EBA proposes a definition of 'fixed overheads' and capital charge for use of tied agents
This RTS fleshes out the definition of Fixed Overheads - a key determinant of capital for investment firms under Article 97(4) of the Capital Requirements Regulation (CRR). Because of a linkage between legislation focused on this Article, the definition will also be applicable to UCITS Management Companies and AIF Management Companies.
The definition mostly confirms existing understanding of fixed overheads being total non-extraordinary accounting expenses less certain deductions such as depreciation and discretionary staff bonuses.
However the RTS also proposes the inclusion of an add-on for firms which use tied agents.
The thinking behind this is that business carried out through a tied agent exposes an investment firm to risk in the same manner as business carried out by the investment firm itself. Furthermore, there should not be incentives for firms to reduce their capital requirements through the use of these agents. Therefore, a firm should maintain a capital component for tied agents.
As calculating fixed overheads for tied agents in the same manner as for investment firms themselves would pose many practical problems, the use of a fixed percentage of 35% of all fees per tied agent is proposed instead.
Click here to download the draft RTS.