How are investment management firms in the EEA faring with the newly implemented Investment Firm Regime, which became effective on 26th June 2021?
Many firms are not yet confident that they are meeting the requirements, particularly around reporting.
We partnered with ARKK Solutions to deliver a webinar to recap the reporting requirements set out by the Investment Firm Directive and the Investment Firm Regime and offer some tips and advice for firms that may not be fully compliant yet.
The new rules set out in the IFD and IFR have been designed specifically for investment firms, replacing the previous regime, the CRR, which was designed for banks and not fit for purpose for the investment sector.
Whilst the regime is broad and far reaching, we focused specifically on the reporting requirements within the IFR, which essentially fall into a number of categories:
- Threshold Review and K-Factor (Risk) Summaries
- Capital Requirements
- Capital Resources
Threshold Review and K-Factor Summaries
For most firms, the first step has been to understand how they are classified with a threshold review. During the webinar, the poll results showed that whilst some firms understand which category they fall under, many are unclear.
The IFR/IFD classifies investment firms according to their business model and size, the latter of which is benchmarked against various thresholds.
Firms which fall under every threshold below are classified as Class 3 firms, also called Small and Non-Interconnected firms (SNIs):
- Assets Under Management (AUM) of less than EUR 1.2bn
- Client Orders Handled (COH) of less than EUR 100m per day cash trades, or EUR 1bn per day derivatives
- Assets Safeguarded and Administered, zero
- Client Money Held, zero
- Daily Trading Flow, zero
- Net Position Risk or Clearing Margin Given, zero
- Trading Counterparty Default, zero
- On and Off Balance Sheet Total, less than EUR 100m
- Total Annual Gross Revenue from Investment Services and Activities, less than EUR 30m
If any of these thresholds are breached, the firm is then classified as class 2.
Being classified as Class 3 or SNI is probably good news for many, as they will be subject to lighter reporting requirements which are due on an annual basis, rather than class 2 firms, which must report quarterly.
Challenges of Classification
A common challenge firms have is in understanding the criteria when calculating AUM and COH.
AUM covers portfolios that the firm manages on a discretionary basis or advisory mandates that exist on an ongoing basis for including or excluding certain items that have been delegated, for example. Careful consideration of the EBA’s technical standards should be applied to make sure the thresholds are applied correctly.
Calculating COH is not a straightforward exercise either, particularly with a derivatives conversion exercise to undergo.
There are three main areas covered by Capital Requirements that must be reported:
- Permanent Minimum Requirement (PMR)
- Fixed Overheads Requirement (FOR)
- Sum of K-Factor Requirements (KFR)
The calculations are clear for Class 3 (SNI) firms, as the PMR is a flat rate of EUR 75,000.
For Class 2 firms the PMR is applicable based on activities, and ranges from EUR 75,000 through to EUR 150,000 and beyond to EUR 750,000.
For all firms, the FOR is ¼ of overheads, less (inter-alia):
- Discretionary bonuses
- Expenses directly linked to income
- Non-recurring, non-ordinary items
Class 3, SNI firms have no K-Factor requirements to calculate.
Class 2 firms must calculate the sum of:
- Risk to Customer
- Risk to Market
- Risk to Firm
From a reporting perspective, different classes of firms will be impacted differently, but significantly, as the capital requirements and thresholds are calculated on a rolling average basis. The data gathering burden will be especially high for Class 2 firms.
Once firms have calculated their capital requirements, they need to understand and report that they have the resources to meet those requirements. The good news is that if the firm has been subject to CRR previously, then changes are minimal under the IFR/IFD.
It is important to note that firms will need to report any deductions from capital resources, including things like investments in financial and non-financial sector entities; any intangible assets or deferred tax assets will be deducted from capital resources.
Liquidity reporting is relatively straightforward and quite simple to calculate. Firms need to assess the various assets on the balance sheet to make sure that they do qualify as a liquid asset. The next step is to report a breakdown of those items and the various haircuts applied.
Groups of entities that include investment firms will need to assess the scope of prudential consolidation under the IFR requirements, and when a consolidated group has been identified the parent entity will be responsible for maintaining sufficient capital resources and group-wide risk assessment processes to meet the new rules. This will include completing the Internal Capital Adequacy and Risk Assessment (ICARA) on a group basis.
ARKK Solutions can support the XBRL reporting requirements of IFR/IFD
ARKK believes that the XBRL reporting requirements within IFR shouldn’t be daunting. Whilst XBRL reporting will be familiar to firms that have to file under COREP, there may be firms that are not familiar. ARKK’s portal allows firms to easily populate the IFR templates, which fully comply with EBA standards ensuring the correct taxonomies are always available, and upload and convert through the portal.
ARKK demonstrated how easy it is to upload and convert the mandated template report into XBRL format utilising ARKK’s user friendly end-point solution. The portal includes a validation check which highlights errors and warnings that should be rectified before submitting a report in XBRL format.
ARKK’s knowledge base is accessible through the portal and contains helpful guides for users when submitting the first return. The support team are also available for extended hours around submission deadlines.
How does Wheelhouse Advisors Support firms to meet the requirements of IFR/IFD?
Wheelhouse Advisors’ team of prudential and regulatory reporting experts advise investment firms at any stage of preparedness for IFR/IFD. Whether it is in the early stages of classification or risk assessment, identifying capital requirements and capital resources, or assisting firms in completing the ICARA, Wheelhouse Advisors can provide the right level of support.
Contact our Head of Prudential Mike Chambers to discuss the IFR and your reporting requirements in more detail.