The Central Bank of Ireland has confirmed that it will be willing to authorise proprietary trading firms under a new category of MiFID licence to be known as the MiFID Local Licence, which will qualify as a CRD IV Exempt Firm.

The significance of this development:

  • It increases the categories of MiFID firms in Ireland from 8 to 9.
  • The MiFID Local Licence will be exempt from the minimum initial capital requirements of €730,000.
  • The MiFID Local Licence firm will be exempt from the CRD IV Own Funds Regime.
  • The MiFID Local Licence firm will be subject to a minimum initial capital of €50,000.
  • The MiFID Local Licence will be a CRD IV Exempt Own Funds firm, subject to an annual fixed overhead requirement of ¼ of the previous year’s revenue.

And significantly,

  • The MiFID Local Licence (being a CRD IV Exempt MiFID firm) is exempt from the bonus cap.

Proprietary Traders, MiFID II Local Licence, and the Bonus Cap

The bonus cap limits variable remuneration to 100% of fixed remuneration, subject to an upper limit of 200%, with shareholder approval.

The exemption from the Bonus Cap facilitates the expansion of trading in Ireland for proprietary traders, whose staff are largely rewarded by way of variable remuneration.

MiFID II Proprietary Trader Local Licence Requirements

The Central Bank has confirmed that the qualifications for a MiFID Proprietary Trader Local Licence will be available for traders:

  • Engage solely in dealing on own account on derivatives markets and on cash markets, but in the case of the latter, only to hedge positions in derivatives;
  • Do not have external clients;
  • Do not act as a market maker;
  • Engage solely in exchange traded instruments; and
  • Will access clearing on a client or indirect client basis only.

The Central Bank has confirmed that a market maker is an investment firm subject to a contractual or regulatory obligation to make and publish two way prices, on a continuous basis within the meaning of MiFID II.

The Bank has also confirmed that it will consider possible recognition of other firms within the definition of local firm.

Conclusions

The acceptance by the Central Bank of a new category of MiFID II Proprietary Trading Local Licence Firm is further acknowledgement of the need for re-assessment of the application of the full application of the CRD IV prudential regime for MiFID firms that do not pose systemic risks and do not hold client funds, and, therefore, should fall outside of the CRD IV prudential regime.

By virtue of the low risks presented by Proprietary Trader Local Licence Firms, it is entirely appropriate that the bonus cap requirements are removed.