Investment Firms Prudential Regime – Consultation Paper Feedback and Initial Thoughts on Data Requirements
The IFPR (Investment Firms Prudential Regime) is the new regulatory framework aimed at instituting a more proportional prudential approach to the activities of investment firms and groups that hold investment entities which will replace the existing obligations under CRR/CRD or under the old IFPRU, BIPRU or CAD-exempt rules. The current expected date for the new regime to come in to force is January 2022.
The FCA has planned three consultation papers to gather feedback from the industry and inform the implementation of the new framework in the UK. The second of these CPs closed recently and the resultant policy statement (PS21/9) was issued on 26th July 2021.
The PS can be found on the FCA’s site here:
The Policy Statement contains a number of clarifications and amendments to the proposed IFPR including:
- A change to the definition of a Small Non Interconnected investment firm, including an amended list of the quantitative criteria involved in classification.
- Proposals regarding calculation of K Factor Requirements (KFR)
- Basic Liquid Assets Requirement
- Internal Capital Adequacy and Risk Assessment (ICARA) process and general Risk Management, including stress and reverse stress tests
There are also several clarifications regarding Regulatory Reporting (Chapter 12 PS 21/9) with some comments of particular interest concerning:
- Exemptions from Liquid assets requirement reporting – MIF002
- Guidance regarding ICARA process reporting – MIF007
- Exemptions from MIF008 for FCA investment firms that are
part of a consolidation group under the UK CRR and the PRA
- K Factor requirements
We would encourage everyone to look over this Policy Statement and also to engage with the final Consultation Paper which is due imminently.
VERMEG’s team of subject matter experts, have already started to analyse the requirements presented in the near final rules to ensure an early understanding of the probable data requirements involved in reporting under IFPR.
The analysis of the data requirements in order to fully support the population of the Investment Firms Regime reporting templates is on-going at present as the requirements will continue to evolve until the publication of the final Policy Statement. However, the current data requirements are broadly similar to those presently required for COREP reporting, albeit in far less detail.
For example, the IFPR Own Funds (i.e. Capital) reporting (Article 9) is based on the same principles as in COREP, but with far fewer distinctions. Most of the details that are specified are taken directly from Regulation (EU) No 575/2013, i.e. the existing COREP rules. IFPR reporting will need to same kinds of data as before, the same CET 1, AT1, and Tier 2, but with far fewer qualifications and subtypes.
The Own Funds Requirements calculations are very similar in principle, e.g.
Trading Counterparty Default (K-TCD) (Article 26)
Own funds requirement = 1.2 x EV x RF x CVA
- RF is the risk factor defined by counterparty type
- CVA is either 1 or 1.5 depending on the transaction type
- EV is the exposure value, where EV = Max(0; RC + PFE – C)
- RC is the replacement cost, generally the Current Market Value
- PFE is the potential future credit exposure, which is EN * SF, where EN is the effective notional and SF is the supervisory factor, both defined by the product type.
- C is the amount of collateral
All of these can be represented by a subset of our existing GLC codes and other data fields, which we are not expecting to change.
In a few cases the calculations are not just simcommilar to the existing COREP obligations, but identical. For example, with regard to SA-CCR, the new calculations for the Standardised Approach to Counterparty Credit Risk, are carried over in their entirety.
It is anticipated that a subset of the new and amended source data requirements related to changes to COREP reporting published by the EBA in DPM v3.0, needed to support the SA-CCR calculations will be required from investment firm clients in order to fully automate the production of the IFR reporting templates.
Similarly, the calculations for Market Position Risk on the trading book, including
- Traded Debit Instruments,
- Interest Rate Risk stemming from derivatives and options,
are all unchanged from the existing rules. The IFR simply refers to COREP for these calculations (See Article 22).
Ultimately, while there is no guarantee at this stage that there will no new data items required, from what we’ve seen so far the pattern has been for the data requirements to be a smaller sub-set of the existing data items required for COREP and FINREP reporting, with minor changes to definitions in some cases. We expect to complete our analysis fully, and to be in a position to publish a definitive specification of the IFR source data requirements in the near future.
To learn how VERMEG can help with IFPR reporting – and also for IFR for EU based institutions – contact us on email@example.com
ANDREW KESBEY – GLOBAL HEAD OF REGULATORY PRODUCT