Tag Archives: European Commission

CRD V: Proposals for bank intermediate EU parent undertakings – retaliation to US measures?

On 23 November 2016, the European Commission (EC) outlined proposals to amend the Capital Requirements Regulation (EU/575/2013) (CRR) and the Capital Requirements Directive (2013/36/EU) (CRD) (and together referred to as CRD IV).  These proposals are likely to form part of the next version of these measures i.e. CRD V.  Links to the proposals are here (CRR) and here (CRD).

One proposed CRD V measure is a requirement for non-EU banking groups (including US groups) operating in the EU to consolidate their subsidiaries under a single “Intermediate Parent Undertaking (IPU)” in the EU, which will need to be separately authorised and capitalised.  I discuss this and similar measures introduced by the US for non-US banking groups operating there.  I also consider the impact of the proposals in relation to Brexit.

EC Proposals

The EC proposals would see a new Article 21b added into CRD to cover IPUs, which would stipulate that:

  1. if a third country group (i.e. a non-EU group) has two or more institutions (i.e. banks or investment firm subsidiaries) in the EU, it must have an EU-based IPU above them;
  2. such an IPU must be separately authorised and be subject to EU capital requirements or be an existing bank or investment firm authorised under CRR;
  3. there must be a single IPU for all subsidiaries that are part of the same group; and
  4. the threshold for this requirement to apply would be if: (a) the total value of assets in the EU (both subsidiaries and branches) of the non-EU group is at least Euro 30 billion; or (b) the third country group is a non-EU G-SII (i.e. global systemically important institution or bank – see list maintained by the FSB).

These proposals would require non-EU banking groups to hold EU bank and broker-dealer (investment firm) subsidiaries through a single EU-based IPU that would be subject to capital, liquidity, leverage and other prudential standards on a consolidated basis.

The IPU requirement may have been added late into the draft CRD V proposals and it seems to have been included without following the usual discussion and impact assessment process for such measures.  It has been suggested that this is a retaliatory action to similar measures introduced by the US (discussed below).  It is possible that EU Member States will decide to alter or even drop this measure before CRD V is adopted into law.

Possible Effect of the EC Proposals on US Banking Groups

Due to strict limitations on transactions between a US Federal Deposit Insurance Corporation (FDIC)-insured bank (and its subsidiaries – the “bank chain”) on the one hand and its bank holding company parent and sister companies (the “non-bank chain”) on the other, the large US bank holding companies operate their US broker-dealer subsidiaries as sister companies of their FDIC-insured banks and often do the same with their non-US broker-dealer subsidiaries.

Such large US bank holding companies operate in the EU through branch offices of their FDIC-insured banks as well as through locally-incorporated bank subsidiaries of those banks and separate (non-bank chain) broker-dealer subsidiaries.

To comply with the EC poposals on IPUs, a US bank holding company would need to transfer its EU bank subsidiaries so that they and the EU broker-dealer subsidiaries become indirect subsidiaries of the parent bank holding company via a single EU IPU. Doing so, could severely limit transactions between the US FDIC-insured bank including its EU branch offices and the EU bank subsidiaries (as well as the other EU subsidiaries) of the US bank holding company.

All this is likely to mean that US banking groups may have to totally rethink their existing holding structures in Europe – they may already be doing so due to Brexit (see below).

US Intermediate Holding Company Rule

Title 12 of the US Code of Federal Regulations (12 CFR Part 252.153) introduced a similar rule in March 2014 requiring  that any foreign banking organisation with US non-branch assets (i.e. subsidiaries) of USD 50 billion or more must establish a US intermediate holding company (US IHC) or designate an existing subsidiary as such.

As you can see, the US IHC rule has a much higher threshold (USD 50 billion) than that of the corresponding EC proposal (Euro 30 billion) and the US threshold only considers assets of subsidiaries, whereas the EC proposal also counts branch assets.

The US IHC rule was viewed as addressing the capital position of large US broker-dealer subsidiaries of non-US banking groups because such subsidiaries were not otherwise subject to US prudential banking regulations including on risk and leverage.  In the EU however, broker-dealer (investment firm) subsidiaries of US banking groups are currently subject to Basel-based prudential requirements.


The EC may or may not have had Brexit in mind when it came up with this proposed IPU measure.  Post-Brexit, depending on any negotiated arrangements, the UK will be outside the EU and thus, on the face of it, UK banking groups will be in the same boat as other non-EU groups with regard to the CRD V proposals and may need to establish IPUs in the EU to hold their EU subsidiaries.  Some UK and non-EU banking groups that are not G-SIIs may review the scope of their activities in the EU in light of these requirements.

Also, from the point of view of US and other non-EU banking groups who currently operate in Europe out of the UK, the need for a separately capitalised holding company in Frankfurt or Luxembourg, for example, could make London a less attractive headquarters for European operations.  Given that most banking groups are currently looking at their structures in light of Brexit, the EC proposals on IPUs will add a further layer of complexity to these considerations.

Next Steps and Conclusion

The EC intends that the CRD V proposals will apply two years after the legislative text is finalised. This would take us well into 2019 at the earliest and therefore, the IPU measure is unlikely to be applicable when the UK leaves the EU – assuming that the UK invokes Article 50 of the Lisbon Treaty in early 2017 and leaves the EU in the two year period provided.

The EC proposal for IPUs will probably be welcomed by European banking groups that have found themselves on an uneven playing field with US rivals.  However, most banking groups are reluctant to hold multiple pools of capital around the world, overseen by different regulators, which they see as less efficient than a centrally managed capital pool regulated by their home bank regulatory authority.

Whether or not the EC proposals on IPUs are adopted into law as they are currently drafted, there does seem to be a growing regulatory trend towards a fragmentation in financial rules, as key jurisdictions like the EU and the US seek to assert control and seem comfortable taking tit-for-tat action even at the risk of duplicating or complicating internationally-settled regulatory measures.




New Market Abuse Regime: ESMA advises European Commission on implementation

On 3 February 2015, the European Securities and Markets Authority (ESMA) published its technical advice to the European Commission on possible delegated acts under the Market Abuse Regulation (Regulation 596/2014) (MAR) in a Final Report.

The draft technical advice covers recommendations in the following areas:

  • examples of practices that may constitute market manipulation as well as proposing additional indicators of market manipulation.
  • minimum thresholds for the purpose of the exemption for certain participants in the emission allowance market from the requirement to publicly disclose inside information.
  • how to determine to which regulator delays in disclosure of inside information need to be notified.
  • clarification of the enhanced disclosure of managers’ transactions.
  • clarification of the transactions that can be allowed by the issuer during a closed period when normally trading by managers is prohibited.
  • procedures and arrangements to ensure sound whistleblowing infrastructures.

In some cases, ESMA has modified its technical advice in the light of comments received in its consultation in July 2014 on MAR.

Next steps

ESMA will send this technical advice to the European Commission for its consideration in drafting its implementing standards regarding MAR.  ESMA’s regulatory technical standards (RTS) on MAR are intended to be delivered in July 2015.  Under European law, these delegated acts should be adopted by the European Commission so that they enter into force 24 months after the entry into force of MAR.  MAR entered into force on 2 July 2014 so the delegated acts would need to be in force by July 2016.

MiFIR & MiFID II: where do things stand?

The Markets in Financial Instruments Regulation (Regulation 600/2014) (MiFIR) and Markets in Financial Instruments Directive (Directive 2014/65/EU) (MiFID II) will be the new EU legal framework (replacing MiFID I) governing the requirements applicable to investment firms, trading venues, data reporting service providers and third-country firms providing investment services or activities in the EU.  Although the MiFIR & MiFID II regime doesn’t come into effect until 3 January 2017, there are a number of measures that are currently being taken in relation to them.  We look at some of these below.

  • Many elements of the MiFIR & MiFID II regime need to be further specified in delegated acts to be adopted by the European Commission and it has therefore requested the European Securities and Markets Authority (ESMA) and the European Banking Authority (EBA) to provide technical input.  On 19 December 2014, ESMA published final technical advice to the European Commission under MiFIR & MiFID II (ESMA/2014/1569).
  • On the same date, ESMA also put out a consultation paper (ESMA/2014/1570) that consults on regulatory technical standards (RTS) and implementing technical standards (ITS) including in relation to Investor Protection and Transparency under the new regime.  This Consultation is open until 2 March 2015.
  • ESMA has published a list of responses to its September 2014 consultation on draft guidelines clarifying the definition of derivatives under MiFID II, which closed on 5 January 2015.
  • Following the publication of the text of MiFIR & MiFID II in the Official Journal of the EU on 12 June 2014 (coming into force on 2 July 2014), Member States need to adopt and publish by 3 July 2016 the measures transposing the MiFID II Directive into national law to apply from the aforementioned 3 January 2017 deadline.  MiFIR being an EU Regulation has direct effect and does not need to be transposed into law by Member States.

A number of further measures are expected by mid-2015 and will be covered in further updates to The Flaw.

EC decides Third Country Equivalence for the Capital Requirements Regulation

The European Commission (EC) has decided that various non-EU countries have equivalent arrangements for the purposes of treatment of exposures in relation to the Capital Requirements Regulation (Regulation 575/2013) (CRR).  The EC’s Implementing Decision (link here) will enter into force on 1 January 2015.  Countries that have been found equivalent for all three types of exposure under CRR include Brazil, Canada, China, Saudi Arabia, Singapore, South Africa and the USA.  Types of exposure and equivalent countries are listed below.

(1) Supervisory and regulatory arrangements for exposures to credit institutions:

Australia, Brazil, Canada, China, Guernsey, Hong Kong, India, Isle of Man, Japan, Jersey, Mexico, Monaco, Saudi Arabia, Singapore, South Africa, Switzerland and the USA.

(2) Exposures to investment firms:

Australia, Brazil, Canada, China, Mexico, Saudi Arabia, Singapore, South Africa and the USA.

(3) Exposures to exchanges:

Brazil, Canada, China, India, Japan, Mexico, Saudi Arabia, Singapore, South Africa and the USA

Bank of England Note on CRR & CRD IV