Categories of Investment Firms under IFR and IFD

CLASS 1: Own account dealer/underwriter firms

If:

• The Firms consolidated assets are equal to or exceed €30bn;
• The Firm is part of a group where the total consolidated assets of all own account dealer/underwriter firms that have consolidated assets of less than €30bn are equal to or exceed €30bn (for third-country groups, this includes total assets of all EU branches of the group);

or

• They the firm is part of a group where the total consolidated assets of all own account dealer/underwriter firms are equal to or exceed €30bn and their consolidated supervisor designates them as Class 1 to address financial stability or circumvention issues. (Again, for third-country groups, the €30bn includes total assets of all EU branches of the group).

The Investment Firm Regulations (IFR) will reclassify some systemically important or large investment firms as credit institutions for the purposes of CRR/CRD and other EU legislation (currently, this is the regulatory class reserved for deposit-taking banks).

If the Firm’s business is to carry out MiFID investment activities of own account dealing, underwriting or placing on a firm commitment basis and if their assets meet the size thresholds as detailed (or they are designated by their consolidated supervisor under the powers described in this table), then existing investment firms will fall into this class.

‘Class 1’ investment firms will continue to remain subject to the Basel-derived prudential requirements under CRR/CRD, however their reclassification as credit institutions may have a number of direct and indirect effects.

Note that IFR does not specifically address whether firms that carry on the activity of dealing on own account, but are exempted from authorisation under MiFID, can nevertheless be required to be authorised as credit institutions if they meet the tests that apply to Class 1 investment firms.

CLASS 1a Authorised investment firms that are own account dealer/underwriter firms

(excluding commodity and emission allowance dealers, collective investment undertakings and insurance undertakings):

If:

• The Firm's consolidated assets are equal to or exceed €15bn excluding assets of non-EU subsidiary own account dealer/underwriter firms (for third-country groups, this includes total assets of all EU branches of the group);
• The Firm is part of a group where the total consolidated assets of all own account dealer/underwriter firms that have consolidated assets of less than €15bn are equal to or exceed €15bn (excluding assets of non-EU subsidiary own account dealer/underwriter firms); or
• The Firm's consolidated assets are equal to or exceed €5bn (excluding assets of non-EU subsidiary own account dealer/ underwriter firms) (for third-country groups, this includes total assets of all EU branches of the group) and their competent authority designates them as Class 1a based on systemic risk, clearing member status or economic importance, cross-border significance or interconnectedness.

Whilst the European Commission originally proposed that all other investment firms would fall under the new IFR/IFD prudential regime, the final texts of IFR/IFD provide that authorised investment firms that carry out the MiFID regulated activities of own account dealing, underwriting or placing on a firm commitment basis will be treated as institutions subject to the CRR/CRD prudential regime if their assets meet the other (lower) size thresholds as summarised (or they are designated by their consolidated supervisor under the powers described in this table).

CLASS 1b Authorised investment firms that are own account dealer/underwriter firms:

If:

• The Firm elects to be subject to CRR;
• The Firm is part of a group containing an EU credit institution and subject to consolidated supervision under CRR; and
• The competent authority is satisfied that the election does not reduce own funds requirements and is not for purposes of regulatory arbitrage.

IFR/IFD also provides that authorised investment firms that carry out the MiFID regulated activities of own account dealing, underwriting or placing on a firm commitment basis can elect to be treated as institutions subject to the CRR/CRD regime if they are part of a group containing a credit institution that is subject to consolidated supervision under that regime. Investment firms may wish to make this election to simplify compliance and reporting, but the competent authority can override the election if it considers that applying the election would result in a reduction of the firm’s own funds requirements or the election is made for the purposes of regulatory arbitrage. Therefore, these firms may need to be able to assess the capital requirements that would otherwise apply to them under IFR.