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05 October 2020 Supervision Supervision label Supervision Q&A

Question:

Can small, non-interconnected investment firms apply for exemption from the liquidity requirement?

Answer:

No, we do not intend to grant exemption from the liquidity requirement to small and non-interconnected investment firms. Investment firms falling under the scope of the IFR/IFD must comply with the liquidity requirement of at least one-third of the fixed overheads capital requirement (FOR). Under Article 43(1) of the IFR, supervisory authorities may exempt small and non-interconnected investment firms from this liquidity requirement. In consultation with the ESMA, the EBA will draft guidelines to further specify the criteria that competent authorities may take into account when granting an exemption from the liquidity requirement to small and non-interconnected investment firms. Pending these guidelines, we do not intend to grant exemption from the liquidity requirement to small and non-interconnected investment firms. Our consideration is based on the fact that the liquidity requirement is a proportionate requirement, which is important in ensuring that an investment firm has sufficient liquidity to operate – or wind down its operations – in an orderly manner.

Question 2:

How can an investment firm apply for permission to temporarily reduce the amount of liquid assets held?

Answer:

In accordance with Article 44 of the IFR, investment firms may temporarily reduce the amount of liquid assets held under exceptional circumstances and after approval by the competent authority. Investment firms wishing to invoke this article can submit an application to us. They must include the following information:

  1. An explanation of why exceptional circumstances exist and why the investment firm cannot meet its short-term liquidity needs in another way.

  2. A plan in which the investment firm demonstrates how it will be able to meet the liquidity requirement again within 30 days, also taking into account its short-term (contractual) obligations.

  3. A recent liquidity report dating back no more than three days, with explanatory notes to all elements of the report.

We will then assess whether the application meets the conditions of Article 44 of the IFR before granting permission for a temporary reduction of liquid assets held. If we grant permission, we expect the investment firm in question to report its available liquid assets to us on a daily basis, until it meets the liquidity requirement again. To do so, the investment firm must use the liquidity requirement reporting format that the EBA has drafted on the basis of Article 54(3) of the IFR. We will decide on applications for permission after the IFR/IFD have entered into force in the Netherlands.

Question 3:

Can a parent company apply for exemption from the liquidity requirement at consolidated level?

Answer:

No, we do not intend to grant exemption from the liquidity requirement to parent companies. Under Article 7(4) of the IFR, competent authorities may exempt EU parent investment firms, EU parent investment holding companies and EU parent mixed financial holding companies from compliance with the liquidity requirement based on their consolidated situation and taking into account the nature, scale and complexity of the investment firm group. We do not intend to grant such exemptions. We considered that the liquidity requirement is a proportionate requirement that is important in ensuring that an investment firm group has sufficient liquidity to operate – or wind down its operations – in an orderly manner.

Question 4:

How can investment firms apply for exemption from meeting the liquidity requirement at the individual level, as meant in Article 6(3) of the IFR?

Answer:

Under Article 6(3) of the IFR we may exempt investment firms from having to meet the liquidity requirement at the individual level provided they comply with the conditions specified in that paragraph. Investment firms must submit the following information when applying for exemption.

For condition (a) of Article 6(3) of the IFR:

(i) A calculation of actual and required liquidity at consolidated level.

For condition (b) of Article 6(3) of the IFR:

(i) An organisation chart of the group's liquidity management function.

(ii) A description of the processes, procedures and instruments used for internal monitoring of liquidity positions of the group entities.

(iii) A description of the group's liquidity contingency plan.

For condition (c) of Article 6(3) of the IFR:

(i) The contracts between the group entities as meant in Article 6(3) of the IFR.

(ii) A legal opinion from an independent, external third party or an internal legal department, approved by the investment firm's management body, confirming that the free movement of funds is not subject to conditions that prevent or impede the exercise of these contracts.

(iii) Documentary evidence that these contracts cannot be terminated unless the exemption is revoked, or only with a 6-month notice period with mandatory prior notification to DNB.

For condition (d) of Article 6(3) of the IFR:

(i) A legal opinion from an independent, external third party or an internal legal department, approved by the investment firm's management body, confirming that there are no legal impediments, for example with respect to national insolvency law.

(ii) An internal assessment by the investment firm concluding that there are no material practical or legal impediments to contract compliance as meant in Article 6(3) of the IFR and confirming that the exemption is taken into account in the recovery plan (if available) and the group agreement for financial support.

We will then assess whether the application meets the conditions of Article 6(3) of the IFR before granting exemption. 

Sector(s)

  • Investment firms