The German Securities Institutions Act (WpIG): A new era for German investment firms - Q&A part 2
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After briefly entering into the regulatory framework of the WpIG, the following part is going to examine the requirements for the investment firms.
5. What are the differences between small, medium and large investment firms?
The provisions of the WpIG are designed in such a way that the intensity of supervision by BaFin is proportional to the size of the investment firms. The WpIG distinguishes between small, medium and large investment firms.
A small investment firms benefits from numerous legal reliefs and is deemed to exist pursuant to Section 2 para. 16 WpIG in conjunction with Art. 12 para. 1 IFR if all of the following conditions are cumulatively fulfilled:
- The moving average of the monthly total value of assets under management is below EUR 1.2 billion;
- the moving average of the daily total value of client orders handled is below
- EUR 100 million/day for spot transactions or
- EUR 1 bn/day for derivatives;
- the moving average of the daily total value of the assets safeguarded and administered is zero;
- the moving average of the total daily value of client money held is zero;
- the moving average of the value of the total daily trading flow is zero;
- the value of trades maintained in the trading book of a securities institution ("net position exposure") and the "clearing margin given", i.e. the amount of the total margin required from a clearing member or a qualified central counterparty, is equal to zero;
- the "trading counterparty default risk", i.e. the risk positions in the trading book of the investment firm, is zero;
- the total on-balance sheet and off-balance sheet amount of the investment firm is less than EUR 100 million; and
- the total annual gross income from investment services and activities of the investment firm is less than EUR 30 million.
So-called large investment firms are not primarily regulated by the WpIG and the IFR. Instead, the regulations of the Capital Requirements Directive IV (CRD IV) (implemented in Germany in the KWG) and the Capital Requirements Regulation (CRR) apply. A characteristic feature of large investment firms is their considerable importance for the stability of the financial market. This importance results primarily from their size and their interconnectedness with other market participants and their risk model. Their business models and risk profiles are comparable to those of major credit institutions. In addition, given their size, business models and risk profiles, large investment firms may pose a threat to the stable and orderly functioning of financial markets. Thus, under the IFR, large securities institutions are subject to the provisions of the CRR.
6. How are the requirements for initial capital changing?
The requirements for initial capital result from an interaction of the WpIG and the IFR. The WpIG regulates the specific amount of the initial capital. Correspondingly, the IFR defines the exact composition of the initial capital. Depending on the business conducted, the WpIG distinguishes between three categories:
- EUR 750,000 initial capital must be held if an investment firms engages in proprietary trading, underwriting or OTF business. Investment firms must also hold this initial amount if they hold and manage financial instruments.
- EUR 75,000 initial capital must be held if the investment institution provides investment brokerage, acquisition brokerage, financial portfolio management, investment advisory or placement services without obtaining ownership or possession of client funds.
- EUR 150,000 initial capital must be held by all other investment firms.
7. What happens to the existing licences according to § 32 KWG?
The obligation to obtain a licence for the provision of investment services and ancillary services will in future be governed by section 15 WpIG. For investment firms that have been granted a licence pursuant to section 32 KWG by 26 June 2021, a licence pursuant to section 15 WpIG is deemed to have been granted for those transactions (section 86 WpIG). Therefore, a new authorisation does not have to be obtained in this regard.
8. Can an investment firm continue to passport its authorisation to other EU countries?
An investment firms may continue to passport its licence to other EU countries. This procedure is now governed by sections 70 to 72 WpIG for domestic investment firms (outgoing passport). An investment firm domiciled in another EEA country may continue to operate in Germany pursuant to sections 73 to 75 WpIG (incoming passport).
9. What happens to the current passport under the KWG?
According to the current status of the draft law, no explicit provision has been made so far as to whether a passport procedure that has already been completed must be repeated with BaFin. Further developments remain to be seen here.
10. Does an investment firm have to adapt its client contracts?
So far, neither the IFR nor the WpIG contain regulations that make an adjustment of the contracts appear mandatory. The amendments to the law are supervisory law, which to this extent has no direct influence on civil law. The WpHG remains unchanged.
With the kind assistance of Paul Gerlach (legal assistant).
