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Recovery plans

Question:

In which instances does a proprietary trader have to submit a recovery plan to DNB and which requirements must be met with regard to such a plan?

Published: 27 November 2023

Answer:

Due to the change, effective from 13 November 2017, of the prudential regime for proprietary traders that under the CRR were earmarked by DNB as ‘local firm’, DNB instigated a transitional trajectory. This transitional trajectory implies that proprietary traders have until 31 March 2018 to comply with the prevailing requirements under the CRR. By 14 May 2018 at the latest, the proprietary traders must report to DNB on their capital position, calculated on the basis of the applicable capital requirements under the CRR as per 31 March 2018. When calculating the capital position on 31 March 2018, the applicable capital buffer requirements under the CRD must be included as well; see also part (2) of this Q&A (Capital buffer requirements under the CRD).

If a proprietary trader does not meet the capital requirements under the CRR, it does not meet the combined buffer requirement under the CRD either. As a possible capital shortfall must be resolved before a capital buffer shortfall can be resolved, a proprietary trader must submit a recovery plan to DNB both in case of a capital shortfall and in case of a capital buffer shortfall. There are then three possible situations:

  1. A proprietary trader meets both the CRR capital requirements and the CRD combined buffer requirement by 31 March 2018: a recovery plan is not necessary;
  2. A proprietary trader meets the CRR capital requirements, but does not meet the CRD combined buffer requirement: a recovery plan that meets the requirements of a capital conservation plan is necessary; or
  3. A proprietary trader meets neither the CRR capital requirements, nor the CRD combined buffer requirement: a recovery plan is necessary.

A recovery plan must be submitted to DNB for approval within five working days after a proprietary trader detects a capital shortfall and/or a capital buffer shortfall. DNB may extend this term to 10 working days. Based on the 14 May 2018 submission deadline for the first-quarter reports, a proprietary trader must submit its recovery plan to DNB by Tuesday, 22 May 2018 at the latest.

A recovery plan must state how a proprietary trader plans to meet the CRR capital requirements and/or the CRD combined buffer requirement as soon as possible, but by 31 December 2019 at the latest. DNB will approve a recovery plan if the plan makes a convincing case that it is plausible that the measures contained in the plan will enable the proprietary trader to meet, within the shortest term possible, the prudential requirements (see part 1 of this Q&A for the applicable capital requirements under the CRR and part 2 of this Q&A for the combined buffer requirement under the CRD).

If DNB does not approve a recovery plan, DNB may, pursuant to Section 3:62a(6) of the Wft, require the relevant firm to (i) increase its own funds to specified levels within specified periods; or (ii) adhere to a course of action prescribed by DNB with respect to distributions in connection with Common Equity Tier 1 capital, variable remuneration or payments on Additional Tier 1 instruments, in as far as such distributions would lead to a decrease of its available capital to a level where the combined buffer requirement is no longer met. Recovery plans may also prompt DNB to impose one or more measures as referred to in Article 104 of the CRD (as implemented in Section 3:111a(2) of the Wft).

DNB expects the recovery plans submitted by proprietary traders to at least contain the following elements:

a. estimates of income and expenditure and a statement of the projected balance sheet position;
b. measures to increase capital ratios. The submitting institution must for each measure explain the quantitative impact that this measure has on its capital ratios and indicate the degree of feasibility of implementation of the measure; and
c. a scheduled plan for increasing own funds in order to comply with both the CRR capital requirements and the CRD combined buffer requirement.

As part of measures to be taken to increase capital ratios (see point b above) DNB expects proprietary traders to discuss limitations to payouts explicitly in their recovery plans, i.e. limitations with respect to: profit distributions, awarding or distributing variable remunerations, or claims thereon, and making payments on capital instruments. If such limitations on distributions are not included in a recovery plan containing measures to increase capital ratios, the submitting firm must include in its recovery plan well-founded reasons for not applying or not reasonably being able to apply these limitations. Examples of additional measures that proprietary traders may implement in order to meet the CRR capital requirements and the CRD combined buffer requirement include: reducing trading positions, changing trading strategies and raising additional capital.