Own funds composition for investment firms.

Where the definitions come from

Regulation (EU) 2019/2033 does not redefine capital from scratch. Article 9 sets out what own funds means for investment firms by applying the definitions and eligibility conditions in Part Two of Regulation (EU) No 575/2013, with adjustments. The practical consequence is that an investment firm reads its capital definitions out of the credit institution regulation, and reads the composition limits and the requirement out of its own.

Own funds are the sum of common equity tier 1, additional tier 1 and tier 2, each after its own deductions and subject to the composition limits.

Common equity tier 1

The highest quality tier, and for most investment firms effectively all of it. Instruments qualify only where they meet every eligibility condition — issued directly, paid up, perpetual, ranking last in insolvency, with distributions fully discretionary and non-cumulative, and not subject to any arrangement that enhances their seniority.

Alongside instruments and their share premium, the tier includes retained earnings, accumulated other comprehensive income and other reserves. Interim or year-end profits count only where they have been verified by persons independent of the firm and any foreseeable charge or dividend has been deducted.

Additional tier 1 and tier 2

Both tiers are used far less by investment firms than by credit institutions, because the composition limits cap how much of the requirement they can cover and because issuing them is disproportionate at most firm sizes.

Composition limits

Article 9 requires own funds to be composed so that at least a defined proportion of the own funds requirement is met by common equity tier 1, and a further proportion by common equity tier 1 together with additional tier 1, with tier 2 permitted for the remainder. The limits are expressed against the requirement, which produces an effect firms sometimes miss: as the requirement rises, the minimum amount of common equity tier 1 rises with it, so a firm holding a fixed amount of equity and a fixed amount of tier 2 can breach the composition limits without issuing or redeeming anything.

Confirm the current proportions against the Regulation as in force; they are the kind of provision amendments touch.

Deductions

• Losses for the current financial year.
• Intangible assets, including goodwill and, in most treatments, capitalised software.
• Deferred tax assets that rely on future profitability.
• Holdings in financial sector entities, direct, indirect and synthetic, subject to the applicable thresholds and treatment.
• Defined benefit pension fund assets on the balance sheet.
• Own instruments held, directly or indirectly.
• Foreseeable dividends and charges not yet deducted from the profit being included.

Deductions apply to the tier the item corresponds to, with defined treatment where the tier is insufficient to absorb them.

Where firms get caught

1. Unverified profits included. Interim profits need independent verification and the deduction of foreseeable charges before they count.
2. Capitalised software treated as an asset rather than deducted as an intangible.
3. Shareholder arrangements that quietly disqualify equity from the top tier.
4. Composition drift as the requirement grows, without any change to the capital stack.
5. Deferred tax not split between the amounts relying on future profitability and those that do not.
6. Group holdings in other financial sector entities not identified as deductions.

REGREP is an independent software provider. This record explains a reporting framework in plain language and is not legal, tax or regulatory advice. Confirm scope, thresholds and submission dates with your competent authority before you file.