Entry into force of the regulation and directive on investment firms

The regulation and directive on investment firms (the “IFR/D package”) became applicable on 26and from June 2021, introducing a new prudential framework applicable to investment firms. Prior to the introduction of the new prudential framework, investment firms were subject to the Capital Requirements Regulation and the Capital Requirements Directive. Investment firms should note that certain smaller firms will still be subject to the Capital Requirements Regulation (“CRRIn addition, investment firms will still be subject to MiFIR and MiFID II, regardless of classification, as explained below.

Credit institutions offering MiFID-related services are not covered by the IFR/D package and will therefore continue to be subject to the CRD V/CRR II framework.

Investment firms had to carry out a self-assessment to determine in which classification they fell. It is important to note that the license categories (Category 1; Category 2; Category 3 and Category 4 Investment Services License) were based on a local framework and will no longer be in place. Therefore, in future, license certificates issued by the Malta Financial Services Authority (“MFSA”) will no longer include the category type, but will indicate:

  • The investment services that the authorized entity can offer to its clients;
  • The type of customers it can serve; be retail, professional and/or eligible counterparties; and
  • The list that financial instruments can offer to its clients.

In 2020 and 2021, the MFSA issued various briefings and circulars for the industry to start getting to grips with the new framework.

Investment firms can belong to one of the following categories three categories as explained below:

  • Class 1 investment firms – This type of Class is mainly intended for large investment firms which [1] have total consolidated assets equal to or greater than €15 billion, and [2] who place financial instruments with a firm commitment and/or trade on their own account and/or subscribe to financial instruments. The above are the two main criteria that determine whether an investment firm will fall under the Class 1 classification. However, there are other principles to consider apart from the above.
  • Class 1 minus investment firms (this is a subclass of class 1) –Investment firms classified in this category must: [1] have a total consolidated asset value equal to or greater than EUR 5 billion but less than EUR 15 billion and [2] dealing on own account and/or underwriting financial instruments and/or placing financial instruments on a firm commitment basis. This classification does not come into effect automatically, but is at the discretion of the MFSA.

Investment firms in Class 1 or Class 1 Minus must fully apply the CRR package. These investment firms will be treated as credit institutions and the declarations and publications must comply with the CRR/CRD framework.

  • Class 3 investment firms – A class 3 investment firm must at all times meet the following criteria:

I. Assets under management are less than 1.2 billion euros;

ii. Customer orders processed are less than:

a. EUR 100 million/day for cash transactions or

b. 1 billion euros/day for derivatives.

iii. Assets backed up and administered are zero;

iv. Money held by customers is zero;

v. Daily trading flow is zero;

vi. The net position risk or compensation margin given is zero;

vii. The default value of the trade counterparty is zero;

viii.The investment firm’s balance sheet and off-balance sheet total is less than EUR 100 million;

ix. The total annual gross income from the investment firm’s investment services and activities is less than EUR 30,000,000 calculated on average on the basis of annual figures for the two-year period immediately preceding the financial year concerned.

  • Class 2 investment firms –Companies that do not meet the requirements of Class 1, Class 1 minus, or Class 3 should be classified as Class 2. It should be noted that there is no specific list to which these investment firms must join.

The 8thand of October 2021, the AMSF issued another circular in which it informed the industry that it had revised Part A of the Investment Services Rules for Investment Services (“the rulebook”) to reflect the above. The main changes made relate to:

  • Section 4: Holders of an investment services license,
  • Section Seven: Feesand
  • Section ten: Rules relating to investment services.

Amendments to section four of the Regulations have been made to reflect the newly adopted classification framework for investment services licensees. The MFSA has revisited this section by removing any reference to local ‘Category’ nomenclature. In addition, the MFSA will categorize investment services licensees according to their license type; to be, Depositary, Custodian LiteUCITS management company, AIF ManagerOf Minimis AIFM, or investment firm. In addition, the MFSA has provided additional guidance by listing the licensed activities that each entity can offer.

Other changes have been made to the wording of section seven of the Rulebook to reflect the new license classification framework. In addition, Section ten of the Rulebook has been revised to implement the minimum initial capital requirements for each license class that were introduced by the IFRD package for investment firms.

Investment firms should refer to the EBA’s technical standards on reporting requirements and the disclosures include the draft implementing technical standards (“HIS“) on capital levels, concentration risk, liquidity, level of activities as well as capital disclosure; and draft regulatory technical standards (“RTS“) specifying the information that investment firms must provide in order to allow the control of the thresholds which determine whether an investment firm must apply for authorization as a credit institution. These documents are accessible via this link.

Reporting requirements

Prior to the introduction of the new prudential framework, MiFID companies were subject to COREP reporting. The COREP declaration will be replaced by the EBA XBRL model. The new XBRL reporting will be applicable from the third quarter of 2021, the last reporting period being 30and June 2021.In accordance with the MFSA circular of 11and October 2021Investment firms had until 1st from November 2021 to inform the Autorité of their classification and to submit the excel spreadsheet through the LH portal.