On December 6, the Breach of Union Law Panel of the European Banking Authority (EBA) published a press release relating to a breach of European Union (EU) law (BUL) investigation against the Dutch central bank, De Nederlandsche Bank (DNB), relating to the latter’s prudential framework for proprietary traders.

Since January 2014, the DNB had designated investment firms licensed to perform the investment activity of proprietary trading (that is, dealing on own account) with the status of “local firms”, according to the DNB’s interpretation of Article 4(1)(4) of the Capital Requirements Regulation (CRR). This therefore exempted such firms from the scope of the EU’s framework of capital requirements under the CRR (including, significantly, the bonus cap rules (restricting bonuses to no more than 2 x the individual’s salary), which apply to banks and investment firms subject to the CRR). Instead, the DNB had historically imposed a national framework of capital requirements that reflected the risk exposure of the relevant firms—and exempted Dutch “local firms” from the bonus cap.

Exercising its power under Article 17 of the EBA Regulation, on November 3, 2017, the EBA initiated a BUL investigation into the DNB’s prudential framework for proprietary traders, as the EBA took the view that DNB’s application of the definition of “local firm” was incompatible with EU law. The EBA considered that a “local firm,” as defined in the CRR, may be active as a proprietary trader, both on the derivatives and cash markets, but that this investment activity in the cash markets must be limited “exclusively to transactions performed to hedge positions in the derivatives markets.” As a result under the new requirements, transactions in the cash markets, such as proprietary trading in units in collective investment undertakings, that do not have the purpose of hedging previous and directly related derivatives transactions, fall outside the scope of the activities that may be conducted by a “local firm.”

Having conducted its own analysis of the term “local firm,” the DNB concluded on November 13, that the current Dutch national prudential regime is “appropriate and proportional,” but that its interpretation of “local firm” was legally untenable and decided to discontinue its prudential regime for “local firms.” Following the DNB’s decision, the EBA has now closed its investigation.

The main effects on firms impacted by the DNB’s decision are the following:

1. Such firms will have until March 31, 2018 to meet applicable CRR capital requirements; and

2. Such firms will no longer be exempt from the bonus cap under the revised Capital Requirements Directive (CRD IV).

The DNB also wrote a letter, dated November 13, to the 13 investment firms affected by the amended prudential regime. In its letter, the DNB noted that the Dutch Minister of Finance will consult the Dutch national financial services regulator, the Autoriteit Financiële Markten, and the investment services sector in the period leading up to March 2018 to discuss the new remuneration regulations for the sector.

The amended prudential regime will not affect investment firms licensed by the DNB to perform the investment activity of “proprietary trading” only, but the CRR capital requirements will be applicable to them.

The EBA’s press release is available here.

The DNB press release is available here; and its letter to affected firms is available here.

The CRR is available here.