CRD IV - what the capital requirements directive means for UK investment firms.
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Transcript of CRD IV - what the capital requirements directive means for UK investment firms.
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CRD IV What it means for investment firms
Ben Blackett-OrdRichard CrossJackie Domanska
November 2013
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• CRD IV will be implemented on 1 January 2014 – many firms will be affected
• Even unaffected firms need to ensure they’re not inadvertently caught
• Some firms will be subject to significantly different capital requirements
• All impacted firms will be subject to new and complex reporting requirements
Make sure you understand what CRD IV means for you ASAP
Summary – CRD IV cannot be ignored
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Evolving prudential categories
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IPRU INV 9
BIPRU / GEN PRU
IPRU INV 3
IPRU INV 5
IPRU INV 13
MiFID CRD III Exempt CAD Non-MiFID
SFA IMRO PIA1990s
EU Directives
2010s UPRU
UCITS
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• The Banking Consolidation Directive and the Capital Adequacy Directive (CAD) are collectively known as the Capital Requirements Directives (CRD)
• Investment firms subject to MiFID are subject to the prudential requirements of the CAD
• The CRD has been amended on a number of occasions, we are currently at CRD III
• CRD IV takes effect from 1st January 2014
The path to CRD IV
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• Strengthens capital requirements
• Introduces a capital buffer regime for significant firms
• Introduces an EU wide supervisory reporting framework for Financial Reporting (FINREP) and Common Reporting (COREP)
CRD IV: strengthening capital across the EU
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• The Capital Requirements Regulation- Directly applicable- Very little scope for consultation/amendment- Focuses on capital requirements, risk, liquidity and
disclosure
• The Directive- Member states to transpose into national law- Main focus of consultation- Focus is in supervision- Capital buffers, corporate governance and remuneration
CRD IV: structuring the new requirements
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• The Regulation – where most of the rules willnow be located
• Technical standards and guidance issued by theEuropean Banking Authority (EBA)
• FCA Handbook Rules and Guidance – IFPRU(with some changes to SYSC)
Finding the rules and guidance
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CRD IV
Establishing how you’re affected
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Whether firms are in scope depends on MiFID permissions
In scope:• Anyone dealing on own account• Underwriting/placing financial instruments on firm commitment
basis• Placing without firm commitment basis• Operating MTF• Safekeeping, custodian, cash/collateral management (MiFID
ancillary service permission 1)• Anyone holding client money
All BIPRU 730k and 125k firms are in scope • Can catch some BIPRU 50k firms depending on permissions and
exempt CAD firms specifically if they have MiFID ancillary permission 1
It’s not easy to determine who is in scope
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FCA numbers reveal scale of regulation
Firm primary category Full scope
Limited activity
Limitedlicence
Total
Discretionary Inv. Manager 20 5 1440 1465Adviser and Arranger 21 3 229 253Stockbroker 62 11 85 158Corp Finance Firm 14 1 118 133Financial adviser 3 102 105Other 81 23 218 322Total 201 43 2192 2436
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• Existing BIPRU 50k firms that are only categorised as such because they have permission to :
- provide investment advice- receive and transmit orders- execute orders on behalf of clients (MiFID activity 2); or- undertake portfolio management (MiFID activity 4)
AND- do not hold client money and assets
… will fall outside CRD IV, remain subject to CRD III and will be known as BIPRU Firms.
Some existing BIPRU 50k firms escape
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• However, existing BIPRU 50k firms that do:
- place securities without a firm commitment basis (MiFIDactivity 7).
…will be caught by CRD IV and the associated reporting requirements.
If you are not placing you must return a VoP to FCA by 20th Novor you may be subject to CRD IV requirements.
If appropriate you should have been contacted by the FCA regarding this.
But some don’t…
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• Investment Firms Prudential Rules
• Categorisation dependent on activities (scope of permission)
• IFPRU Category (ie 50k, 125k and 730k)- This drives base capital requirement
• All have secondary categorisation (limited licence, limited activity or full scope)- This drives variable capital resources requirement
Welcome to IFPRU – new CRD IV categories
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CPMIs under AIFMD are potentially in scope
• Collective portfolio management firm (CPM)A firm that undertakes external collective portfolio management of AIFs, UCITS or both, but does not provide any MiFIDservices.
CPMs are not in scope
• Collective portfolio management investment firm (CPMI) A firm that undertakes external collective portfolio management of AIFs, UCITS or both and provides MiFID services (only managing investments permitted).
CPMIs may be in scope
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The new regime – CRD IV and AIFMs
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No AIFM Full Scope AIFM Sub-threshold AIFM
No MiFID Activity IPRU (INV) 3, 5 or 13 IPRU (INV) 11CPM
IPRU (INV) 5
RTO and Investment Advice
IPRU (INV) 9 IPRU (INV) 11 and 9 IPRU (INV) 5and 9
Portfolio Management (PM)
New BIPRU IPRU (INV) 11 and new BIPRUCPMI
IPRU (INV) 5and new BIPRU
Execution of Orders New BIPRU X IPRU (INV) 5and new BIPRU
Placing IFPRU 50k X IPRU (INV) 5and IFPRU 50k
Holding money / assets
IFPRU 125k IPRU (INV) 11 and IFPRU 125k / CPMI (if holding in relation to PM)
IPRU (INV) 5 and IFPRU 125k
Dealing on own account
IFPRU 730k X ?
Underwriting IFPRU 730k X ?
Operate an MTF IFPRU 730k X ?
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Wealth manager• Discretionary portfolio management • Does not hold client money or assets
Currently – BIPRU 50k Limited Licence firm
From 1st Jan – BIPRU Firm
Example: Dolphin Securities
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Corporate finance boutique• Gives M&A advice• Places securities in relation to IPOs• Deals as agent• Does not hold client money or assets.
Currently – BIPRU 50k Limited Licence
From 1st Jan – IFPRU 50k Limited Licence
Example: Williams Corporate Finance
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Hedge fund manager (full-scope AIFM)• Discretionary managed accounts (ie MiFID
business)• Holds client money/assets in respect of its
MiFID business. • Currently BIPRU 125k
CPMI = subject to IPRU (INV) Chapter 11 in relation to its AIFM business and IFPRU/CRR in relation to its MiFID investment business.
Example: Gold Star Asset Management
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Preparing for CRD IV• Understanding capital requirement• Getting ready for new reporting
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CRD IV
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The are two categories for capital requirements: ‘significant’ firm or SME (small and medium enterprise).
‘Significant’ firms:• meet one or more of certain financial indicators such as:
- Total assets £530mm- Annual fees £120mm- Client money £425mm
• have to to hold various ‘capital buffers’ including:- Conservation capital buffer = 2.5% risk weighted assets. (Firms
have to hold but can use buffer with FCA permission)- Counter cyclical buffer = up to 2.5%- Systemic risk buffer = up to 5%
Significant firms can be asked to hold capital up to 18%
Capital – ‘Significant’ firms
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SMEs (small and medium enterprises) are not subject tocapital buffers
• Tier 3 no longer allowed as part of the calculation
• Simplified credit risk calculation no longer available forIFPRU firms. FCA may publish a help-sheet on this
• No changes to Pillar 2
• No changes to FOR calculation
• EU looking to overhaul prudential regime for all investmentfirms in 2015
Capital – Other firms
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• In scope IFPRU firms have to comply with COREP reporting from 1 Jan 2014 (first quarter affected ends 31 March 2014)
• New reports submitted in XBRL language to EBA via GABRIEL reporting. Can no longer input everything direct to GABRIEL
• Report templates found at EBA website
• 25 templates replace FSA003 to FSA008 (risk reporting) –granularity of detail needed and data input needs to be validated
• If outside of scope, status quo. New BIPRU firm reports under old FCA reports in GABRIEL
• FINREP replaces FSA001 and FSA002 for very limited number of firms from 1July 2014
Reporting – COREP/FINREP
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Reporting: which new templates do I use?
IFPRU 50k firm capital adequacy templates only
IFPRU 125k firmcapital adequacy templates + credit risk part 3.2 + market risk templatesCR+MR > FOR
capital adequacy templates only
CR+MR< FOR
IFPRU 730k firm full suite of reports
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Example: Dolphin Securities
‘new’ BIPRU firm
greater of:• base capital• credit risk +market risk • FOR
GABRIEL reporting FSA 003
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Example: Williams Corporate Finance
IFPRU 50k firm
greater of:• base capital• credit risk +market risk • FOR
IFPRU 3
COREP capital adequacy templates
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Example: Gold Star Asset Management
IFPRU 125k firm greater of:• base capital• credit risk +market risk • FOR
IFPRU 3
IPRU-INV CH 11greater of• base capital +• 2BP on AUM >250MM
or • FOR
Take the greater of the two calculations
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• Review your underlying data to see if it is sufficientlydetailed and in appropriate format for COREP submission
• Review credit risk calculation as simplified risk calculationno longer available.
• Trial run of new templates
• Ensure you can convert Excel to XBRL
• Consider purchasing XBRL and validation software
Bovill can help
Getting ready for the new reporting regime
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• Review your permissions and work out your new prudential category
• Decide whether you need to apply for a variation
• If so apply ASAP
• Review capital adequacy if you’re a ‘Significant Firm’
• Establish what you need to do to meet new reporting
Before you think about Christmas…
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Questions
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