The European Banking Authority are proposing to change fundamentally the prudential landscape for investment firms. In this briefing we looked at these proposals for strategic context around the update to your 2016 ICAAP.

1. CRD for investment firms
New Horizons
Caroline Beck and Jackie Domanska
Thursday 17th March

2. 2
Contents
1. Introduction
2. The prudential journey since the 1990s
3. Background to the European review
4. New risk based prudential categories
5. Fitting client assets into this new framework
6. Applying the going and gone concern concepts
7. New reporting regime
8. Other proposals
9. Conclusion and next steps
10. Questions

3. The prudential journey since the 1990s
3
IPRU
INV 9
BIPRU &
GENPRU
IPRU
INV 3
IPRU
INV 5
IPRU
INV 13
MiFID CRD
III
Exempt
CAD
Rules for Non-MiFID firms
SFA IMRO PIA
MiFID CRD
IV
1990’s
2001
IPRU
INV 11
AIFMD/
UCITS
IFPRU &
GENPRU
FSA
FCA2013
2014
2006

4. 4
A fresh look at investment firms by Europe
European Banking Authority (EBA) Review
• Reviews the scope of EU prudential rules
• Takes a risk based approach
• Identifies bank rules that are difficult for investment
firms to apply
• Proposes simplification of regulatory reporting
framework

5. Implementation timetable
5
Legislative
changes, final
EBA guidance
2016 2016/17 2018/19
FCA starts to
roll out new
SREP Approach
FCA will
consider EBA
proposals in
setting ICGs
EBA proposals
will be refined
based on
additional data
2015

6. 6
New risk based classifications
Tier 1
Investment firms that
are ‘bank like’ in
structure and which are
deemed systemic
Tier 2
Non ‘bank-like’
investment firms that
are of lesser systemic
importance
Tier 3
Small and non-
interconnected firms
and limited license firms
For these firms there is
unlikely to be any
change.
For these investment firms a less complex prudential
regime that is more tailored to the specific risks that
investment firms pose to investors and to other market
participants.

7. 7
Applying these new classifications in the UK
IFPRU 730K Full Scope
IFPRU 730K Limited Activity
IFPRU 730K Limited Licence
IFPRU 125K Limited Activity
IFPRU 125K Limited Licence
IFPRU 50K Limited
BIPRU Firm
Exempt CAD
Tier 1 Firms
Tier 2 Firms
Tier 3 Firms

8. 8
Revised prudential reporting framework
COREP Capital Reporting
COREP Liquidity Reporting
FINREP Reporting
Pillar 2 Information Requirements
FSAXXX Prudential Reports
Pillar 3 Disclosure Rules
Simplified with some exemptions
No change and only applies to Tier 1
Acknowledged as difficult, possible change
Not mentioned
Not covered, but change expected
Exemptions, or made more relevant

9. 9
Is holding client assets a prudential risk?
Potentially two new prudential
requirements:
 Additional initial capital requirement
 Operational risk capital requirement
However firms can also cover these risks in their
ICAAP….and they can do that now!

10. 10
Applying gone and going concern concepts
Banks & 730K Limited Licence/Activity
GOING concern basis:
• Capital adequacy (ICAAP)
• Liquidity adequacy
(ILAAP/ILAA)
• Recovery plan (almost gone)
GOING concern basis:
• Capital adequacy (ICAAP)
• Liquidity adequacy (ICAAP)
GONE concern basis:
• Resolution arrangement
• Transfer of client
balances/records
GONE concern basis:
• Fixed Overhead Requirement
(ICAAP)
• Wind Down Analysis, (ICAAP)
• Transfer of client
balances/records
EBA Proposals are to:
• Redefine the scope of the RRD
• Review parameters of Fixed Overhead Requirement
• Incorporate FCA wind-down analysis into new EU framework

11. 11
Potential impacts on pillar 1 capital
Market risk
• Re-work of what is market risk and
who has to calculate it
• Matched principal trading issues
Operational risk
• Currently only full scope firms
• Potentially all investment firms
Credit risk
• Simplified approach paying
‘particular attention to intraday,
settlement and counterparty risk’

12. 12
Operational risk – examples of the key threat
Failed trades
‘Fat fingers’
Client money
Data breaches
System failures
Fraud

13. 13
Potential impacts on pillar 1 capital
Market risk
• Re-work of what is market risk and
who has to calculate it
• Matched principal trading issues
Operational risk
• Currently only full scope firms
• Potentially all investment firms
Credit risk
• Simplified approach paying
‘particular attention to intraday,
settlement and counterparty risk’
Large exposures
• Currently only full scope firms
• Potentially all investment firms

14. 14
How do you position for your 2016 ICAAP
• Agreeing who owns the ICAAP process
• Explain business model clearly
• Identify KEY risks
• Clear and actionable conclusions
Expect:
More scrutiny of the ICAAP and
supporting documentation
More FCA questions, more FCA visits

15. 15
Stress testing
Reverse stress test
Concentration risk
Competitors experience
Indirect impacts
Past experience
FCA focus
External threats
Bank of England

16. 16
Conclusions
• Good news for the industry and regulators
• Aim is to allow firms to focus on key risks
• UK industry & regulators are in a unique position
• Next steps for you:
 Determine how this will affect you – Tier 1, 2, 3 or other?
 Consider how they could affect your 2016 ICAAP
 Demonstrate that this new approach can work
 Help drive these proposals to a quick & considered conclusion

17. Questions?