CRD for investment firms

New Horizons

Caroline Beck and Jackie Domanska

Thursday 17th March

2

Contents

1. Introduction

2. The prudential journey since the 1990s

3. Background to the European review

4. New risk based prudential categories

5. Fitting client assets into this new framework

6. Applying the going and gone concern concepts

7. New reporting regime

8. Other proposals

9. Conclusion and next steps

10. Questions

The prudential journey since the 1990s

3

IPRU

INV 9

BIPRU &

GENPRU

IPRU

INV 3

IPRU

INV 5

IPRU

INV 13

MiFID CRD

III

Exempt

CADRules for Non-MiFID firms

SFA IMRO PIA

MiFID CRD

IV

1990’s

2001

IPRU

INV 11

AIFMD/

UCITS

IFPRU &

GENPRU

FSA

FCA 2013

2014

2006

4

A fresh look at investment firms by Europe

European Banking Authority (EBA) Review

• Reviews the scope of EU prudential rules

• Takes a risk based approach

• Identifies bank rules that are difficult for investment

firms to apply

• Proposes simplification of regulatory reporting

framework

Implementation timetable

5

Legislative changes, final EBA guidance

2016 2016/17 2018/19

FCA starts to roll out new

SREP Approach

FCA will consider EBA proposals in setting ICGs

EBA proposals will be refined

based on additional data

2015

6

New risk based classifications

Tier 1

Investment firms that

are ‘bank like’ in

structure and which are

deemed systemic

Tier 2

Non ‘bank-like’

investment firms that

are of lesser systemic

importance

Tier 3

Small and non-

interconnected firms

and limited license firms

For these firms there is

unlikely to be any

change.

For these investment firms a less complex prudential

regime that is more tailored to the specific risks that

investment firms pose to investors and to other market

participants.

7

Applying these new classifications in the UK

IFPRU 730K Full Scope

IFPRU 730K Limited Activity

IFPRU 730K Limited Licence

IFPRU 125K Limited Activity

IFPRU 125K Limited Licence

IFPRU 50K Limited

BIPRU Firm

Exempt CAD

Tier 1 Firms

Tier 2 Firms

Tier 3 Firms

8

Revised prudential reporting framework

COREP Capital Reporting

COREP Liquidity Reporting

FINREP Reporting

Pillar 2 Information Requirements

FSAXXX Prudential Reports

Pillar 3 Disclosure Rules

Simplified with some exemptions

No change and only applies to Tier 1

Acknowledged as difficult, possible change

Not mentioned

Not covered, but change expected

Exemptions, or made more relevant

9

Is holding client assets a prudential risk?

Potentially two new prudential

requirements:

Additional initial capital requirement

Operational risk capital requirement

However firms can also cover these risks in their

ICAAP….and they can do that now!

10

Applying gone and going concern concepts

Banks & 730K Limited Licence/Activity

GOING concern basis:

• Capital adequacy (ICAAP)

• Liquidity adequacy

(ILAAP/ILAA)

• Recovery plan (almost gone)

GOING concern basis:

• Capital adequacy (ICAAP)

• Liquidity adequacy (ICAAP)

GONE concern basis:

• Resolution arrangement

• Transfer of client

balances/records

GONE concern basis:

• Fixed Overhead Requirement

(ICAAP)

• Wind Down Analysis, (ICAAP)

• Transfer of client

balances/records

EBA Proposals are to:• Redefine the scope of the RRD

• Review parameters of Fixed Overhead Requirement

• Incorporate FCA wind-down analysis into new EU framework

11

Potential impacts on pillar 1 capital

Market risk

• Re-work of what is market risk and who has to calculate it

• Matched principal trading issues

Operational risk

• Currently only full scope firms

• Potentially all investment firms

Credit risk

• Simplified approach paying

‘particular attention to intraday,

settlement and counterparty risk’

12

Operational risk – examples of the key threat

Failed trades

‘Fat fingers’

Client money

Data breaches

System failures

Fraud

13

Potential impacts on pillar 1 capital

Market risk

• Re-work of what is market risk and who has to calculate it

• Matched principal trading issues

Operational risk

• Currently only full scope firms

• Potentially all investment firms

Credit risk

• Simplified approach paying

‘particular attention to intraday,

settlement and counterparty risk’

Large exposures

• Currently only full scope firms

• Potentially all investment firms

14

How do you position for your 2016 ICAAP

• Agreeing who owns the ICAAP process

• Explain business model clearly

• Identify KEY risks

• Clear and actionable conclusions

Expect:

More scrutiny of the ICAAP and

supporting documentation

More FCA questions, more FCA visits

15

Stress testing

Reverse stress test

Concentration risk

Competitors experience

Indirect impacts

Past experience

FCA focusExternal threats

Bank of England

16

Conclusions

• Good news for the industry and regulators

• Aim is to allow firms to focus on key risks

• UK industry & regulators are in a unique position

• Next steps for you:

Determine how this will affect you – Tier 1, 2, 3 or other?

Consider how they could affect your 2016 ICAAP

Demonstrate that this new approach can work

Help drive these proposals to a quick & considered conclusion

Questions?