EU regulatory review of prop trader capital requirements under scrutiny

European Union to review capital requirements for non-bank financial firms. Will the new rules level the playing field or leave prop traders cautious?

European Union regulatory watchdogs are set to initiate a review of capital requirements for proprietary trading groups, buy-side firms, and broker-dealers without banking licenses. Scheduled for April, the review is anticipated to address concerns raised by principal trading firms (PTFs) regarding the impact of bank-style rules. However, scepticism abounds among PTFs about the likelihood of substantial changes being recommended.

The ongoing debate stems from the implementation of pan-EU rules in June 2021, which introduced minimum capital requirements for non-deposit-taking firms under the Investment Firms Regulation (IFR). This legislation has prompted concerns about its efficacy, with some non-bank market-makers relocating their headquarters outside the EU.

The impending review, though eagerly anticipated, faces delays, possibly pushing any legislative proposals to 2025. Prop traders express doubts about the European Banking Authority (EBA) and the European Securities and Markets Authority (Esma) advocating for significant alterations to the IFR.

Moreover, the IFR’s €30 billion threshold poses challenges for large non-banks, potentially subjecting them to bank prudential rules. This uneven playing field between EU and non-EU firms underscores the need for comprehensive regulatory scrutiny and potential adjustments.

The forthcoming discussion paper, a joint effort by EBA and Esma, aims to solicit industry feedback and address key concerns highlighted by the European Commission. However, the outcome of the review and subsequent recommendations remain uncertain, leaving stakeholders eagerly awaiting regulatory clarity.