Investment firm (MiFID definitions)
European Union Electricity Market Glossary

 


 

 

"Investment firm" under the Markets in Financial Instruments Directive (MiFID) means "any legal person whose regular occupation or business is the provision of one or more investment services to third parties and/or the performance of one or more investment activities on a professional basis" (Article 4(1)).

 

info

 

 

In general, any (natural or legal) person that deals on own account or provides investment services in commodity derivatives as a regular occupation or business on a professional basis pursuant to Article 5 of MiFID II has to be authorised as an investment firm under MiFID II.

 

However, if the person meets the criteria for activities considered to be ancillary to the main business pursuant to Article 2(1)(j) and the provisions in RTS 20 and makes use of the ancillary activity exemption, then it has to notify annually the relevant competent authority that they make use of this exemption.

 

Questions and Answers, on MiFID II and MiFIR commodity derivatives topics, 31 May 2017, ESMA70-872942901-28

 

The MiFID definition, therefore, covers all natural an legal persons who perform investment services and activities using financial instruments, as a regular occupation or business, and on a professional basis.

 

Where a person meets these criteria and is not otherwise exempt it will require authorisation as an investment firm.

 

In this context authorisation is a consequence rather than a part of the definition.

 

The MiFID lays down organisational, governance, consumer protection and market functioning regulations, as well as sets out the passporting process for those firms that provide one of the listed services in the MiFID,i.e.:

- investment advice to clients,

- management of client portfolios,

- execution of clients' orders on financial instruments,

- reception and transmission of orders on financial instruments,

- dealing with own account,

- market making,

- underwriting,

- placing of financial instruments, and

- operating trading facilities.

  

 

Article 4(1) MiFID II

 

'Investment firm' means any legal person whose regular occupation or business is the provision of one or more investment services to third parties and/or the performance of one or more investment activities on a professional basis.

 

Member States may include in the definition of investment firms undertakings which are not legal persons, provided that:

 

(a) their legal status ensures a level of protection for third parties' interests equivalent to that afforded by legal persons; and

 

(b) they are subject to equivalent prudential supervision appropriate to their legal form.

 

However, where a natural person provides services involving the holding of third party funds or transferable securities, that person may be considered to be an investment firm for the purposes of this Directive and of Regulation (EU) No 600/2014 only if, without prejudice to the other requirements imposed in this Directive, in Regulation (EU) No 600/2014, and in Directive 2013/36/EU, that person complies with the following conditions:

 

(a) the ownership rights of third parties in instruments and funds must be safeguarded, especially in the event of the insolvency of the firm or of its proprietors, seizure, set-off or any other action by creditors of the firm or of its proprietors;

 

(b) the firm must be subject to rules designed to monitor the firm's solvency and that of its proprietors;

 

(c) the firm's annual accounts must be audited by one or more persons empowered, under national law, to audit accounts;

 

(d) where the firm has only one proprietor, that person must make provision for the protection of investors in the event of the firm's cessation of business following the proprietor's death or incapacity or any other such event.

 

ESMA considered that according to the Level 1 definition in MiFID II, undertakings which are not a legal persons may be licensed as an investment firm only if they fulfil the following conditions:

 

(a) their legal status ensures a level of protection for third parties' interest equivalent to that afforded by legal persons and

 

(b) they are subject to equivalent prudential supervision appropriate to their legal form.

 

The European Banking Authority (EBA) Report on Investment Firms, Response to the Commission's Call for Advice of December 2014, EBA/Op/2015/20 (p. 6) observes the European investment services landscape comprises various types of operators.

 

Also recitals to the Commission Delegated Regulation (EU) 2017/565 of 25.4.2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council as regards organisational requirements and operating conditions for investment firms and defined terms for the purposes of that Directive acknowledge investment firms vary widely in their size, their structure and the nature of their business.

 

The above EBA Report of December 2014 evidences a little more than 6 500 investment firms initially authorised and regulated by MiFID (in number, just over half of these are based in the UK. The United Kingdom, Germany and France are the main jurisdictions for over 70% of the investment firm population of the European Union).

 

The aforementioned Commission Delegated Regulation 2017/565 of 25.4.2016 has adapted a regulatory regime to diversity of investment firms while imposing certain fundamental regulatory requirements which are appropriate for all firms.

 

To ensure the uniform application of the various relevant provisions, it also establishes a harmonised set of organisational requirements and operating conditions for investment firms.

 

 

 

Article 4(1) MiFID I

 

'Investment firm' means any legal person whose regular occupation or business is the provision of one or more investment services to third parties and/or the performance of one or more investment activities on a professional basis;

 

Member States may include in the definition of investment firms undertakings which are not legal persons, provided that:

 

(a) their legal status ensures a level of protection for third parties' interests equivalent to that afforded by legal persons, and

 

(b) they are subject to equivalent prudential supervision appropriate to their legal form.

 

However, where a natural person provides services involving the holding of third parties' funds or transferable securities, he may be considered as an investment firm for the purposes of this Directive only if, without prejudice to the other requirements imposed in this Directive and in Directive 93/6/EEC, he complies with the following conditions:

 

(a) the ownership rights of third parties in instruments and funds must be safeguarded, especially in the event of the insolvency of the firm or of its proprietors, seizure, set-off or any other action by creditors of the firm or of its proprietors;

 

(b) the firm must be subject to rules designed to monitor the firm's solvency and that of its proprietors;

 

(c) the firm's annual accounts must be audited by one or more persons empowered, under national law, to audit accounts;

 

(d) where the firm has only one proprietor, he must make provision for the protection of investors in the event of the firm's cessation of business following his death, his incapacity or any other such event.

 

 

 

 

CRR investment firms

 

 

The prudential framework applied to investment firms depends on the firm's categorisation within the CRD IV framework. This categorisation is currently primarily determined by the investment services and activities it offers and undertakes, as set out in Annex I of the MiFID.

 

The term 'investment firm' is defined in the CRR by referring to the definition of the MiFID, albeit the legal definition excludes upfront a number of firms and credit institutions themselves.

 

This means that the CRR definition is a subset of those firms subject to the MiFID definition.

 

CRR investment firm is defined in subparagraph (2) of Article 4(1) of the CRR as a MiFID investment firm, excluding:

 

(i) credit institutions;

 

(ii) local firms; and

 

(iii) firms that do not hold client money and perform a combination of MiFID services (transmitting orders, executing orders, portfolio management, and investment advice).

 

Credit institutions are excluded from the CRR definition of 'investment firm' because, even though they may provide investment services, they already fall within the regular scope of the CRR as credit institutions.

 

The exclusion of local firms was based on the assumption that local firms were small and would pose a minimal risk to the financial system or not be subject to competition issues (EBA's Report on Investment Firms of December 2014, p. 13).

 

The said Report concludes that "current total population of non-bank firms conducting any sort of investment business is not straightforward when it comes to prudential coverage: it comprises firms that are exempt from the MiFID, MiFID firms that are exempt from the CRR, and MiFID firms that are subject to different types of requirements under the CRR".

 

The categorisation of investment firms in CRD IV has a direct influence on a firm's initial capital requirement, which remains the basic and most common prudential 'building block' for investment services providers; every investment firm should, by default, be subject to a EUR 730 000 requirement (Article 28 of the CRD), with this amount being reduced to EUR 125 000 (Article 29 of the CRD) if a firm neither deals on own account nor underwrites under firm commitment while still holding client money or securities (EBA's Report on Investment Firms of December 2014, p. 14).

 

The aforementioned EBA's Report of December 2014 (p. 15, 16) identifies at least 11 different prudential categories of investment firms within the CRR framework.

 

 

Table: Categorisation of MiFID investment firms within the CRD framework

 

 

 Categories 
 Initial capital

 

Own funds requirement

 

1

 

 Local firms (CRR 4(1)(4))

 

 €50 000 (CRD 30)   Not applicable 
2

Firms falling under CRR 4(1)(2)(c) that only provide reception/transmission and/or 
investment advice

 

€50 000 (CRD 31(1))  Not applicable 

 

Firms falling under CRR 4(1)(2)(c) that only provide reception/transmission and/or 
investment advice and are registered under the Insurance Mediation Directive (IMD)

 

€25 000 (CRD 31(2))   Not applicable
 4 

 

Firms falling under CRR 4(1)(2)(c) that perform, at least, execution of orders and/or portfolio management 


 

 €50 000 (CRD 31(1))   CRR 95(2)
 5   

Investment firms not authorised to perform deals on own account and/or underwriting/placing 
with firm commitment that do not hold client funds/securities

 

 €50 000 (CRD (29(3))  CRR 95(1)

 

Investment firms not authorised to perform deals on own account and/or underwriting/placing with firm commitment but hold client funds/securities

 

 €125 000 (CRD 29(1))  CRR 95(1) 
 7

 

 Investment firms that operate an MTF

 

 €730 000 (CRD 28(2))   CRR 95(1)

 

Investment firms that only perform deals on own account to execute client orders


 

 €730 000 (CRD 28(2))   CRR 95(1)(a) 
 9

 

 Investment firms that do not hold client funds/securities, only perform deals on own account, and have no external clients

 

 €730 000 (CRD 28(2))   CRR 95(1)(b) 
10 

 

 Commodity derivatives investment firms that are not exempt under the MiFID

 

 €50 000 to 730 000 (CRD 28 or 29)  CRR 493 & 498 
11   

Investment firms that do not fall under the other categories

 

 €730 000
(CRD 28(2)) CRR 92 

 

 

The CRD IV framework makes a distinction between:

 

a) those firms that are included in the CRR definition of 'investment firm' (CRR investment firms, categories 5 to 11);


b) those firms that are excluded from the CRR definition of 'investment firm' but are brought back into the scope of the own funds requirements for credit, market and operational risk (Article 95(2) of the CRR, category 4); and


c) those firms that are excluded from both the CRR definition of 'investment firm' and the scope of CRD IV (categories 1 to 3), but are still subject to a minimum level of initial capital (for the purpose of receiving authorisation under the MiFID and the ability to use a passport under that Directive), as laid down in the CRD.

 

 


 

 

Table focuses solely on the combined provisions as set out in the MiFID and CRD IV. The table does not take into account national transpositions and options, which can apply to:

 

i) the number of different categories of investment firms;

 

ii) the definition of MiFID investment services and activities; and

 

iii) the minimum level of initial capital applicable to each of the categories.

 

"The MiFID was implemented by way of national transpositions. The application of provisions to some services might give rise to diverging applications at the national level of MiFID investment services and activities. Because of this, it appears that there are some variations with respect to the required level of initial capital requested for particular types of investment services or activities, leading to different (e.g. more granular or, in some cases, fewer) categorisations depending on the jurisdiction where the investment firm actually operates," the EBA's Report of December 2014 concludes.

 

 

 

Recommendation for a new categorisation of investment firms distinguishing between systemic and 'bank-like' investment firms to which the full CRD/CRR requirements should be applied; other investment firms ('non-systemic') with a more limited set of prudential requirements; and very small firms with 'non-interconnected' services

 

It is necessary to make a distinction between investment firms for which prudential requirements equivalent to the ones held of credit institutions are necessary and investment firms that are not systemic or interconnected, for which specific requirements could be developed. Such a distinction would enhance proportionality and clarify the question of 'gone' versus 'going' concerning supervision for investment firms.

 

It is recognised that a small minority of MiFID firms are substantial undertakings that run 'bank- like' intermediation and underwriting risks at a significant scale. Such activities expose these institutions to credit risk, primarily in the form of counterparty risk, and market risk for positions taken on own account, be it for the purpose of external clients or not.

 

For other investment firms, however, a less complex prudential regime seems appropriate to address the specific risks that investment firms pose to investors and other market participants, with regards to investment business risks such as credit, market, operational and liquidity risk.

 

In the last tier, small and non-interconnected firms warrant a very simple regime to wind them down in an orderly manner. Such a regime could be based mainly on fixed overheads requirements (FORs) that fulfil the objective of setting aside sufficient capital for ensuring safe and sound management of their risks. These firms could also be subject to simplified obligations with regards to reporting obligations.

 

The future categorisation of investment firms under the CRD IV should, then, be achieved with reference to the systemic importance of the investment firm or its ability to run 'bank-like' activities, expressed through consistent indicators, both qualitative and quantitative; this would lead to a clear cut in the population of investment firms within the EU. Indeed, a key tool for amending the current complex regime, which establishes rules that apply differently depending on the category to which the firm belongs, could be reducing the number of 'categories' and simplifying the regime by establishing greater use of proportionality, both upstream (strengthening rules for those firms that are deemed to pose more risks to financial stability) and downstream (simplifying requirements for the majority).

 

In order to set out detailed and well-researched and reasoned policy options for such a modified prudential regime for investment firms, more work is required. It is proposed that this work will be completed in a second phase with a second, more in-depth, report, which is proposed to be initiated after the finalisation of this report. The complexity of the considerations concerning such a new regime will, however, mean substantial time and resources are required.

 

Report on Investment Firms, Response to the Commission's Call for Advice of December 2014, EBA/Op/2015/20, p. 85

 

 

 

This thread is followed in the Explanatory Memorandum to the Proposal for a Regulation of the European Parliament and of the Council amending Regulation (EU) No 575/2013 as regards the leverage ratio, the net stable funding ratio, requirements for own funds and eligible liabilities, counterparty credit risk, market risk, exposures to central counterparties, exposures to collective investment undertakings, large exposures, reporting and disclosure requirements and amending Regulation (EU) No 648/2012, 23.11.2016, COM(2016) 850 final 2016/0360 (COD) (p. 22, 23): 

 

"The review under Article 508(3) on investment firms is now in its second phase. In a first report published in December 2015, EBA found that the bank-like rules under the CRR were not fit for purpose for the majority of investment firms with the exception of the more systemic ones that pose risks similar to those faced by credit institutions. At the request of the Commission, the EBA is conducting additional analytical work and a data-gathering exercise in order to articulate a more appropriate and proportionate capital treatment for investment firms which will cover all parameters of a possible new regime. EBA is expected to deliver their final input to the Commission in June 2017. The Commission intends to present legislative proposals setting-up a specific prudential framework for non-systemic investment firms by the end of 2017.

 

Pending the adoption of these proposals, it is considered appropriate to allow investment firms that are not systemic to apply the CRR in the version as it stood before the amendments come into force. Systemic investment firms will, for their part, be subject to the amended version of the CRR. This will ensure that systemic firms are treated appropriately while alleviating the regulatory burden for non-systemic firms who would otherwise have to temporarily apply a new set of rules designed for credit institutions and systemic investment firms during the period preceding the final adoption of the dedicated investment firms' prudential framework that will be proposed in 2017."

 

 

Authorisation process of investment firms

 

 


Criteria for the authorisation process of investment firms under MiFID II are stipulated uniformly across the European Union Member States in the Commission Delegated Regulation (EU) of 14.7.2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council with regard to regulatory technical standards on information and requirements for the authorisation of investment firms.

 

The said Regulation is structured in the following way:

 

- Articles 1 to 7 detail the information to be provided to the competent authorities by investment firms as part of the process for granting and refusing requests for authorisation;

 

- Articles 8 to 10 set out the requirements applicable to the management of investment firms and the requirements applicable to shareholders and members with qualifying holdings, as well as obstacles which may prevent effective exercise of the supervisory functions of the competent authority.

 

The above Regulation is largely based on the existing standards and forms contained in the CESR (ESMA's predecessor) Protocol on MiFID Notifications, hence the EU financial regulator does not expect the costs implied by these rules to be significant.

 

 

Status of investment firms under REMIT

 

 

Investment firm qualifies as market participant under REMIT if entering into transactions, including orders to trade, in one or more wholesale energy markets.

 

 

 

 

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Last Updated on Monday, 17 July 2017 22:44
 

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