The German Securities Institutions Act (WpIG): A new era for German investment firms - Q&A part 1

The Bundestag and Bundesrat create an independent regulatory framework for investment firms. The law is to come into force on 26 June 2021. Until then, the affected institutions should get to grips with the legal novelties.

At the same time, the European Regulation (EU) 2019/2033 of 27 November 2019 on prudential requirements for investment firms (Investment Firm Regulation - IFR) will enter into force. The content of the IFR is directly linked to the scope of application of MiFID II. In principle, all legal entities that provide one or more investment services to third parties and/or carry out one or more investment activities on a professional basis as part of their normal business activities are therefore covered by its scope of application. 

1. Who does the WpIG affect?

The WpIG applies to investment firms domiciled or operating in Germany. Investment firms are companies that provide investment services on a commercial basis or to an extent that requires a commercially established business operation, alone or together with ancillary securities services or ancillary transactions.

2. What are investment services according to the WpIG?

The investment services under the WpIG correspond to the investment services of MiFID II or its implementation in the German Securities Trading Act (WpHG) and the German Banking Act (KWG). Market participants are therefore already familiar with the previous regulation under the KWG. 

The individual investment services in the WpIG are:

1. Financial commission business (section 2 (2) no. 1 WpIG): the acquisition or sale of financial instruments in one's own name for the account of a third party. This corresponds to § 2 para. 8 no. 1 WpHG.
   
   
2. Issuing business (section 2 para. 2 no. 2 WpIG): the underwriting of financial instruments on a firm commitment basis or the underwriting of equivalent guarantees. This corresponds to section 2 (8) no. 5 WpHG.
   
   
3. Investment brokerage (section 2 (2) no. 3 WpIG): the brokering of transactions on the acquisition and sale of financial instruments. This corresponds to section 2 (8) no. 4 WpHG.
   
   
4. Investment advice (section 2(2) no. 4 WpIG): the provision of personal recommendations to clients or their representatives relating to transactions in specific financial instruments, provided the recommendation is based on an examination of the investor's personal circumstances or is presented as suitable for the investor and is not disclosed exclusively through information dissemination channels or to the public. This corresponds to Section 2 (8) No. 10 WpHG.
   
   
5. Contract brokerage (section 2 (2) no. 5 WpIG): the acquisition or sale of financial instruments in another's name for another's account. This corresponds to section 2 (8) no. 3 WpHG.
   
   
6. Operation of a multilateral trading facility (section 2(2) no. 6 WpIG): the operation of a multilateral system that brings together the interests of a large number of persons in the purchase and sale of financial instruments within the system and in accordance with non-discretionary provisions in a manner that results in a contract for the purchase of such financial instruments. This corresponds to Section 2 (8) No. 8 WpHG.
   
   
7. Operation of an organised trading facility (section 2(2) no. 7 WpIG): the operation of a multilateral system which is not an organised market or a multilateral trading facility and which brings together the interests of a large number of third parties in the purchase and sale of debt securities, structured finance products, emission allowances or derivatives within the system in a way that results in a contract for the purchase of these financial instruments. This corresponds to section 2 (8) no. 9 WpHG.
   
   
8. Placement business (section 2 para. 2 no. 8 WpIG): the placement of financial instruments without a firm commitment basis. This corresponds to section 2 (8) no. 6 WpHG.
   
   
9. Financial portfolio management (Section 2 (2) No. 9 WpIG): the management of individual or multiple assets invested in financial instruments for others with decision-making discretion. This corresponds to section 2 (8) no. 7 WpHG.
   
   
10. Various forms of proprietary trading (section 2 para. 2 no. 10 WpIG):
    
    
    1. Market-making: continuous offering of the purchase and sale of financial instruments on the financial markets at prices set by the bank itself for its own account using its own capital. This corresponds to Section 2 (8) no. 2 letter a WpHG.
       
       
    2. Systematic internalisation: frequent organised and systematic operation of trading for own account to a significant extent outside an organised market or a multilateral or organised trading facility if client orders are executed outside a regulated market or a multilateral or organised trading facility without operating a multilateral trading facility. This corresponds to section 2 (8) no. 2 letter b WpHG.
       
       
    3. Proprietary trading: Acquiring or disposing of financial instruments for one's own account as a service for others. This corresponds to section 2 (8) no. 2 letter c WpHG.
       
       
    4. High-frequency trading: Buying or selling financial instruments for one's own account as a direct or indirect participant in a domestic organised market or a multilateral or organised trading facility by means of a high-frequency algorithmic trading technique characterised by specific infrastructure. This corresponds to section 2 (8) no. 2 letter d WpHG.

With Regulation (EU) 2019/2033 (IFR), the European legislator expresses regulations for MiFID investment firms that are directly applicable in all EU member states. In addition, Directive (EU) 2019/2034 on the supervision of investment firms (Investment Firm Directive - IFD) leaves the EU member states room for specific regulations. The WpIG is the German implementation of this directive. In addition to this implementation, the IFR applies as directly applicable EU law. The interaction of WpIG and IFR results in the supervisory regime under which investment firms will operate in the future.

The regulations are designed in such a way that the intensity of supervision by BaFin is proportional to the size of the investment firms. For smaller institutions, relief applies in certain areas.

The provisions of the WpIG include:

• Initial capital requirements;
  
  
• Requirements for business organisation and certain notification obligations;
  
  
• Supervisory powers of the competent supervisory authorities, in particular with regard to the solvency of investment firms and capital and liquidity requirements;
  
  
• Benchmarks for assessing the adequacy of internal capital requirements;
  
  
• Requirements for the board of directors and supervisory bodies of investment firms with regard to internal corporate governance; and
  
  
• Rules on the remuneration policy towards certain categories of staff of the investment firms.

The regulations of the IFR include:

• Own funds requirements in relation to quantifiable, uniform and standardised elements of corporate, customer and market risk;
  
  
• Requirements to limit concentration risk;
  
  
• liquidity requirements in terms of quantifiable, uniform and standardised elements of liquidity risk;
  
  
• Reporting obligations in relation to the above-mentioned capital and liquidity requirements and concentration risk; and
  
  
• Disclosure obligations.