Slides used for November 2013 client briefing by Bovill - UK financial services regulatory consultants. For more info visit: www.bovill.com/CRDIV.aspx CRD IV is the EU Capital Requirements Directive which implements Basel III. It is designed to strengthen capital requirements for financial institutions, covering both the amount, and quality, of capital held. CRD IV is driven by the European Bank (EBA) and will harmonise reporting across Europe. Establishing who is affected by CRD IV Whereas Basel III applies specifically to banks, CRD IV extends to certain types of investment firm. Whether or not you are covered, and become an "IFPRU" firm, depends on the activities you are authorised to carry out under MiFID. Working out whether your business activities mean you are performing one of these functions is not straightforward. Your permissions may need to be reduced to ensure you are not in scope for CRD IV unnecessarily. Becoming an IFPRU firm under CRD IV IFPRU firms – those in scope for CRD IV – will be subject to new capital buffers that increase the amount and quality of capital they have to hold. All IFPRU firms must also comply with COREP (common reporting) from 31 March 2014. Twenty-five new templates to report "own funds", "credit risk", "operational risk", "market risk" and "large exposures" replace FCA forms and significantly more data is needed at a more granular level. Reports need to be submitted in XBRL (standardised reporting language) which will require an investment in software. Mapping data into the new templates is a time consuming and complicated piece of work. Preparing for CRD IV You need to decide now if you are in scope for CRD IV. And if you are you need to start preparing for the new reporting regime. Bovill can help you understand CRD IV and how it will affect your organisation. We can also review and prepare your data, convert your templates to XBRL, and submit returns on your behalf. For more information contact us via www.bovill.com/CRDIV.aspx.

1. CRD IV
What it means for investment firms
Ben Blackett-Ord
Richard Cross
Jackie Domanska
November 2013

2. Summary – CRD IV cannot be ignored
• 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
2

3. Evolving prudential categories
SFA
1990s
IMRO
PIA
EU
Directives
2010s
BIPRU / GEN
PRU
IPRU
INV 9
UPRU
MiFID CRD III
Exempt
CAD
UCITS
IPRU
INV 3
IPRU
INV 5
IPRU
INV 13
Non-MiFID
3

4. The path to CRD IV
•
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
4

5. CRD IV: strengthening capital across the EU
• 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)
5

6. CRD IV: structuring the new requirements
•
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
6

7. Finding the rules and guidance
• The Regulation – where most of the rules will
now be located
• Technical standards and guidance issued by the
European Banking Authority (EBA)
• FCA Handbook Rules and Guidance – IFPRU
(with some changes to SYSC)
7

8. CRD IV
Establishing how you’re affected
8

9. It’s not easy to determine who is in scope
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
9

10. FCA numbers reveal scale of regulation
Firm primary category
Full
scope
Limited
activity
Limited
licence
Total
Discretionary Inv. Manager
20
5
1440
1465
Adviser and Arranger
21
3
229
253
Stockbroker
62
11
85
158
Corp Finance Firm
14
1
118
133
Financial adviser
3
102
105
Other
81
23
218
322
Total
201
43
2192
2436
10

11. Some existing BIPRU 50k firms escape
• 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.
11

12. But some don’t…
• However, existing BIPRU 50k firms that do:
- place securities without a firm commitment basis (MiFID
activity 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 Nov
or you may be subject to CRD IV requirements.
If appropriate you should have been contacted by the FCA
regarding this.
12

13. Welcome to IFPRU – new CRD IV categories
•
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
13

14. 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 MiFID
services.
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
14

15. The new regime – CRD IV and AIFMs
No AIFM
Full Scope AIFM
Sub-threshold AIFM
No MiFID Activity
IPRU (INV) 3, 5 or 13
IPRU (INV) 11
CPM
IPRU (INV) 5
RTO and Investment
Advice
IPRU (INV) 9
IPRU (INV) 11 and 9
IPRU (INV) 5
and 9
Portfolio Management
(PM)
New BIPRU
IPRU (INV) 11 and new
BIPRU
CPMI
IPRU (INV) 5
and new BIPRU
Execution of Orders
New BIPRU
X
IPRU (INV) 5
and new BIPRU
Placing
IFPRU 50k
X
IPRU (INV) 5
and IFPRU 50k
Holding money /
assets
IFPRU 125k
Dealing on own
account
IFPRU 730k
X
?
Underwriting
IFPRU 730k
X
?
Operate an MTF
IFPRU 730k
X
?
IPRU (INV) 11 and
IFPRU 125k / CPMI (if
holding in relation to PM)
IPRU (INV) 5 and
IFPRU 125k
15

16. Example: Dolphin Securities
Wealth manager
• Discretionary portfolio management
• Does not hold client money or assets
Currently – BIPRU 50k Limited Licence firm
From 1st Jan – BIPRU Firm
16

17. Example: Williams Corporate Finance
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
17

18. Example: Gold Star Asset Management
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.
18

19. CRD IV
Preparing for CRD IV
• Understanding capital requirement
• Getting ready for new reporting
19

20. Capital – ‘Significant’ firms
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%
20

21. Capital – Other firms
SMEs (small and medium enterprises) are not subject to
capital buffers
• Tier 3 no longer allowed as part of the calculation
• Simplified credit risk calculation no longer available for
IFPRU 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 investment
firms in 2015
21

22. Reporting – COREP/FINREP
• 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
22

23. Reporting: which new templates do I use?
IFPRU 50k firm
capital adequacy
templates only
IFPRU 125k firm
capital adequacy
templates + credit risk
part 3.2 + market risk
templates
CR+MR > FOR
CR+MR< FOR
IFPRU 730k firm
capital adequacy
templates only
full suite of reports
23

24. Example: Dolphin Securities
‘new’ BIPRU firm
greater of:
• base capital
• credit risk +market risk
• FOR
GABRIEL reporting
FSA 003
24

25. Example: Williams Corporate Finance
IFPRU 3
IFPRU 50k firm
greater of:
• base capital
• credit risk +market risk
• FOR
COREP capital adequacy
templates
25

26. Example: Gold Star Asset Management
IFPRU 125k firm
IFPRU 3
IPRU-INV CH 11
greater of:
• base capital
• credit risk +market risk
• FOR
greater of
• base capital +
• 2BP on AUM >250MM
or
• FOR
Take the greater of the two calculations
26

27. Getting ready for the new reporting regime
• Review your underlying data to see if it is sufficiently
detailed and in appropriate format for COREP submission
• Review credit risk calculation as simplified risk calculation
no longer available.
• Trial run of new templates
• Ensure you can convert Excel to XBRL
• Consider purchasing XBRL and validation software
Bovill can help
27

28. Before you think about Christmas…
• 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
28

29. Questions

30. Thanks for coming
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