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New regime for investment firms (IFR/D)

New regime for investment firms (IFR/D)

To strengthen capital markets, the European Commission has announced in its mid-term review of the Action Plan for the Capital Markets Union in summer 2017 for the first time, that it would provide a more effective supervisory framework for investment firms. This new regime entered into force in December 2019.

The special role of investment firms in the overall functioning of the EU financial markets is now recognised by a distinctive regulation and directive, which simplify the rules for investment firms and facilitate investment flows throughout the EU.

As an operator of regulated markets, we welcome the new rules, as they acknowledge and support the important contribution of investment firms to trading and liquidity provision.

Deutsche Börse Group is directly affected by the framework through Eurex Repo, Eurex STS and 360T and via its customer relationships.

Objective

Regulation (2019/2033) ("IFR") and directive (2019/2034) ("IFD") are designed to ensure that key prudential requirements for investment firms are adequately set and that compliance with them is monitored.

Previously, all investment firms were subject to the same capital, liquidity and risk management rules as banks (EU regulation 575/2013 and directive 2013/36). The new regulation provides a better tailored supervisory system. Among other things, the level of capital requirements for risk protection for investment firms is determined according to a classification scheme, that is divided in four categories. So-called "K-factors" are established for this classification of individual firms, to calculate the final level of their capital requirements. These are based on the various risks in the respective activities of an investment firm.

In addition, the regulation lays down the conditions under which investment firms located in non-EU countries may obtain market access to the European single market. At the same time, it strengthens the supervisory powers of the European Securities and Markets Authority (ESMA).

Timeline

In December 2017, the EU Commission published the first draft of the revised legal framework. On February 26, 2019, a political agreement was reached between the EU Commission, Council and Parliament on the associated directive and regulation.

After the EU Parliament officially accepted the framework in April 2019, the final documents were published in the Official Journal of the European Union on 5 December 2019. Consequently, the documents and their content entered into force on 25 December 2019. The rules set out in the final documents will apply 18 months later, from 26 June 2021 with the end of the transposition period.

In this regard, the Federal Ministry of Finance presented a first draft law on the implementation of the IFD in Germany on 17 August 2020.

After the end of the Level 1 process at the end of 2019, the European Banking Authority (EBA) and ESMA started to develop the related regulatory technical standards (RTS) and implementing technical standards (ITS).

According to an overview, which is based on the regulatory provisions and was published by EBA, EBA and ESMA plan to finalise the majority of the relevant standards, guidelines and other assignments by December 2021. Further work within the Level 2 process is planned until 2025.

Further, the regulatory framework also foresees that the regulatory review process will start in June 2024, while the transition phase of the framework will end in June 2026.

IFR/D: the highlighted parts of the value chain are affected