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Capital buffer requirements under the CRD

Question:

To what extent do the different components of the CRD combined buffer requirement apply to proprietary traders?

Published: 28 February 2024

Answer:

Article 128(6) of the CRD defines the combined buffer requirement as: the total tier 1 core capital necessary to comply with the capital conservation buffer (CBB) requirement extended by the following, as applicable:

(a) an institution-specific countercyclical capital buffer (CCyB;
(b) a G-SII-buffer (for global systemically important institutions – G-SIIs);
(c) an O-SII buffer (for other systemically important institutions – O-SIIs); and
(d) a systemic risk buffer (SRB).

For proprietary traders, only the capital conservation buffer (CBB) and the institution-specific countercyclical capital buffer (CCyB) are relevant. The two systemic buffers, i.e. both the G-SII and the O-SII buffers and the systemic risk buffer (SRB), to date do not apply to the Dutch population of investment firms.

Pursuant to Section 3:62a(3) of the Dutch Financial Supervision Act (Wet op het financieel toezicht – Wft) an immediate notification duty to DNB is in place in case a financial undertaking does not comply, foresees, or may reasonably foresee that it will not comply with the applicable capital buffer requirements.

Based on Section 3:62a(4) of the Wft proprietary traders that do not comply with the applicable capital buffer requirements must within five working days after notifying DNB to this effect, submit a capital conservation plan to DNB. DNB may extend this term to ten working days. The capital conservation plan must include the measures that the proprietary trader plans to take in order to comply with its combined buffer requirement.

Part (5) of this Q&A (Recovery plans) elaborates on the capital conservation plan. This also explains the situation where a proprietary trader does not comply with the CRD combined buffer requirement, nor with the CRR capital requirements.

The different components of the combined buffer requirement and their relevance for proprietary traders are explained below.

Capital conservation buffer (CCB) – Article 129 CRD / Section 3:62a Wft

The capital conservation buffer (CCB) as referred to in Article 129 of the CRD was implemented in the Netherlands in section 3:62a of the Wft in conjunction with sections 105 and 105a of the Decree on Prudential Rules for Financial Undertakings (Besluit prudentiële regels Wft – Bpr). This CCB, the level of which is determined at EU level, is 1.875% for 2018 and 2.5% from 2019 onwards (for the phasing-in of this requirement, see Section 105(4) of the Bpr). Based on Section 3:62a(1) of the Wft this CCB applies to investment firms holding a MiFID licence for proprietary trading, and hence also to proprietary traders that are subject to the 13 November 2017 amendment to the prudential regime.

Countercyclical capital buffer (CCyB) – Article 130 CRD/Section 3:62a Wft

The institution-specific countercyclical capital buffer (CCyB) as referred to in Article 130 of the CRD was implemented in the Netherlands in section 3:62a of the Wft in conjunction with sections 105 and 105b of the Bpr. This CCyB is periodically determined by DNB (see Section 105b(2) of the Bpr) and has thus far been set at 0% (see DNB's news Item of 2 March 2018). Based on Section 3:62a (1) of the Wft, this CCyB applies to investment firms holding a MiFID licence for proprietary trading, and hence also to proprietary traders that are subject to the 13 November 2017 amendment to the prudential regime.

Systemic relevance buffers (G-SII and O-SII buffers) and the systemic risk buffer (SRB)

Both the systemic relevance buffers for G-SIIs and O-SIIs and the systemic risk buffer (SRB) to date do not apply to investment firms, as no MIFID licence holders in the Netherlands have to date been earmarked as systemically important. Consequently, proprietary traders are not required to adhere to these systemic buffer requirements when calculating their applicable combined buffer requirement.