The capital requirements for MiFID firms was originally established by Directive 2006/49 (CRD), but were later supplemented by Directive 2009/111 (CRD II) and Directive 2010/76/ (CRD III). CRD II introduced amongst other things, harmonised eligibility criteria for the inclusion of hybrid instruments in Tier 1 capital, changes to the rules related to large exposures and enhanced liquidity risk management requirements. CRD III amongst other things, places an obligation upon firms to have remuneration policies that are consistent with effective risk management, by establishing remuneration guidelines for staff whose professional activities have a material impact on the institution’s risk profile.
Generally the capital requirements for an investment firm are driven by the type of service undertaken and range from 25,000 Euro ( service dependent and the firm must also be an insurance intermediary) to 730,000 Euro.
In addition to the capital requirements, there is a requirement for the firm to have/provide for Fixed Overheads. In other words, shareholders funds must be ‘the higher of its Initial CRD Requirement or its Fixed Overhead Requirement which equates to 25% of all projected fixed expenses’. The Central Bank also is entitled to apply a buffer on top of this under under the regulations implementing the CRD.
Each investment firm is required to formulate an internal capital adequacy assessment process (ICAAP) as a means of determining that they have an adequate level of capital required to cover the business’s risks. The Central Bank distinguishes between small non complex firms and large and/or complex firms when assessing and applying capital requirements.
Small non complex firms will be required to prepare an ICAAP on the basis of the Central Bank’s ICAAP questionnaire.
Large and/or complex firms will be required to prepare an ICAAP on the basis of the Central Bank’s ICAAP portal.
MIFID currently regulates three types of trading venue, Regulated Markets (RMs), Multilateral Trading Facility (MTFs) and Systematic Internalisers. MiFID II creates and will regulate a new category of trading venue called an organised trading facility (OTF). This is intended to capture firms which operate crossing networks, for example, broker dealing systems and inter-broker dealing systems.