Because of this, it appears that there are some variations with respect to the required level of initial capital requested for particular types of investment services or activities, leading to different e. In a first report published in December , EBA found that the bank-like rules under the CRR were not fit for purpose for the majority of investment firms with the exception of the more systemic ones that pose risks similar to those faced by credit institutions.
At the request of the Commission, the EBA is conducting additional analytical work and a data-gathering exercise in order to articulate a more appropriate and proportionate capital treatment for investment firms which will cover all parameters of a possible new regime. EBA is expected to deliver their final input to the Commission in June The Commission intends to present legislative proposals setting-up a specific prudential framework for non-systemic investment firms by the end of Pending the adoption of these proposals, it is considered appropriate to allow investment firms that are not systemic to apply the CRR in the version as it stood before the amendments come into force.
Systemic investment firms will, for their part, be subject to the amended version of the CRR. This will ensure that systemic firms are treated appropriately while alleviating the regulatory burden for non-systemic firms who would otherwise have to temporarily apply a new set of rules designed for credit institutions and systemic investment firms during the period preceding the final adoption of the dedicated investment firms' prudential framework that will be proposed in This categorisation reflects multiple historic and implicit assumptions of the risks and prudential relevance of these services and functions and of how effectively the available risk-metrics developed principally for banks capture and address those risks.
Consequently, investment firms which conduct a broad range of services are subject to the same requirements as credit institutions in terms of capital requirements for credit, market and operational risk, and potentially liquidity, leverage, remuneration and governance rules, while firms with limited authorisations typically those which are considered less risky, i. The proposal gives investment firms a transitional period of five years before they must apply the new requirements in full.
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This would be achieved by treating these investment firms as credit institutions. Smaller firms would enjoy a new bespoke regime with dedicated prudential requirements. These would, in most cases, be different from those applicable to banks. In areas such as own account trading where risks of credit institutions and investment firms are similar, the proposal introduces a simplified version of some of the current prudential requirements into the new regime. Investment firms would be divided into three classes, each of those capturing different risk profiles.
Class 3 firms would be those below all of the above thresholds. They would be subject to the least complex requirements. Minimum capital would be set either as for class 3 investment firms, or according to the new K-factor approach for risk measurement, whichever is higher. The K- factors specifically target the services and business practices that are most likely to generate risks to the firm, to its customers and to counterparties.
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As previously proposed for smaller credit institutions, the rules will allow further proportionality: these firms will be free to choose between the types of instruments used to pay out part of the variable remuneration. Competent authorities can still decide that investment firms below the threshold are not subject to the derogation. This is reduced to EUR in cases where a firm does not deal on its own account or underwrite on a firm commitment basis while still holding client money or securities and, if Member States choose, to EUR 50 if such a firm is not authorised to hold client money or securities.
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The Commission shall update, by means of implementing acts, the amount of initial capital referred to in paragraphs 1 to 3 of this Article to take account of developments in the economic and monetary field. Those implementing acts shall be adopted in accordance with the examination procedure referred to in Article 56 2. In some cases, Member States have also adopted entirely different initial capital requirements, partly due to the fact that the levels in CRDIV have not been amended since According to the EBA's preliminary analyses, aggregate capital requirements for all EU investment firms are not expected to change significantly as a result of projected changes.
Capital requirements may increase more for some investment firms whose risks would be captured for the first time. The aforementioned Article 41 stipulates that the provisions of the said Part 4 do not apply to commodity and emission allowance dealers when all the following conditions are met for intra-group transactions:.
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ESMA considers that this provision should be read in conjunction with the requirements of Article 2 1. In addition, the Section regime was widened in to permit the holding of plant and machinery directly by Section issuers. Again, this was a significant enhancement of the regime and facilitates, in particular, the simplification of aircraft securitisation structures — a natural fit with Ireland's status as an aviation finance hub within Europe — and other asset classes such as automobile leasing and rentals. There is significant industry and legislative support for the potential to finance the aviation industry through instruments such as enhanced equipment trust certificates EETCs issued out of Ireland and the establishment of a primary and secondary market in Europe.
This is perceived as a natural progression complementary to the traditional bank and export credit agency financing sources in the international aviation industry, especially given regulatory capital and balance sheet issues. Since , many significant aviation transactions have been completed using Irish aircraft-owning entities to hold multiple aircraft portfolios.
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These Irish structures facilitate the efficient financing and leasing of aircraft through capital markets technology. Also, a number of ABS transactions completed between and were solely collateralised on aircraft assets.
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In the equity-linked space, there has been significant development in recent years in the capital markets in Ireland. While more traditional commoditised structured debt products have declined significantly, the area of hybrid equity products has opened up, in both bespoke i. Bespoke products have included some capital products and equity-linked products being accessed by institutions as positive approaches to debt restructuring with clients — seeking debt or equity swap solutions to restructurings rather than default, in an effort to adopt London Approach principles of forbearance, has brought capital markets technology to bear on banking workout solutions.
More commoditised and higher-volume product areas have included products to some extent mimicking equity or fund structures. In this regard, the popularity of fund-managed account platforms in the investment community has generated product in the debt world.
This has presented new challenges to capital markets lawyers and technologies in that such fund products are usually characterised by high-volume trading and are priced and redeemed regularly. Commoditised structured finance products are traditionally illiquid and are not exchange traded. In addition, innovative certificated note structures have been developed to facilitate daily issuance and redemption of Euroclearable notes — not usual for these types of debt products. These product offerings have also presented challenges in the context of the Prospectus Directive requirements, and maintaining Prospectus Directive compliance has presented interesting documentary requirements and listing needs on a pan-European basis.
The ISE being acquired by and joining the Euronext group further consolidates the Irish position in the area, hopefully erasing such passporting issues. In the wake of Brexit, this will add to Ireland's attraction as a defined contribution location. Irish SPVs continue to increase in popularity as structured solutions to the thriving funds industry in Ireland and the Cayman Islands.
Irish SPVs complement Irish and Cayman funds by offering flexibility as finance vehicles where funds are acquiring particular types of financial assets, contracting with prime brokers and investment managers, and providing leverage. Irish qualifying investor alternative investment funds, combined with Irish SPVs or holding companies, also offer significant facilitation to purchasers and managers acquiring Irish and international asset portfolios. Irish SPVs are also being used to aggregate and manage restructuring solutions by financial institutions with attendant instruments being issued by the SPVs.
There has been a huge increase in distressed asset, loan and property acquisitions in Ireland in recent years and remains ongoing in Many of these purchases have employed SPV technology to acquire and hold such assets, with notes to finance the purchase and structure cashflows to and from relevant counterparties.
These may now be affected by new Irish regulations on credit servicers and lenders, as noted above. In addition, CLO capital markets technology has been used in Irish structures creating credit 'funds' lending to numerous sectors of Irish and pan-European borrowers, including Irish government-backed initiatives in the SME sector. This form of funding was historically perceived by some industry sectors as 'disintermediation' of the banking industry, but there is clear evidence of increased cooperation between traditional lenders and newer credit fund or alternative lenders.
The complementary nature of the services and funding each offers the market has created effective synergies, which has led to a sharp growth in alternative lenders as a lending sector in Ireland as in the rest of the European Union. Throughout and , many funding platforms have been established to facilitate lending for everything from housing and to SMEs, activity that is supported by official policy. Many of these alternative lenders are now actively lending, well-established players in the Irish market.
follow url Many new entrants have joined this market in — There have been significant general developments in Irish insolvency law in recent years. These have been predominantly in the area of pure bank lending to domestic borrowers rather than with the international capital markets; however, inevitably capital markets participants have seen these developments affect the nature of their advice on insolvency.
The Personal Insolvency Act makes a number of fundamental reforms to Irish bankruptcy law; it provides a legislative mechanism for three non-judicial debt settlement procedures for individual debtors and shortens the bankruptcy period from the current 12 years to three years, subject to certain conditions. Also, there have been a number of progressive and highly interesting examinership rulings Ireland's Chapter style regime , which have already had an impact on the nature and tenor of advice to capital markets clients. Bondholders on large financed transactions will inevitably be involved in any insolvency analysis with bank debt, and these recent changes have affected their general advisory requirements, including in particular the formulation of their defensive strategies as creditor groups.
In broad terms, an increase in the sheer volume of insolvency activity in the Irish courts has added clarification to particular areas of the law while also facilitating some judicial activism in certain areas. Some Irish corporate groups have achieved prepack-style examinership in substance if not in pure legal form. This should enhance Ireland's continued status as an international hub for aviation leasing and finance, replicating the certainty of the Section US Bankruptcy Code system in relation to the insolvent repossession of aircraft by creditors.
This will also further facilitate the use of Ireland as a location for the successful execution of EETCs, which are regularly issued as capital-raising instruments by international airlines.
Ireland amended its tax code specifically to facilitate the variety of traditional Islamic finance structures extending the tax treatment that applies to conventional finance transactions to Islamic finance products so that these structures can be implemented in a tax-efficient manner. The Irish government has also publicly committed to further increasing the attractiveness of the jurisdiction to this sector in the coming years. Ireland continues to complete tax agreements with other countries, increasing transparency and promoting its facilitation as an international capital markets hub.
As at October , the position was as follows:. However, the overall effects of the US Volcker Rules and how to deal with them in capital markets documentation generally are still being assessed. International commentary highlights the need for a coordinated mutual recognition that does not currently exist.
The Irish government has implemented a number of measures to deal with perceived and real issues within the regulation of financial institutions in Ireland. The Act underpins the implementation of a new financial regulatory model, which intends to create a proactive risk-based model of supervision supported by a credible enforcement threat. In this regard, Part 3 of that Act introduced a new fitness and probity regime that sets new standards across the financial services industry and enhanced powers to approve, veto and investigate and, where appropriate, remove or prohibit position holders from 1 December fully effective from 1 December In addition, the Central Bank and Credit Institutions Supervision and Enforcement Act has significantly enhanced the supervisory and enforcement powers of the regulatory authorities in Ireland.
In particular, it provides for a significant increase in the financial penalties levied on regulated entities, including turnover-based penalties for corporations. It also include powers to restrict an entity's activity and to suspend and revoke the authorisation of credit institutions, and provides protection for whistle-blowers. It also provides significant new rule-making powers for the CBI, and for a civil law damages remedy for aggrieved customers who suffer loss as a result of a breach of the rules by a regulated entity.
During the financial crisis, the capitalisation of Irish banks, relative to the size and stability of their loan books, fell under the spotlight. Subsequently, the PCAR process resulted in further stress tests imposing institution-specific requirements based upon the individual circumstances of each institution the prudential liquidity assessment review, or PLAR for any banks participating in a PCAR. In addition to the existing burden of PCAR and PLAR, the new Basel III requirements were scheduled to be introduced at the beginning of for Irish credit institutions, implementing new permanent standards of bank capitalisation although, at the time of writing, there are still debates as to what timelines are feasible.
Basel III is currently expected to be implemented in phases, as follows:. One of the key expected effects of Basel III is that it will force Irish banks to be much less reliant on Tier 2 capital and non-equity capital. In addition, from onwards, all capital deductions e. This is why some commentators have speculated that core capital will have to rise between sevenfold and tenfold to meet the new Basel III requirements.
These changes are certain to have a profound albeit phased effect on bank financing and the relationship between banks and the international capital markets — most notably, increased own funds requirements will significantly affect the ability of banks to use the capital markets as a leverage tool although it will equally affect lending transactions. Fundamentally, Ireland has retained its attraction as a structured finance location for international transactions.
Brexit should not fundamentally affect this position, and indeed may enhance it. Structures that were historically established in the jurisdiction in particular, limited recourse structures have, notwithstanding credit events and defaults generally, worked as originally intended, and security and bankruptcy structuring has been robust.