Commission Delegated Regulation (EU) 2023/1668 of 25 May 2023 supplementing Directive (EU) 2019/2034 of the European Parliament and of the Council with regard to regulatory technical standards specifying the measurement of risks or elements of risks not covered or not sufficiently covered by the own funds requirements set out in Parts Three and Four of Regulation (EU) 2019/2033 of the European Parliament and of the Council and the indicative qualitative metrics for the amounts of additional own funds (Text with EEA relevance)

THE EUROPEAN COMMISSION,

Having regard to the Treaty on the Functioning of the European Union,

Having regard to Directive (EU) 2019/2034 of the Parliament and of the Council of 27 November 2019 on the prudential supervision of investment firms and amending Directives 2002/87/EC, 2009/65/EC, 2011/61/EU, 2013/36/EU, 2014/59/EU and 2014/65/EU (1), and in particular Article 40(6), fourth subparagraph, thereof,

Whereas:

(1) To ensure the harmonised application of the additional own funds requirement across the Union, it is necessary to set out a uniform approach towards the measurement of the risks and elements of risks that would support the determination of the level of capital adequate to address all material risks to which investment firms might be exposed. Competent authorities should therefore ensure that investment firms hold adequate additional own funds to cover each risk category (Risk-to-Client, Risk-to-Firm and Risk-to-Market), as well as any other material risks.

(2) In order for competent authorities to be able to appropriately monitor the risk profile of investment firms and to identify, assess and quantify material risks, it is necessary to set out a detailed and comprehensive methodology proportionate to the nature, scope and complexity of investment firm activities based on all available information sources, including information gathered for the purpose of Article 36 of Directive (EU) 2019/2034.

(3) The level of the additional own funds requirement is deemed adequate when it reduces the likelihood of investment firm failure and limits the risk of disorderly wind-down that would pose threats to the investment firm’s clients and to the wider market, including other financial institutions, market infrastructures, or the market as a whole. Due to this dual objective of the additional own funds requirement and in keeping with the structure of the own funds requirements as set out in Parts Three and Four of Regulation (EU) 2019/2033 of the European Parliament and of the Council (2), competent authorities should consider separately the risks related to ongoing investment firm activities and the risk of disorderly wind-down of the investment firm’s business.

(4) To ensure that all the risks or elements of risks that an investment firm is exposed to or poses to others are duly covered, an investment firm should hold sufficient own funds, taking into account the business model, scale and complexity of activities performed by the investment firm, to withstand additional operational expenses related to an orderly wind-down process. In order to ensure that such own funds would be appropriate in particular economic circumstances, different plausible economic scenarios should be considered by competent authorities during the supervisory review and evaluation process carried out in accordance with Article 36 of Directive (EU) 2019/2034. In particular, business continuity, investor protection and market integrity are not to be jeopardised during the wind-down process. To that end, the investment firm should be capable, also during that process, of absorbing costs and losses not matched by a sufficient volume of profits. Given that the length of the wind-down process could differ significantly depending on specific circumstances, competent authorities should take this into account when setting the additional own funds requirement. Moreover, given the potentially diverse legal forms that investment firms can have, the competent authorities should take into account the applicable national insolvency, corporate and trade laws, which could affect the length of wind-down processes, as well as associated costs and risks.

(5) To ensure proportionality in determining the additional own funds requirement, risks and elements of risk not covered or not sufficiently covered by the K-factor requirement referred to in Article 15 of Regulation (EU) 2019/2033 should be measured only for those investment firms that are subject to the K-factor requirement referred to in that Article, and not for small and non-interconnected firms that meet the conditions set out in Article 12(1) of that Regulation. Other risks not covered at all by the own funds requirements set out in Parts Three and Four of Regulation (EU) 2019/2033, including risks explicitly excluded from those own funds requirements, exist for investment firms. Therefore, it is necessary to specify that those risks are assessed and measured by competent authorities on the basis of the size and business model of the invetsment firm as well as on the basis of the scope, nature and complexity of its activities.

(6) To ensure the correct measurement and coverage of all the risks which are referred to in Parts Three and Four of Regulation (EU) 2019/2033 but not fully or adequately covered by those requirements, such risks should be measured separately for each risk category (Risk-to-Client, Risk-to-Market and Risk-to-Firm). For the same reason, the risks not covered in Parts Three and Four of that Regulation, including those explicitly excluded from those requirements, should be measured on a risk-by-risk basis. However, if the measurement per risk category or on a risk-by-risk basis is overly burdensome or is not feasible in cases of investment firms subject to an initial capital requirement lower than the requirement laid down in Article 9(1) of Directive (EU) 2019/2034, the measurement of risks should in those cases be performed on an aggregate level, taking into account the principle of proportionality.

(7) To strike the right balance between prudential considerations and proportional application, the measurement of risks on an aggregate level should not apply to investment firms that are subject to the initial capital requirement laid down in Article 9(1) of Directive (EU) 2019/2034. Investment firms that are subject to higher initial capital requirements should be assessed in terms of risks with a measurement per risk category and on a risk-by-risk basis.

(8) To ensure consistency in the measurement of material risks that investment firms could pose to others or face themselves, competent authorities should rely on a harmonised set of minimum indicative qualitative metrics. Given that risks evolve throughout the business cycle of a firm, competent authorities should perform not only a static assessment, but also perform a historical trend analysis of such metrics. To cover all the relevant risks properly, different metrics should be used for investment firms with different business models and activities. In order to properly cover all the relevant risks of the investment firm, taking into account the specific business model or activity, legal form and the availability of reliable data, competent authorities should, under certain conditions notably pertaining to the specificities of a firm’s business model or data quality, adjust the metrics and use those adjusted metrics or, if that is not possible, use alternative metrics that are proportionate to the investment firm’s size, complexity, business model, and operating model and that would ensure an appropriate assessment of the risks.

(9) This Regulation is based on the draft regulatory technical standards submitted to the Commission by the European Banking Authority.

(10) The European Banking Authority has conducted open public consultations on the draft regulatory technical standards on which this Regulation is based, analysed the potential related costs and benefits and requested the advice of the Banking Stakeholder Group established in accordance with Article 10 of Regulation (EU) No 1093/2010 of the European Parliament and of the Council (3),

HAS ADOPTED THIS REGULATION:

Article 1

Risk of disorderly wind-down

(a) an estimation of the realistic time frame to wind down the investment firm;

(b) an assessment of operational and legal tasks of the investment firm during the wind-down process over a realistic time frame;

(c) the identification and assessment of material fixed and variable costs;

(d) the identification and assessment of material risks or elements of risks that could materialise during the wind-down process;

(e) any other aspect relevant for the wind-down process.

(a) the closure costs, including litigation costs for the purpose of paragraph 2, point (c), of this Article;

(b) the loss in revenues and loss in the net realisable value of assets expected to be incurred due to the wind-down process for the purpose of paragraph 2, point (d), of this Article.

Competent authorities shall use the relevant indicative qualitative metrics referred to in Article 6(1) and shall combine them with static and historical trend analysis, delivering their expert judgement as appropriate.

Article 2

Material risks or elements of risks not covered or not fully covered by the K-Factor requirement set out in Part Three, Title II, of Regulation (EU) 2019/2033

Competent authorities shall determine the capital that would be considered adequate to cover the relevant risks related to the K-factor requirement.

By way of derogation from the first subparagraph, for investment firms subject to an initial capital requirement lower than the requirement laid down in Article 9(1) of Directive (EU) 2019/2034, where competent authorities deem a more granular quantification not feasible or overly burdensome, the measurement shall be performed on an aggregate level.

Article 3

Material risks or elements of risks not covered by the own funds requirements set out in Parts Three and Four of Regulation (EU) 2019/2033

(a) the risks posed to the security of the investment firm’s network and information systems to ensure confidentiality, integrity and availability of their processes, data, and assets;

(b) the interest rate risk and credit risk arising from non-trading book activities.

For investment firms subject to an initial capital requirement lower than the requirement laid down in Article 9(1) of Directive (EU) 2019/2034, where competent authorities deem a more granular quantification not feasible or overly burdensome, the measurement shall be performed on an aggregate level.

Article 4

Total material risk not covered or not fully covered by the own funds requirements set out in Parts Three and Four of Regulation (EU) 2019/2033

Article 5

General qualitative metrics for the determination of the additional own funds requirement

(a) the outcomes of the internal capital adequacy assessment process and the internal risk assessment process by the investment firm set out in Article 24 of Directive (EU) 2019/2034;

(b) data reported in accordance with Articles 54 and 55 of Regulation (EU) 2019/2033;

(c) the outcome of the reviews carried out in accordance with Articles 36 and 37 of Directive (EU) 2019/2034;

(d) the results of any other supervisory activities;

(e) other relevant inputs, including supervisory judgement.

Article 6

Indicative qualitative metrics

(a) the number of tied agents compared to total staff;

(b) the average duration of a wind-down in the jurisdiction, taking into consideration the complexity of the investment firm’s business;

(c) the share of non-cancellable contracts and their residual duration;

(d) the identification of markets where the investment firm is the main service provider;

(e) the value and liquidity of fixed assets that the investment firm would have to dispose of during a wind-down;