Scope of Capital Requirements Regulation (1) And Directive (2) In Relation To Investment Firms

Circular CSSF 15/606 (the "Circular") defines the criteria according to which an investment firm is considered to fall within the definition of "CRR investment firm" as defined in the Bill of Law 6660 implementing the CRD IV, which will amend the Law on the Financial Sector (the "LFS") by introducing an investment firm subcategory, i.e. "investment firm within the meaning of the Regulation (EU) 575/2013" (the "CRR Investment Firm").

CRR Investment Firms will not only have to apply the Implementing Technical Standards on Supervisory Reporting as described in Circular 13/575, but will also be required to comply with the conditions imposed by the CRD IV regarding supervision on a consolidated basis, governance and remuneration.

CRR Investment Firm's definition includes all investment firms as defined in Article 1(9) of the LFS excluding those satisfying the cumulative criteria of Article 4(1)(2) of the CRR. Any investment firm is deemed to meet such criteria if:

  1. it is not authorised for the "safekeeping and administration of financial instruments for the account of clients, including custodianship and related services such as cash/collateral management" (Section C (1) of the Annexe II of the LFS (the "Auxiliary Service 1")); and
  2. it is authorised exclusively to provide one or several of the following investment services: "reception and transmission of orders in relation to one or more financial instruments", "executions of orders on behalf of clients", "portfolio management" and "investment advice" (points 1, 2, 4 and 5 of Section A of Annexe II of the LFS, the "Annex"); and
  3. it is not authorised to hold funds or securities from its clients and accordingly, cannot be considered to be in a debit position towards them.

As for point (iii), since only an investment firm authorised to provide the Auxiliary Service 1 will be authorised to hold assets pertaining to its clients, all investment firms holding assets from their clients will have to be authorised to offer the Auxiliary Service 1 and will thus be indistinctly considered as CRR Investment Firms.

Thus, investment firms exclusively authorised to provide one or several of the services described under point (ii) above, but not authorised to provide the Auxiliary Service 1, do not fall within the scope of the CRR. On the contrary, investment firms authorised to provide one or several of the services under points 3, 6, 7 and 8 of the Annex, as well as those authorised to provide the Auxiliary Service 1, are considered CRR Investment Firms and fall within the scope of application of the CRR.

Regarding the definition of holding assets (détention d'avoirs) in the sense of point (iii) above, the CSSF considers that an investment firm holds assets from its clients when:

  • it receives assets from its clients and itself assumes their actual custody (e.g., by means of a safe) or delegates their custody to a third entity, by virtue of a sub-deposit established in the name of the investment firm;
  • clients' assets are placed in accounts from a third party under the name of the investment firm. A contrario, if clients' assets are placed with a third party under their name, the investment firm shall not be considered as holding the assets pertaining to its clients;
  • in the case of registered securities, the investment firm is registered with the issuer's register (e.g., register of shareholders) in its own name, as holder of the securities (also when the investment firm acts on behalf of the client).

The Circular recalls investment firms' obligations regarding the protection of clients' assets as derived from Article 37-1(7) and (8) of the LFS, and Articles 18, 19 and 20 of the Grand Ducal Regulation of 13 July 2007 on organisational requirements and rules of conduct in the financial sector. The CSSF also recalls that investment firms holding accounts in their own name on behalf of their clients shall put in place efficient processes of detection, management, control and declaration of risks, as well as adequate internal control mechanisms, including administrative, accounting and IT procedures allowing an exact and continuous separation of the clients' assets.

With the objective of classifying investment firms as possessing or not possessing assets from their clients, which is instrumental in determining the necessity to obtain an authorisation as provider of the Auxiliary Service 1, the CSSF will require the form attached to the Circular to be completed. This form will be required in all cases for demands of new authorisations and, when the CSSF deems it appropriate, for previously granted authorisations.

Investment firms which are not currently holding their clients' assets, but are authorised Auxiliary Service 1 may choose to maintain this authorisation. In that case, however, they will be considered CRR Investment Firms as well, and will thus fall within the scope of application of the CRR.

(1) Regulation (EU) 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) 648/2012.

(2) Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC .