Investment firms could face new capital charges to reflect risks that regulators say aren’t captured by the existing prudential framework, including firms’ crypto exposures.
In a joint discussion paper, the European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA) sketched out a series of potential changes to the capital rules for investment firms.
Among other things, the report examines the adequacy of the existing requirements, the current methodology for determining firms’ capital charges, and it reviews risks not covered by the current framework.
The paper seeks feedback for the regulators that will inform their advice to the European Commission on the prudential rules for investment firms, including possible reforms to address firms’ crypto activities, ESG risks, commodity and emission allowances.
Currently, the risks related to firms’ crypto-asset transactions are not captured. The paper noted that the capitalization of these risks “may not be straightforward,” and it sets out a series of possible options to account for these risks.
Other risks that aren’t specifically captured in the current regime, include investment firms that operate trading venues, and certain non-core activities of investment firms.
Additionally, it said some regulators are of the view that existing charges for operational risk aren’t adequate, and should potentially be revised to better account for the potential losses that could be caused by “fat finger” errors, pricing mistakes, rogue trading frauds, IT failures and cyber-attacks.
The discussion paper also covers issues involving the oversight, disclosure and transparency of remuneration policies at investment firms and asset managers. It also reviews the treatment of firms that are active in commodity markets but aren’t prudentially regulated, and it contemplates extending the regime to crowdfunding and crypto service providers.
The consultation on these, and other issues discussed in the report, runs until Aug. 30, 2024. A public hearing has also been scheduled for June 20.