Since 1st January 2022, there has been a new UK prudential regime for MiFID investment firms, the IFPR. This new prudential regime affects all UK investment firms but has a specific consequence for Matched Principal Broker (MPB) firms.
We have set out the changes in more detail below:
Do MPB firms need a permanent minimum capital requirement?
The minimum permanent amount of capital that investment firms must have is based on the service or the investment activity provided. The range is between £75,000 and £750,000. All firms which conduct proprietary trading activities, sometimes referred to as trading book activities or dealing as principal, are put at the top end of this range due to the perceived level of risk they face and pose. Therefore, this is true for MPB firms as well.
Do MPBs have a risk-based capital requirement?
MPB firms will now have to calculate K-factor requirements based on “trading book” activity. Firms will need to put in place procedures to assess these requirements and monitor ongoing capital resources and liquid assets.
This change comes because MPB firms enjoyed an exemption under the previous prudential regimes, meaning capital requirements attributable to trading book activity were waived due to the limitations placed on MPB firms restricting the taking of trading book positions. The new capital requirements, designed with proportionality in mind, mean that all trading book firms, including MPB firms, should calculate capital requirements as applicable to the activities they undertake.
According to the IFPR as designed by the FCA, MPB firms pose a particular risk to the markets, based on their trading volumes. An MPB firm trading large volumes poses a greater risk than an MPB firm trade low volumes. The capital requirements are designed to generate capital requirements using this relative scale and risk.
Does the FCA make any allowances for MPB firms experiencing vast increases in capital requirements?
The IFPR contains a number of transitional provisions allowing for investment firms which experience material changes to their capital requirements to smooth the increase over a period of time.
MPB firms benefit from some of these transitional provisions. Firstly, there is a transitional provision allowing for a phased increase from the base requirement under the current prudential rules (e.g. €50k or €125k) to the new permanent minimum requirement under the IFPR (£750k). MPB firms therefore have a longer period of time to adapt if the permanent minimum requirement is their highest requirement.
MPB firms which have a new capital requirement either based on the fixed overheads requirement or k-factor requirement which is more than double their capital requirement under the old prudential rules, may limit their new capital requirement to double the capital requirement based on these pre-existing rules. This limit will last for a period of five years and firms using this transitional provision will need to continually recalculate the requirements based on both sets of rules to ensure the double limit is set at the right level.
What should MPB firms do now?
Matched Principal Broker firms must embrace these changes in order to adhere to FCA guidelines. This include developing, implementing and operating the internal controls necessary to ensure timely, accurate and consistent data-gathering and monitoring ongoing capital requirements, taking into account any applicable transitional provisions. If your firm requires assistance with the new legislation, contact Wheelhouse Advisors at mchambers@wheelhouse-advisors.com