Commission Delegated Regulation (EU) 2023/1651 of 17 May 2023 supplementing Directive (EU) 2019/2034 of the European Parliament and of the Council with regard to regulatory technical standards for the specific liquidity measurement of investment firms under Article 42(6) of that Directive (Text with EEA relevance)
Commission Delegated Regulation (EU) 2023/1651of 17 May 2023supplementing Directive (EU) 2019/2034 of the European Parliament and of the Council with regard to regulatory technical standards for the specific liquidity measurement of investment firms under Article 42(6) of that Directive(Text with EEA relevance)THE EUROPEAN COMMISSION,Having regard to the Treaty on the Functioning of the European Union,Having regard to Directive (EU) 2019/2034 of the European Parliament and of the Council of 27 November 2019 on the prudential supervision of investment firms and amending Directives 2002/87/EC, 2009/65/EC, 2011/61/EU, 2013/36/EU, 2014/59/EU and 2014/65/EUOJ L 314, 5.12.2019, p. 64., and in particular Article 42(6), third subparagraph, thereof,Whereas:(1)To measure the adequate level of liquidity that investment firms should hold, it is necessary to lay down common criteria to estimate the corresponding liquidity needs under normal and stressed circumstances, and to determine whether there are any gaps between the level of liquid assets held by investment firms and the liquidity needs identified.(2)Investment firms that meet the conditions for qualifying as small and non-interconnected investment firms set out in Article 12(1) of Regulation (EU) 2019/2033 of the European Parliament and of the CouncilRegulation (EU) 2019/2033 of the European Parliament and of the Council of 27 November 2019 on the prudential requirements of investment firms and amending Regulations (EU) No 1093/2010, (EU) No 575/2013, (EU) No 600/2014 and (EU) No 806/2014 (OJ L 314, 5.12.2019, p. 1). are deemed to have only a limited liquidity risk relative to other investment firms. That is why competent authorities, pursuant to Article 43(1), second subparagraph, of Regulation (EU) 2019/2033, may exempt such investment firms from the liquidity requirement laid down in Article 43(1), first subparagraph, of that Regulation. That exemption is, however, optional. To cater for small and non-interconnected investment firms that have not been exempted by their competent authority from that liquidity requirement, it would be disproportionate to subject those investment firms to the same liquidity requirements as bigger and interconnected investment firms. It is therefore appropriate to lay down that competent authorities, when they measure the liquidity risk and elements of liquidity risk referred to in Article 42(1), first subparagraph, point (a), of Directive (EU) 2019/2034, should only measure the liquidity risk or elements of liquidity risk that stem from those activities and from other factors, specific to small and non-interconnected investment firms, which are highly likely to lead to a liquidity risk that is material and that is not covered by the liquidity requirements laid down in Part Five of Regulation (EU) 2019/2033. Those factors include activities of providing portfolio management, operating a multilateral trading facility as defined in Article 4, point (22), of Directive 2014/65/EU of the European Parliament and of the CouncilDirective 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU (OJ L 173, 12.6.2014, p. 349). or an organised trading facility as defined in Article 4, point (23), of that Directive, granting credits and loans to investors, as well as the funding risk, and the group structure’s relevance to liquidity risk.(3)Article 7(3) of Regulation (EU) 2019/2033 requires that Union parent investment firms, Union parent investment holding companies and Union parent mixed financial holding companies comply with the liquidity requirements set out in Part Five of that Regulation at consolidated level. A Union parent investment firm, Union parent investment holding company and Union parent mixed financial holding company may be exposed, in a consolidated situation, to liquidity risk or elements of liquidity risk that are material and are not covered or not sufficiently covered by those liquidity requirements. Similarly, a Union parent investment firm, Union parent investment holding company and Union parent mixed financial holding company may not meet, in a consolidated situation, the requirements set out in Articles 24 and 26 of Directive (EU) 2019/2034, while other administrative measures are unlikely to sufficiently improve the arrangements, processes, mechanisms, and strategies referred to in Article 42(1), point (b), of Directive (EU) 2019/2034 within an appropriate timeframe. Competent authorities should therefore, for such Union parent investment firms, Union parent investment holding companies and Union parent mixed financial holding companies, measure on a consolidated basis whether the exposure of those firms and companies to liquidity risk is material and not covered by the liquidity requirements laid down in Part Five of Regulation (EU) 2019/2033.(4)Different activities of investment firms may affect their liquidity profile in different ways. Changes in the value of asset prices may generate losses and affect investment firms’ balance sheets and liquidity position, despite those firms not holding clients’ assets on own account. Investment firms providing portfolio management services may be sensitive to market fluctuations that can create or sharpen the cash flow mismatches between inflows from payment of fees typically received on a quarterly or semi-annual basis and outflows for the payment of liabilities as they fall due. It is therefore appropriate to specify for each investment service or activity listed in Section A of Annex I to Directive 2014/65/EU the criteria that competent authorities should consider when measuring whether the liquidity risk or elements of liquidity risk of an investment firm are sufficiently covered by the liquidity requirement set out in Part Five of Regulation (EU) 2019/2033. Competent authorities should in particular be required to consider those investment services or activities that are most sensitive to market fluctuations because such fluctuations are unpredictable in both timing and scale, and may affect the liquidity risk in different ways, including higher margin calls, lower profits and reduced fees.(5)Investment firms that are authorised to grant credits or loans to investors as an ancillary service are exposed to specific liquidity risk. Late repayment of debts by investors may impair an investment firm’s ability to meet its obligations, while the liquidation of collaterals with deteriorated liquidity profile may result in less liquid assets to deploy on ordinary operations. Competent authorities should therefore assess the increased risk for investment firms performing such services.(6)Funding is a primary source of liquidity for investment firms, and limited or suspended access to funding may result in discontinuing investment firms’ services, with a potential negative impact on markets and clients. Considering the differences between funding investment firms and funding deposit-taking credit institutions, and considering that accessing funding by such investment firms may entail risks in certain circumstances, it is necessary to specify the elements that competent authorities should take into account when setting specific liquidity requirements for such investment firms.(7)The deterioration of macroeconomic and geopolitical situations may cause investment firms to face severe restrictions in accessing funding. Competent authorities should therefore assess the consequences that such deterioration might have on the funding sources of investment firms, including wholesale funding and credit lines. Against that background, it is necessary to specify the elements that competent authorities need to assess in relation to adverse external events, the occurrence of which may increase the liquidity risk of investment firms.(8)To enable competent authorities to determine which operational events may have a material impact on the investment firms’ liquidity, it is necessary to specify the operational events that are expected to be the most relevant for investment firms as a subset of the list of loss event types referred to in Article 324 of Regulation (EU) No 575/2013 of the European Parliament and of the CouncilRegulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and amending Regulation (EU) No 648/2012 (OJ L 176, 27.6.2013, p. 1)..(9)Increased liquidity risk may arise from reputational risk, which may in turn affect the operations of investment firms. While some effects of the reputational risk are not readily predictable, others like reduced market access or accessing liquidity from counterparties can be anticipated. Competent authorities should therefore assess the impact of such predictable effects of reputational risk on the liquidity risk of investment firms.(10)Due to the potential impact of liquidity risk on an investment firm’s functioning, investment firms should closely monitor such risk. In line with Article 29 of Directive (EU) 2019/2034, investment firms are to have robust strategies, policies and processes in place, including monitoring liquidity risk and confronting liquidity shortages. It is therefore necessary to specify what competent authorities should assess to evaluate the effectiveness of the liquidity risk management and control of investment firms.(11)Whereas a group may provide additional liquidity to an investment firm, such a group may also use significant liquid resources belonging to the investment firm through agreements and other asset-transfer mechanisms between the investment firm, on one hand, and the parent undertaking or any other entities of the group, on the other hand. Therefore, competent authorities should be required to assess the overall group structure and consider the implications that such agreements and other asset-transfer mechanisms may have on the liquidity risk of investment firms that are part of such a group.(12)This Regulation is based on the draft regulatory technical standards submitted to the Commission by the European Banking Authority.(13)The European Banking Authority conducted open public consultations on the draft regulatory technical standards on which this Regulation is based, analysed the potential related costs and benefits and requested the advice of the Banking Stakeholder Group established under Article 37 of Regulation (EU) No 1093/2010 of the European Parliament and of the CouncilRegulation (EU) No 1093/2010 of the European Parliament and of the Council of 24 November 2010 establishing a European Supervisory Authority (European Banking Authority), amending Decision No 716/2009/EC and repealing Commission Decision 2009/78/EC (OJ L 331, 15.12.2010, p. 12).,HAS ADOPTED THIS REGULATION: