Under the Investment Firms Prudential Regime, or IFPR for short, investment firms have obligations in respect of concentration risk, geared towards to levels of exposure on their balance sheet and the types of activity they conduct.

All investment firms, whether SNI or non-SNI, are required to monitor their potential for concentrated exposures to single or related counterparties.  These can include exposures in a trading book, assets outside a trading book (for example trade debtors), cash deposits, the sources of an investment firm’s earnings, off-balance sheet items as well as client money and assets.

Non-SNI firms are required to report quarterly on large exposures and also notify the regulator when such exposures exceed defined limits.  In most circumstances, intra-group exposures are exempt from this requirement but firms need to be sure their intra-group exposures meet the defined criteria.

The “soft limit” is set at 25% of a firm’s capital resources.  Should such an exposure exceed this level a firm must notify the FCA with the details.  There are also two “hard limits” for trading book firms which, if breached, require an FCA notification detailing remedial action and new preventative controls.

Trading book firms are required to calculate and hold a concentration risk K-factor (known as K-CON) to safeguard against risks posed by excessive large exposures.

Firms should ensure they have transparency on their exposures, particularly to groups of connected counterparties.  Setting up the appropriate mechanisms to gather, process and monitor the data is key to ensuring efficient monitoring and timely notifications if needed.