A guide of the new prudential framework IFD/IFR

Guide on the implementation of the new prudential framework of Investment Firms (IFD/IFR), publication and testing submission of the new reporting forms under IFD/IFR

Background

The EU has adopted a new harmonised prudential regime that has been applied to all investment firms authorised in the EU since June 2021. The new Investment Firm Regulation and Directive (IFR/IFD) will treat some firms as (or as if they were) credit institutions and subject them to the same prudential rules as deposit-taking banks, while imposing entirely new and potentially challenging capital, consolidation, reporting, governance and remuneration requirements on other investment firms.

On 16 April 2019, the European Parliament approved the texts of IFR and IFD agreed with the Council of the EU in trilogue, and, on 5 December 2019, the final texts were published in the Official Journal. IFR entered into force on the twentieth day after publication and applied from 26 June 2021 (18 months after entry into force), although it has also made some changes to the Markets in Financial Instruments Regulation (MiFIR) which applied sooner.

The new regime will have significant impacts on the prudential requirements that apply to many investment firms and will have direct and indirect impacts on groups that include such firms. By now, all affected firms implemented systems and controls in order to assess their status under the new regime and to comply with wholly new capital, consolidation, reporting, governance and remuneration requirements. In this stage, it should be noted that there are only limited transitional provisions.

New classification of Investment Firms

IFR and IFD will introduce a new classification system for investment firms, based on their activities, systemic importance, size and interconnectedness. Each class of firms will be subject to a different set of prudential requirements, with some systematically important and larger firms remaining under the current Basel-derived CRR/CRD regime. The table below shows more information:

 

Class

Covered Firms

      1

Own account dealer/underwriter firms* if:
• Their consolidated assets are equal to or exceed €30bn;
• They are part of a group where the total consolidated assets of all own account dealer/underwriter firms that have consolidated assets of less than €30bn are equal to or exceed €30bn†
; or
• They are part of a group where the total consolidated assets of all own account dealer/underwriter firms are equal to or exceed €30bn† and their consolidated supervisor designates them as Class 1 to address circumvention or financial stability issues.

     1a

Authorised investment firms that are own account dealer/underwriter firms* if:
• Their consolidated assets are equal to or exceed €15bn‡ (excluding assets of non-EU subsidiary own account dealer/ underwriter firms);
• They are part of a group where the total consolidated assets of all own account dealer/underwriter firms that have consolidated assets of less than €15bn are equal to or exceed €15bn‡ (excluding assets of non-EU subsidiary own account dealer/underwriter firms); or
• Their consolidated assets are equal to or exceed €5bn (excluding assets of non-EU subsidiary own account dealer/underwriter firms)‡
and their competent authority designates them as Class 1a based on systemic risk, clearing member status or economic importance, cross-border significance or interconnectedness.

    1b

Authorised investment firms that are own account dealer/underwriter firms if:
• They elect to be subject to CRR;
• They are part of a group containing an EU credit institution and subject to consolidated supervision under CRR; and
• The competent authority is satisfied that the election does not reduce own funds requirements and is not for purposes of regulatory arbitrage.

     2

Other authorised investment firms meeting any of the following tests:
AUM (assets under management, discretionary and ongoing non-discretionary advisory) >=1.2bn
Daily COH (client orders handled) >= €100m (cash trades) or €1bn (derivatives)
ASA (assets safeguarded and administered) >0
CMH (client money held) >0
DTF (daily trading flow) >0
NPR (net position risk) or CMG (clearing margin given) >0
TCD (trading counterparty default) >0
On- and off-balance sheet total >=€100m
Total revenue from investment services and activities (average of last 2 years) >=€30m

    3

Other authorised investment firms

 

Initial Capital Requirements

  • IFD sets new initial capital requirements for Class 1a, 1b, 2 and 3 investment firms according to their authorised activities:
  • €750,000: dealing on own account or underwriting or placing on a firm commitment basis (including for operators of organised trading facilities authorised to deal on own account);
  • €75,000: reception and transmission of orders, execution of orders on behalf of clients, portfolio management, investment advice, placing not on a firm commitment basis;
  • €150,000: operation of a multilateral or organised trading facility.

Distinction between Classes

 

 

Class 1

Class 1a and 1b

Class 2

Class 3

Category

CRR credit institution

CRR institution

IFR investment firm

IFR investment firm

Initial Capital

€5m

€750k

€750k, 150k, 75k

€750k, 150k,75k

Risk-based

capital

CRR capital rules

CRR capital rules

Higher of ∑K-factors and

fixed overhead requirement

Fixed overhead

Requirement

Leverage

CRR Leverage rules

CRR Leverage rules

None

None

Large exposures or concentration risk

CRR large exposure rules

CRR large exposure rules

Part Four IFR concentration

risk requirements (and

K-CON capital charge)

Part Four IFR

concentration risk

requirements

Liquidity

CRR LCR and NSFR

CRR LCR and NSFR

Part Five IFR (1/3 fixed

overhead requirement)

Part Five IFR (but

national supervisory

discretion to waive)

Consolidated requirements

CRR rules

CRR rules

Yes – Art 7 IFR (but possibly

simplified approach under Art 8 IFR)

Yes – Art 7 IFR (but

Possibly simplified

approach under Art 8 IFR)

Pillar 3 disclosures

CRR

CRR

Part Six IFR

No (Art 46(1) IFR),

except for AT1 issuers

Reporting

CRR

CRR*

Part Seven IFR

Part Seven IFR (with

exceptions)

 

Reporting Dates

CIFs shall submit their reporting requirements to CySEC on the following reference dates:

(a) Quarterly reporting (for Class 2 CIFs): 31 March, 30 June, 30 September and 31 December.

(b) Annual reporting (for Class 3 CIFs): 31 December.

The first official reporting reference date for Class 2 CIFs, under IFR/IFD, shall be for 30th September 2021, due to be submitted to CySEC by 11th November 2021.

The first official reporting reference date for Class 3 CIFs, under IFR/IFD, shall be for 31st December 2021, due to be submitted to CySEC on 11th February 2022.

CIFs that are under consolidated supervision by CySEC should submit both solo and consolidated information, within the deadlines mentioned above and using the same set of reporting templates.

How can we help?

Our experienced Risk Management Team can help you to prepare for the submission of reporting forms related to IFR/IFD. Do not hesitate to contact us for more information at: info@cxfinancia.com

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