Last week’s blog about the recent FCA CASS Dear CEO letter has prompted many questions, and particularly about the matched principal exemption. This is a brief note to address those common questions about the matched principal exemption.
What is the exemption and who can use it?
The matched principal exemption originated in the Capital Adequacy Directive, with amendments through the Capital Requirements Regulation. It allows a reduction in the amount of initial capital that an investment firm is required to hold provided the firm meets all of some strict criteria. It is available to investment firms only, so it does not apply to banks for example.
Has something changed recently?
Yes. As a result of MiFID 2 the exemption no longer applies to the MiFID definition of dealing on own account. Although the exemption still remains valid for prudential purposes.
Under the current proposals for the new regime for Investment Firms which is scheduled to take effect next summer (2021) the matched principal exemption is being withdrawn completely.
What should I do if I am relying on the exemption?
If you are currently using the matched principal exemption you need to check two things:
Check if you have permission for dealing as principal permission, and
Check what transactions you deem as qualifying for the exemption against the examples given in the FCA’s letter.
You should also start your contingency plans for removal of the exemption, the effect of which will be that you will most likely need to hold additional regulatory capital.