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Waivers and exemptions in the CRD and the CRR

Question:

Which waivers and exemptions included in the CRD and the CRR may be relevant for proprietary traders, and how can proprietary traders qualify for these waivers and exemptions?

Published: 28 February 2024

Answer:

The CRD and CRR include various waivers and exemptions that may be relevant for proprietary traders. Waivers are granted on an individual basis and are valid for a restricted period only. The relevant waivers and exemptions are described below. The following is based on proprietary traders holding minimum initial capital of EUR 730,000 and complying with all conditions mentioned in Article 96(1)(b) of the CRR, i.e.:

(a) they do not hold client money or securities;
(b) they undertake only dealing on own account;
(c) they have no external customers; and
(d) their execution and settlement transactions take place under the responsibility of a clearing institution and are guaranteed by that clearing institution.

Article 7 of the CRR – Solo supervision

The main rule of Article 6(1) of the CRR is that institutions are required to comply on an individual basis with the requirements under Parts 2 through 5 and 8 of the CRR. Based on Article 7 of the CRR, institutions may apply for a waiver from the application of Article 6(1) of the CRR. Based on Article 7(1)(2) of the CRR, the designated supervisory authority may issue a waiver, providing the conditions mentioned in Article 7(1) of the CRR are complied with.

A proprietary trader may apply to DNB for a waiver as referred to under Article 7 of the CRR. For all incoming applications, DNB will assess whether all conditions of the Article 7 of the CRR are complied with. This is an institution-specific assessment. In principle DNB issues a decision on a complete application for a waiver within eight weeks of receiving the application, whereby DNB may suspend the consideration period on one or more occasions, e.g. if the applicant is required to submit additional information within a specified period. Whether DNB is able to issue a decision within eight weeks of receiving the application also depends on the quality of such application.

Article 15/17 of the CRR – Consolidated supervision

The main rule of Article 11(1) of the CRR is that parent institutions in Member States must comply with the requirements set out in parts 2 through 4 and part 7 of the CRR to the degree and in the manner set out in Article 18 of the CRR based on their consolidated situation. Based on Article 11(2) of the CRR, the same applies to investment firms within the meaning of the CRR that are controlled by a (mixed) financial parent holding company in a Member State.

Specifically for groups of investment firms, Article 15 of the CRR provides for a deviation from the main rule that capital requirements must be applied on a consolidated basis. Based on Article 15(1) of the CRR, the consolidated supervisor may grant waivers on an ad hoc basis from the application on a consolidated basis of part 3 of the CRR and Title VII, Chapter 4 of the CRD, providing the conditions stated in Article 15 of the CRR are complied with.

Based on Article 15(2) of the CRR, the relevant competent authorities may also apply the waiver mentioned in Article 15(1) of the CRR if the financial holding companies holds a lower amount of own funds than the amount calculated under Article 15(1)(d) of the CRR, but no lower than the sum of the own funds requirements imposed on an individual basis to – in summary – the financial subsidiaries which would otherwise be consolidated and the total amount of any contingent liability in favour of the financial subsidiaries which would otherwise be consolidated. For the purpose of Article 15(2) of the CRR, subsidiaries in third countries must be submitted to a notional own funds requirement. Article 17 of the CRR includes further rules for the supervision of investment firms holding a waiver based on Article 15 of the CRR.

A proprietary trader may apply to DNB for a waiver as referred to under Article 15 of the CRR. For all incoming applications, DNB will assess whether all conditions of Article 15 (and 17) of the CRR are complied with. This is an institution-specific assessment. In principle DNB issues a decision on a complete application for a waiver within eight weeks of receiving the application, whereby DNB may suspend the consideration period on one or more occasions, e.g. if the applicant is required to submit additional information within a specified period. Whether DNB is able to issue a decision within eight weeks of receiving the application therefore also depends on the quality of such application.

Article 6(4) of the CRR – Liquidity requirements

Note: updated text

Based on Section 3:63(1) of the Wft, investment firms as meant in the CRR that provide investment services or conduct investment activities in the Netherlands are required to dispose of sufficient liquidity, in as far as stipulated by general order in council. This has been detailed in Section 106a of the Bpr, the result of which is that the liquidity rules contained in Part 6 of the CRR also apply to proprietary traders.

Based on Article 6(4) of the CRR, the relevant competent authorities (in this case DNB) may exempt investment firms from the liquidity rules included in Part 6 of the CRR, taking into account the nature, scale and complexity of the activities of the investment firm. An important reason for this is that the European Commission on 20 December 2017 published a legislature proposal for a new prudential regime for investment firms that also includes liquidity rules. Pending these new rules, DNB finds it proportionate and appropriate to make use of the exemption clause contained in Article 6(4) of the CRR.

In order to be exempted from the liquidity rules, proprietary traders (complying with all conditions mentioned in Article 96(1)(b) of the CRR) must apply for an individual exemption from DNB. DNB expects a proprietary trader to describe in its applications how it continuously monitors its liquidity position. An exemption based on Article 6(4) of the CRR will in principle apply up to and including 31 December 2019, unless significant changes occur in the nature, scale and complexity of the proprietary trader's activities. A proprietary trader is required to inform DNB without delay of such significant changes.

On a consolidated basis a proprietary trader can also obtain an exemption from the liquidity rules of Part 6 of the CRR, under the same conditions. Such a consolidated exemption, which is provided for in Article 11(3) of the CRR, must be requested separately, but this can be combined with the application for the individual exemption under Article 6(4) of the CRR. An exemption on a consolidated basis under Article 11(3) of the CRR will in principle also apply up to and including 31 December 2019.

Articles 129(2) and 130(2) of the CRD - Capital buffer requirements

Article 129(2) of the CRD includes an exemption option for small and medium-sized investment firms from the capital conservation buffer (CCB) requirements, providing such an exemption does not threaten the stability of the financial system. This exemption clause involves small and medium-sized enterprises (SMEs) as referred to in Recommendation No. 2003/361/EC of the Commission of 6 May 2003 concerning the definition of micro, small, medium-sized enterprises (OJ L 124 of 20 May 2003). The 2003 Recommendation states that the category of micro enterprises and SMEs is made up of enterprises which employ fewer than 250 persons and at the same time have an annual turnover not exceeding EUR 50 million, and/or an annual balance sheet total not exceeding EUR 43 million. In the Netherlands, proprietary traders qualifying as SME may be exempted from the CBB, based on Section 3:3 of the Wft and the ministerial Exemption Regulation under the Wft (Vrijstellingsregeling Wft). To date, this ministerial exemption option has not been effectuated.

SMEs may also be exempted from the institution-specific countercyclical capital buffer (CCyB) requirement based on Article 130(2) of the CRD, providing this exemption does not threaten the stability of the financial system. To date, this ministerial exemption option has not been effectuated either.

Articles 6(5) and 16 of the CRR – Leveraged financing/Leverage ratio

The requirements pertaining to the leverage ratio included in Part 7 of the CRR do not apply to proprietary traders that comply with all conditions of Article 96(1)(b) of the CRR. This exemption applies both on an individual (solo) basis and on a consolidated basis.

Based on Article 6(5) of the CRR, investment firms as referred to in Articles 95(1) and 96(1) of the CRR are exempted from the requirement to comply on an individual basis (solo) with the requirements pertaining to the leverage ratio of Part 7 of the CRR. Based on Article 16 of the CRR, the same exemption applies on a consolidated basis for groups of investment firms of which all entities, including the parent entity, have been exempted pursuant to Article 6(5) of the CRR.

Article 388 of the CRR – Large exposures/concentration risk

Proprietary traders that comply with all conditions of Article 96(1)(b) of the CRR are exempted from the requirements of Part 4 of the CRR that pertains to large exposures, both on an individual basis (solo) and on a consolidated basis.

The opening sentence of Article 388 of the CRR (‘Negative scope’) states that Part 4 of the CRR (concerning large exposures) does not apply to investment firms that comply with the criteria described in Article 95(1) or 96(1) of the CRR. Pursuant to the second sentence of Article 388 of the CRR, this exemption to the Large Exposure Rule also applies on a consolidated basis, if the group consists solely of investment firms as referred to in Article 95(1) or 96(1) of the CRR and enterprises providing ancillary services, and on the condition that the group does not include credit institutions.