Aligning MiFID II Matched Principal Trading Requirements to the Prudential Regulatory Framework for Investment Firms

By Panayiotis Antoniou,
CEO, MAP Risk Management Services Ltd (MAP RMS)

MiFID II introduced the definition of ‘matched principal trading’ as transactions where the facilitator never faces market risk, concluding at a break-even point after disclosed fees. Pre-MiFID II, such firms could operate with a €125,000 initial capital requirement, later increased to €750,000 following the implementation of the new prudential regulatory regime for investment firms (IFR/IFD). MiFID II clarified that matched principal trading falls under dealing on own account, subjecting firms to its provisions. The Investment Firms Regulation underlines risks depending on firms’ activities, distinguishing between agents and principals. Specifically, the new prudential rules provide tailored methodologies for the calculation of the basic regulatory capital requirements taking into consideration the firms’ size and operations as well as the executed volume under each MiFID Investment Service. Regardless of acting as principal or matched principal, firms must calculate and report the executed volume considering the applicable K-Factor. ‘Matched principal trading’ integrates into firms’ ICARA processes under the IFR, ensuring viability across economic cycles.

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