June 26th 2021 will mark the start of the new prudential regime IFR/IFD’s implementation period. IFR/IFD will have a significant impact on most investment firms and result in an entirely new way of measuring risks. Several areas have been altered completely including capital, liquidity and reporting requirements. Is your firm ready for IFR/IFD?
On December 5th 2019, the Investment Firm Regulation (EU) 2019/2033 (“IFR”) and the Investment Firm Directive (EU) 2019/2034 (“IFD”), were published in the Official Journal of the European Union and entered into force on 25 December 2019. The need for stronger capital markets in the EU resulted in new tailored and risk sensitive rules for investment firms. Consequently, the great majority of investment firms will no longer be subject to the requirements set out in the existing Directive 2013/36/EU (“CRD”) and Regulation (EU) No 575/2013 (“CRR”).
2021 is a year full of changes. On June 26th the new prudential regime, IFR/IFD will apply to investment firms authorized under MiFID II, and the first regulatory reporting to the Swedish FSA will take place from the third quarter of this year.
IFR/IFD results in a completely new way of measuring risks, which will have a significant impact on most investment firms. It introduces a new approach to classify investment firms, where capital and reporting requirements will be applied differently, depending on the classification.
Therefore, the first step for investment firms would be to assess which class their firm is subject to. For most investment firms, IFR/IFD results in complex changes when calculating their capital and reporting requirements. IFR/IFD will most likely also lead to increased capital and liquidity needs for investment firms. The time to prepare for the regulatory reporting impact of IFR/IFD is now.
The key features of the new regulation:
IFR/IFD sheds a light on some fundamental parts of an Investment firm’s business. Class 1 refers to investment firms of systemic importance and these will continue to fall under the CRR/CRD regime. Class 2 applies to larger, ‘non-systemic’, investment firms that exceed certain threshold criteria based on their size and level of specific business activities. Class 3 refers to small and non-interconnected firms that fall below these thresholds and are exempted some parts of the IFR/IFD regime. Class 2 firms will be required to hold own funds which amount to the highest of their permanent minimum capital requirement (PMC), fixed overhead requirement or the K-factor requirement. Class 3 firms are met by lighter prudential rules, and are required to hold own funds based on the highest of their PMC requirement or their fixed overhead requirement.
A key implication of IFR/IFD is the K-factor methodology. The K-factors intend to address specific risks incurred in the Investment firm’s operation such as: client risk, market risk and risk to the firm itself. Concentration risk is a firm-specific risk that has been highlighted in the new regulation and which the investment firm will be obligated to evaluate and monitor.
IFR/IFD bring about changes for most investment firms and the impact is not to be underestimated. The primary challenge with the revised prudential regime is to navigate and interpretate the extensive new regulation. It will be demanding both from an interpretation and a data requirements perspective. Investment firms will be required to adapt their processes in order to integrate new reporting templates, calculate the k-factors and monitor liquidity and concentration risks.
How can we help you?
FCG provides customized solutions that guide and support your company through the complex maze of global regulatory requirements you face, whether it’s reviewing your current regulatory reports or analyzing the impact of new regulations such as IFR and IFD.
To support our clients in handling regulatory reporting challenges, FCG has developed an automated and individually customized Managed Services solution, adapted for investment firms. We will take care of the whole process, map your data, create the reports and submit them to the local Financial Supervisory Authority (FSA) after a sign-off from you. It will help your company free up time, resources and make sure that you focus on your core business. The process will be performed in close cooperation between FCG and your company and enables you to address the numerous regulatory changes with full peace of mind.