential framework does not address all the risks faced and posed by some types of investment firms, large capital add‐ons have been applied to certain investment firms in some Member States. Uniform provisions addressing those risks should be established in order to ensure harmonised prudential supervision of investment firms across the Union.

(6)

A specific prudential regime is therefore required for investment firms which are not systemic by virtue of their size and their interconnectedness with other financial and economic actors. Systemic investment firms should, however, remain subject to the existing prudential framework under Regulation (EU) No 575/2013 and Directive 2013/36/EU. Those investment firms are a subset of investment firms to which the framework laid down in Regulation (EU) No 575/2013 and in Directive 2013/36/EU currently applies and which do not benefit from dedicated exemptions from any of their principle requirements. The largest and most interconnected investment firms have business models and risk profiles that are similar to those of significant credit institutions. They provide “bank‐like” services and underwrite risks at significant scale. Furthermore, systemic investment firms are large enough to, and have business models and risk profiles which, represent a threat for the stable and orderly functioning of financial markets on a par with large credit institutions. Therefore it is appropriate that those investment firms remain subject to the provisions set out in Regulation (EU) No 575/2013 and Directive 2013/36/EU.

(7)

It is possible that investment firms which deal on own account, which underwrite financial instruments or place financial instruments on a firm commitment basis on a significant scale, or which are clearing members in central counterparties, have business models and risk profiles that are similar to those of credit institutions. Given their size and activities, it is possible that such investment firms present comparable risks to financial stability as credit institutions. Competent authorities should have the option of requiring them to remain subject to the same prudential treatment as credit institutions that fall within the scope of Regulation (EU) No 575/2013 and to compliance with prudential supervision under Directive 2013/36/EU.

(8)

There may be Member States in which the authorities competent for the prudential supervision of investment firms are different from the authorities that are competent for the supervision of market conduct. It is therefore necessary to create a mechanism of cooperation and exchange of information between those authorities in order to ensure harmonised prudential supervision of investment firms across the Union which functions promptly and efficiently.

(9)

An investment firm may trade via a clearing member in another Member State. Where it does so, a mechanism for sharing information between the relevant competent authorities in the different Member States should be put in place. Such a mechanism should allow the sharing of information between the competent authority for the prudential supervision of the investment firm and either the authority supervising the clearing member or the authority supervising the central counterparty on the model and parameters used for the calculation of the margin requirements of the investment firm where such method of calculation is used as the basis for the investment firm’s own funds requirements.

(10)

To foster the harmonisation of supervisory standards and practices within the Union, the European Supervisory Authority (European Banking Authority) established by Regulation (EU) No 1093/2010 of the European Parliament and of the Council (7) (EBA) should, in close cooperation with the European Supervisory Authority (European Securities and Markets Authority) established by Regulation (EU) No 1095/2010 of the European Parliament and of the Council (8) (ESMA), retain primary competence for the coordination and convergence of supervisory practices in the area of prudential supervision over investment firms within the European System for Financial Supervision (ESFS).

(11)

The required level of initial capital of an investment firm should be based on the services and activities which that investment firm is authorised to provide and perform, respectively, according to Directive 2014/65/EU. The possibility for Member States to lower the required level of initial capital in specific situations, as provided for in Directive 2013/36/EU on the one hand, and the situation of uneven implementation of that Directive on the other hand, have led to a situation where the required level of initial capital diverges across the Union. To end that fragmentation, the required level of initial capital should be harmonised for all investment firms in the Union. With a view to reducing barriers to market entry that currently exist for the multilateral trading facilities (MTFs) and organised trading facilities (OTFs), the initial capital of investment firms that operate an MTF or an OTF should be set at the level referred to in this Directive. Where an investment firm authorised to operate an OTF has been permitted to also engage in dealing on own account under the conditions provided for in Article 20 of Directive 2014/65/EU its initial capital should be set at the level referred to in this Directive.

(12)

Although investment firms should no longer fall within the scope of Regulation (EU) No 575/2013 or Directive 2013/36/EU, certain concepts used in the context of those legislative acts should retain their well‐established meaning. To enable and facilitate the consistent reading of such concepts in Union legal acts when used, references in such acts to the initial capital of investment firms, to the supervisory powers of competent authorities for investment firms, to the internal capital adequacy assessment process of investment firms, to the supervisory review and evaluation process of competent authorities for investment firms, and to governance and remuneration provisions applicable to investment firms should be construed as referring to the corresponding provisions in this Directive.

(13)

The proper functioning of the internal market requires that the responsibility for prudential supervision of an investment firm, in particular in relation to its solvency and its financial soundness, lies with the competent authority of its home Member State. In order also to achieve effective supervision of investment firms in other Member States, where they provide services or have a branch, close cooperation and exchange of information with the competent authorities of those Member States should be ensured.

(14)

For information and supervisory purposes, and in particular to ensure the stability of the financial system, competent authorities of host Member States should be able, on a case‐by‐case basis, to carry out on‐the‐spot checks and inspect the activities of branches of investment firms on their territory, and to require information about the activities of those branches. Supervisory measures for those branches should, however, remain the responsibility of the home Member State.

(15)

To protect commercially sensitive information, competent authorities should be bound by rules of professional secrecy when conducting their supervisory tasks and when exchanging confidential information.

(16)

To strengthen the prudential supervision of investment firms and the protection of clients of investment firms, auditors should carry out their verification impartially and report promptly to the competent authorities those facts which can have a serious effect on the financial situation of an investment firm or on its administrative and accounting organisation.

(17)

For the purposes of this Directive, personal data should be processed in accordance with Regulation (EU) 2016/679 of the European Parliament and of the Council (9), and with Regulation (EU) 2018/1725 of the European Parliament and of the Council (10). In particular, where this Directive allows for exchanges of personal data with third countries, the relevant provisions of Chapter V of Regulation (EU) 2016/679 and Chapter V of Regulation (EU) 2018/1725 should apply.

(18)

To safeguard compliance with the obligations laid down in this Directive and Regulation (EU) 2019/2033 of the European Parliament and of the Council (11), Member States should provide for administrative sanctions and other administrative measures which are effective, proportionate and dissuasive. In order to ensure that administrative sanctions have a dissuasive effect they should be published except in certain well‐defined circumstances. To enable clients and investors to make an informed decision about their investment options, those clients and investors should have access to information on administrative sanctions and other administrative measures imposed on investment firms.

(19)

To detect breaches of national provisions transposing this Directive and breaches of Regulation (EU) 2019/2033, Member States should have the necessary investigatory powers and should establish effective and rapid mechanisms to report potential or actual breaches.

(20)

Investment firms which are not considered to be small and non‐interconnected should have available internal capital which is adequate in quantity, quality and distribution to cover the specific risks to which they are or may be exposed. Competent authorities should ensure that investment firms have adequate strategies and processes in place to assess and maintain the adequacy of their internal capital. Competent authorities should also be able to request small and non‐interconnected investment firms to apply similar requirements where appropriate.

(21)

Supervisory review and evaluation powers should continue to remain an important regulatory tool that allows competent authorities to assess qualitative elements, including internal governance and controls, risk management processes and procedures and, where needed, to set additional requirements, including in particular in relation to own funds and liquidity requirements, in particular for investment firms which are not considered to be small and non‐interconnected, and where the competent authority deems it to be justified and appropriate also for small and non‐interconnected investment firms.

(22)

The principle of equal pay for male and female workers for equal work or work of equal value is laid down in Article 157 of the Treaty on the Functioning of the European Union (TFEU). That principle should be applied in a consistent manner by investment firms. To align remuneration with the risk profile of investment firms and to guarantee a level playing field, investment firms should be subject to clear principles with regard to corporate governance arrangements and remuneration rules, which are gender neutral and which take into account the differences between credit institutions and investment firms. Small and non‐interconnected investment firms should, however, be exempt from those rules because the provisions on remuneration and corporate governance laid down in Directive 2014/65/EU are sufficiently comprehensive for those types of investment firms.

(23)

Similarly, the Commission report of 28 July 2016 on the assessment of the remuneration rules under Directive 2013/36/EU and Regulation (EU) No 575/2013 demonstrated that the requirements on deferral and pay‐out in instruments laid down in Directive 2013/36/EU are not appropriate for small and non‐complex investment firms or for staff with low levels of variable remuneration. Clear, consistent and harmonised criteria for identifying investment firms and individuals that are exempt from those requirements are necessary to ensure supervisory convergence and a level playing field. Given the important role that high earners play in directing the business and long‐term performance of investment firms, effective oversight of the remuneration practices and trends relating to high earners should be ensured. Therefore, competent authorities should be able to monitor the remuneration of high earners.

(24)

It is also appropriate to offer some flexibility to investment firms in the way investment firms use non‐cash instruments to pay variable remuneration, provided that such instruments are effective in achieving the objective of aligning the interests of staff with the interests of various stakeholders, such as shareholders and creditors, and contribute to the alignment of variable remuneration with the risk profile of the investment firm.

(25)

The revenues of investment firms in the form of fees, commissions and other revenues in relation to the provision of different investment services are highly volatile. Limiting the variable component of remuneration to a portion of the fixed component of remuneration would affect the investment firm’s ability to reduce remuneration at times of reduced revenues and could lead to an increase of the investment firm’s fixed cost base, leading in turn to risks to the investment firm’s ability to withstand times of economic downturn or reduced revenues. To avoid those risks, a single maximum ratio between the variable and the fixed components of remuneration should not be imposed on non‐systemic investment firms. Instead, those investment firms should set appropriate ratios themselves. However, this Directive should not preclude Member States from implementing measures in national law designed to subject investment firms to stricter requirements with regard to the maximum ratio between the variable and the fixed components of the remuneration. Moreover, this Directive should not prevent Member States from imposing such a maximum ratio on all or on specific types of investment firms.

(26)

This Directive should not prevent Member States from adopting a stricter approach with regard to the remuneration when investment firms receive extraordinary public financial support.

(27)

Different governance structures are used across Member States. In most cases a unitary or a dual‐board structure is used. The definitions laid down in this Directive are intended to embrace all existing structures without expressing a preference for any particular structure. They are purely functional for the purpose of setting out rules aimed at a particular outcome irrespective of the national company law applicable to an institution in each Member State. The definitions should therefore not interfere with the general allocation of competences in accordance with national company law.

(28)

Management bodies should be understood to have executive and supervisory functions. The competence and structure of management bodies differ across Member States. In Member States where management bodies have a one‐tier structure, a single board usually performs management and supervisory tasks. In Member States with a two‐tier system, the supervisory function is performed by a separate supervisory board which has no executive functions and the executive function is performed by a separate management board which is responsible and accountable for the day‐to‐day management of the undertaking. Accordingly, separate tasks are assigned to the different entities within the management body.

(29)

In response to the growing public demand for tax transparency, and to promote investment firms’ corporate responsibility, it is appropriate to require that, unless they qualify as small and non‐interconnected, investment firms disclose, on an annual basis, certain information, including information on profits made, taxes paid and any public subsidies received.

(30)

To address risks at investment firm only group level, the prudential consolidation method required by Regulation (EU) 2019/2033 should in the case of investment firm only groups be accompanied by a group capital test for simpler group structures. The determination of the group supervisor, however, should in both cases be based on the same principles that apply in the case of supervision on a consolidated basis under Directive 2013/36/EU. To ensure proper cooperation, core elements of coordination measures, and in particular information requirements in emergency situations or cooperation and coordination arrangements should be similar to the core elements of coordination applicable in the context of the single rulebook for credit institutions.

(31)

The Commission should be able to submit recommendations to the Council for the negotiation of agreements between the Union and third countries for the practical exercise of supervision of compliance with the group capital test for investment firms, the parent undertakings of which are established in third countries, and for investment firms operating in third countries the parent undertakings of which are established in the Union. Moreover, Member States and EBA should also be able to set‐up cooperation arrangements with third countries to perform their supervisory tasks.

(32)

In order to ensure legal certainty and avoid overlaps between the current prudential framework applicable to both credit institutions and investment firms and this Directive, Regulation (EU) No 575/2013 and Directive 2013/36/EU should be amended in order to remove investment firms from their scope. However, investment firms which are part of a banking group should remain subject to those provisions in Regulation (EU) No 575/2013 and Directive 2013/36/EU which are relevant to the banking group, such as the rules on prudential consolidation set out in Articles 11 to 24 of Regulation (EU) No 575/2013 and the provisions on the intermediate EU parent undertaking referred to in Article 21b of Directive 2013/36/EU.

(33)

It is necessary to specify the steps that undertakings need to take to verify whether they fall under the definition of a credit institution as set out in point (1)(b) of Article 4(1) of Regulation (EU) No 575/2013 and therefore need to obtain authorisation as a credit institution. Because certain investment firms already carry out the activities listed in points (3) and (6) of Section A of Annex I to Directive 2014/65/EU, it is also necessary to ensure clarity regarding the continuity of any authorisation granted for those activities. In particular, it is essential that competent authorities ensure that the transition from the current framework to the new one offers sufficient regulatory certainty for investment firms.

(34)

To ensure effective supervision, it is important that undertakings that meet the conditions set out in point (1)(b) of Article 4(1) of Regulation (EU) No 575/2013 apply for an authorisation as a credit institution. Competent authorities should therefore have the possibility to apply sanctions to undertakings that do not apply for that authorisation.

(35)

The amendment to the definition of ‘credit institution’ in Regulation (EU) No 575/2013 by Regulation (EU) 2019/2033 may cover, from the entry into force of the latter, investment firms that are already operating on the basis of an authorisation issued in accordance with Directive 2014/65/EU. Those undertakings should be allowed to continue operating under their authorisation as investment firms until the authorisation of a credit institution is granted. Those investment firms should submit an application for authorisation as a credit institution at the latest when the average of their monthly total assets is equal to or exceeds any of the thresholds set out in point (1)(b) of Article 4(1) of Regulation (EU) No 575/2013 over a period of 12 consecutive months. Where investment firms meet any of the thresholds set out in point (1)(b) of Article 4(1) of Regulation (EU) No 575/2013 as from the date of entry into force of this Directive, the average of their monthly total assets should be calculated taking into account the 12 consecutive months preceding that date. Those investment firms should apply for authorisation as a credit institution within one year and one day after the entry into force of this Directive.

(36)

The amendment to the definition of ‘credit institution’ in Regulation (EU) No 575/2013 by Regulation (EU) 2019/2033 may also affect undertakings which have already applied for authorisation as investment firms under Directive 2014/65/EU and for which the application is still pending. Such applications should be transferred to the competent authorities under Directive 2013/36/EU and be treated in accordance with the authorisation provisions set out in that Directive if the envisaged total assets of the undertaking are equal to or exceed any of the thresholds set out in point (1)(b) of Article 4(1) of Regulation (EU) No 575/2013.

(37)

Undertakings referred to in point (1)(b) of Article 4(1) of Regulation (EU) No 575/2013 should also be subject to all the requirements for access to the activity of credit institutions laid down in Title III of Directive 2013/36/EU, including the provisions on the withdrawal of authorisation in accordance with Article 18 of that Directive. Article 18 of that Directive should, however, be amended to ensure that competent authorities are able to withdraw the authorisation granted to a credit institution where that credit institution uses its authorisation exclusively to engage in the activities referred to in point (1)(b) of Article 4(1) of Regulation (EU) No 575/2013 and has, for a period of five consecutive years, average total assets below the thresholds set out in that point.

(38)

Pursuant to Article 39 of Directive 2014/65/EU, third‐country firms providing financial services in the Union are subject to national regimes which may require the establishment of a branch in a Member State. To facilitate the regular monitoring and assessment of activities carried out by third‐country firms through branches in the Union, competent authorities should be informed about the scale and scope of the services and activities carried out through branches in their territory.

(39)

Specific cross‐references in Directives 2009/65/EC (12), 2011/61/EU (13) and 2014/59/EU (14) of the European Parliament and of the Council to the provisions of Regulation (EU) No 575/2013 and Directive 2013/36/EU, which no longer apply to investment firms from the date of application of this Directive and of Regulation (EU) 2019/2033, should be construed as references to the corresponding provisions in this Directive and in Regulation (EU) 2019/2033.

(40)

EBA, in cooperation with ESMA, has issued a report based on thorough background analysis, data collection and consultation for a bespoke prudential regime for all non‐systemic investment firms, which serves as the basis for the revised prudential framework for investment firms.

(41)

To ensure the harmonised application of this Directive, EBA should develop draft regulatory technical standards to further specify the criteria to subject certain investment firms to Regulation (EU) No 575/2013, to specify the information which the competent authorities of home Member States and of host Member States should exchange in the context of supervision, to set out how investment firms should assess the size of their activities for the purposes of internal governance requirements and, in particular, to assess whether they constitute small and non‐interconnected investment firms. Regulatory technical standards should also specify the categories of staff whose professional activities have a material impact on the risk profile of firms for the purposes of remuneration provisions, and specify the Additional Tier 1 and Tier 2 instruments which qualify as variable remuneration. Finally, regulatory technical standards should specify the elements for the assessment of specific liquidity risks, the application of additional own funds requirements by competent authorities, and the functioning of the colleges of supervisors. The Commission should supplement this Directive by adopting the regulatory technical standards developed by EBA by means of delegated acts pursuant to Article 290 TFEU and in accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010. The Commission and EBA should ensure that those regulatory technical standards can be applied by all investment firms concerned in a manner that is proportionate to the nature, scale and complexity of those investment firms and their activities.

(42)

The Commission should also be empowered to adopt implementing technical standards developed by EBA regarding information sharing between competent authorities and publication requirements of competent authorities and implementing technical standards developed by ESMA by means of implementing acts pursuant to Article 291 TFEU and in accordance with Article 15 of Regulation (EU) No 1093/2010 and Article 15 of Regulation (EU) No 1095/2010.

(43)

In order to ensure the uniform application of this Directive and to take account of developments in financial markets, the power to adopt acts in accordance with Article 290 TFEU should be delegated to the Commission to supplement this Directive by clarifying the definitions in this Directive, the internal capital and risk assessments of investment firms, and the supervisory review and evaluation powers of competent authorities. It is of particular importance that the Commission carry out appropriate consultations during its preparatory work, including at expert level, and that those consultations be conducted in accordance with the principles laid down in the Interinstitutional Agreement of 13 April 2016 on Better Law‐Making (15). In particular, to ensure equal participation in the preparation of delegated acts, the European Parliament and the Council receive all documents at the same time as Member States’ experts, and their experts systematically have access to meetings of Commission expert groups dealing with the preparation of delegated acts.

(44)

Since the objective of this Directive, namely to set up an effective and proportionate prudential framework to ensure that investment firms authorised to operate within the Union operate on a sound financial basis and are managed in an orderly way, including in the best interests of their clients, cannot be sufficiently achieved by the Member States but can rather, by reason of its scale and effects, be better achieved at Union level, the Union may adopt measures, in accordance with the principle of subsidiarity as set out in Article 5 of the Treaty on European Union. In accordance with the principle of proportionality as set out in that Article, this Directive does not go beyond what is necessary in order to achieve that objective.

(45)

In accordance with the Joint Political Declaration of 28 September 2011 of Member States and the Commission on explanatory documents (16), Member States have undertaken to accompany, in justified cases, the notification of their transposition measures with one or more documents explaining the relationship between the components of a directive and the corresponding parts of national transposition instruments. With regard to this Directive, the legislator considers the transmission of such documents to be justified,