This article was updated on 6 August 2021 click here to read update
On 26th of June 2021 the Investment Firm Regulation ("IFR") and the Investment Firm Directive ("IFD") came into force. The new framework is focused on Investment Firms, contrary to the European Directive 2013/36/EU (the "CRD IV"), which IFR/IFD replaced, that was initially designed for credit institutions.
The new framework introduces a classification for the Investment Firms (Class 1A, Class 1B, Class 2 and Class 3) and sets new initial capital requirements as these are shown in Section D of CySEC’s practical guide and are summarised in the table. The Composition of the Initial Capital and Own funds is set according to percentages of Article 9 of the IFR with regards to CET 1, Additional Tier 1 and Tier 2 Capital.
IFR further lays down, depending on their classification, uniform prudential requirements which apply to investment firms in relation to the following:
(a) Own funds requirements relating to quantifiable, uniform and standardised elements of risk‐to‐firm, risk‐to‐client and risk‐to‐market;
According to the new framework Class 1 Investment Firms are still subject to CRR/CRD IV. Class 2 and Class 3 Investment Firms on the other hand, are subject to the IFR/IFD and should maintain own funds of at least the higher between:
i. Their fixed overheads requirement
ii. Their initial capital requirement
iii. Their K-Factor requirement
K-factors are quantitative indicators that reflect the risk that the new prudential regime intends to address. They are divided into three groups and they aim to capture the risk the investment firm can pose to customers (‘RtC’), to market access (‘RtM’) or the investment firm itself (‘RtF’). The K-factor requirement is the sum of (‘RtC’), (‘RtM’) and (‘RtF’).
For Class 3 Firms, only (i) and (ii) of the above are considered excluding K-Factors.
(b) Requirements limiting concentration risk;
Class 2 and Class 3 Investment Firms (subject to exemptions) are required to monitor and control their concentration risk in order to not exceed certain limits according to Article 37 of IFR.
(c) Liquidity requirements relating to quantifiable, uniform and standardised elements of liquidity risk;
Class 2 and Class 3 Investment Firms (subject to exemptions) are required to hold liquid assets amounting to at least one third (1/3) of their Fixed overhead requirement.
(d) Reporting requirements related to points (a), (b) and (c);
Both Class 2 and Class 3 Investment Firms are subject to the same reporting requirements as listed below, however the requirement for Class 2 Firms is on a quarterly basis whilst Class 3 Firms are required to report annually.
i. Level and composition of own funds
ii. Own funds requirements
iii. Own funds requirement calculations
iv. The level of activity, in respect of the conditions of Article 12(1) of the IFR, including the balance sheet and revenue breakdown by investment service and applicable K-Factor
v. Concentration risk
vi. Liquidity requirements
(e) Public disclosure requirements
A number of disclosure requirements derive from IFR/IFD, all of them applicable for Class 2 Investment Firms and to an extent to Class 3 Firms. Specifically, public disclosures are required in respect of:
i. Risk management objectives and policies
ii. Internal governance arrangements
iii. Own funds requirements
iv. Remuneration policy and practices
v. Investment policy
vi. Environmental, social and governance risk
Other supervisory requirements
Class 2 Investment Firms are required to have in place an internal capital adequacy assessment process (ICAAP) whilst the competent authorities may also request Class 3 Investment Firms to comply with the ICAAP requirement to the extent they deem it to be appropriate.
Class 2 Investment Firms will also have to establish internal governance processes on treatment of risks, country-by-country reporting and specific remuneration rules which are largely based on the framework set out in CRR/CRD IV.
Class 3 Investment Firms will also have to establish internal governance processes on treatment of risks.
Investment Firm groups should examine the criteria set in Article 46 of IFD to determine whether they fall under consolidated supervision. The prudential consolidation requirements are stated in Article 7 of IFR.
If you have any questions, do not hesitate to contact us.
UPDATE
The Cyprus Securities and Exchange Commission (the "CySEC") on 4th August 2021 of Circular C464 regarding the Publication of a new Practical Guide and the release of Reporting Templates (Prudential Supervision Forms) with regards to the new prudential framework for Investment firms (IFR/IFD).
A. Practical Guide for the implementation of IFR/IFD
The new guide is updating the one already published by CySEC on March 2020 and should be read in conjunction with the Regulatory Technical Standards (‘RTS’) and Implementing Technical Standards (‘ITS’) issued already or will be issued in the coming months by the European Commission (‘EC’). Thus, all CIFs are urged to search through the EBA’s website on a continuous basis so as to be fully updated with the new developments.
The most important updates of the new Guide are those mentioned in Section I and J where more detail is provided on the Regulator's view on Concentration Risk and Liquidity Requirements. Section L, dealing with Reporting and Disclosure requirements, provides some new information regarding Consolidation, the supervisory powers of the Commission and the reference and reporting dates for the new forms (see below).
Section M of the guide clarifies the requirement for Class 2 Firms to have in place an Internal Capital adequacy assessment process whilst Section N provides important information regarding obligations the firm had with the previous prudential framework (CRR/CRD) and are either no longer applicable or continue to be in force.
B. Reporting Templates
CySEC published new prudential forms as follows:
i. Form ZZ-01 “Reporting for Class 2 CIFs” (to be submitted on a quarterly basis) ii. Form ZZ-02 “Reporting for Class 3 CIFs” (to be submitted on a yearly basis)
Reminding of the planed test submission under the new regime and that there will be no official submissions for Q2 of 2021.
C. Testing submission
CySEC will hold a testing submission for ALL CIFs based on the new forms. Reporting reference date for the test submission will be the 30th of June 2021 and forms shall be submitted on a solo basis only, starting from 4th up to 11th of October 2021. Submission will be through TRS and details for naming convention of the Forms and technical matters are provided in the circular.
D. First official reporting
Class 2 Firms: reference date - 30th September 2021, Submission deadline - 11th November 2021
Class 3 Firms: reference date - 31st December 2021, Submission deadline - 11th February 2022
In case you have any questions, please do not hesitate to contact us for further professional assistance.
Written and updated by Constantinos Constantinides, Director of FAI Comply