Around 6pm last night the Dutch National Bank (DNB) made calls to a number of proprietary trading firms informing them that its prudential regime for local firms was no longer legally tenable. An open letter was released at the same time outlining the situation.
The move followed an investigation from the European Banking Authority, which challenged the DNB’s 2014 position on capital requirements for proprietary traders. Previously, the DNB had calculated capital in line with a company’s risk exposure, significantly reducing requirements for firms trading daily, offsetting positions.
As a result, firms will have until 31 March 2018 to meet the applicable requirements under the Capital Requirements Regulation. If a firm’s capital falls short, it must draw up a restoration plan to ensure that it meets the CRR capital requirements as soon as reasonably practicable but in any event by 31 December 2019 at the latest.
This will result in much higher capital requirements for firms (as yet the exact calculations are unsure) but is likely to be replicated across Europe so, while it will almost certainly force firms to consolidate or shut down, it should not directly constitute a competitive disadvantage for the Dutch.
However, it was one sentence in the final paragraph of the open letter published by the DNB that represents the biggest challenge to Amsterdam.
The sentence read: “The policy change also means that your exemption to the bonus cap will lapse.”
This is nothing short of a disaster for Dutch trading firms and for Amsterdam generally.
The previous Dutch government imposed a bonus cap of 20% of basic salary aimed at restricting what was seen as excessive compensation at banks. Proprietary trading firms were specifically and correctly exempted from this cap.
While the DNB has indicated some potential wriggle room, running the exemption until 2020 and indicating that the Minister of Finance and the regulator the AFM will “discuss” the new remuneration regulations with the sector, the move could not come at a worse time for Amsterdam.
The Dutch city was seen widely as the preferred Brexit relocation destination for high-frequency trading firms, with Quantlab among those already to have established its EU base there.
Many firms currently based in London and US-based firms seeking to establish an EU hub were drawn to Amsterdam for its fluency in English, proximity to London, wealth of talent and, most importantly a regulator that understood their business.
The bonus cap threatens to take a hammer to those plans.
With firms looking to push the button on Brexit contingency plans early next year, any uncertainty regarding the remuneration policy is likely to deter big investments in Amsterdam especially as Dublin is vying for the same business offering a lower corporate tax rate and many of the same advantages.
Indeed, Amsterdam-based institutions specifically campaigned to attract firms to resettle there in part on the basis that they would not be subject to the bonus cap.
One possible upside for Dutch-based firms though is that they might now seek to get in on the Systematic Internaliser trend that is so prevalent in London today. With SI operators being subject to the bonus cap, Dutch firms had hereto avoided the initiative. If they are going to be subject to the stringent remuneration policy regardless, that might change.
But that is just one small possible upside in what is a devastating ruling for the Dutch market. Already struggling like others in Europe with the increased costs of Mifid II compliance, this is a major blow for a group so integral to the orderly functioning of global markets.
One can only hope that common sense prevails, and the Ministry of Finance reaches an agreement with the market on a sensible remuneration policy. But that is likely to take time and there is no guarantee of a successful outcome for firms. For firms looking at Brexit contingency plans, time is not something they have.