CRD for investment firms New Horizons Caroline Beck and Jackie Domanska Thursday 17 th March
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 2
The prudential journey since the 1990s 1990 s SFA IMRO PIA 2001 IPRU INV 3 IPRU INV 5 IPRU INV 13 FSA 2006 2013 IPRU INV 9 BIPRU & GENPRU FCA 2014 IFPRU & GENPRU IPRU INV 11 Rules for Non-MiFID firms Exempt CAD MiFID CRD III MiFID CRD IV AIFMD/ UCITS 3
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 4
Implementation timetable 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 Legislative changes, final EBA guidance 2015 2016 2016/17 2018/19 5
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 noninterconnected 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. 6
Applying these new classifications in the UK IFPRU 730K Full Scope IFPRU 730K Limited Activity Tier 1 Firms IFPRU 730K Limited Licence IFPRU 125K Limited Activity IFPRU 125K Limited Licence Tier 2 Firms IFPRU 50K Limited BIPRU Firm Tier 3 Firms Exempt CAD 7
Revised prudential reporting framework COREP Capital Reporting Simplified with some exemptions COREP Liquidity Reporting No change and only applies to Tier 1 FINREP Reporting Acknowledged as difficult, possible change Pillar 2 Information Requirements Not mentioned Pillar 3 Disclosure Rules Exemptions, or made more relevant FSAXXX Prudential Reports Not covered, but change expected 8
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! 9
Applying gone and going concern concepts Banks & 730K GOING concern basis: Capital adequacy (ICAAP) Liquidity adequacy (ILAAP/ILAA) Recovery plan (almost gone) GONE concern basis: Resolution arrangement Transfer of client balances/records Limited Licence/Activity GOING concern basis: Capital adequacy (ICAAP) Liquidity adequacy (ICAAP) 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 10
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 11
Operational risk examples of the key threat Failed trades System failures Fat fingers Fraud Client money Data breaches 12
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 13
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 14
Stress testing Bank of England Reverse stress test Competitors experience Past experience Indirect impacts FCA focus External threats Concentration risk 15
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 16
Questions?