The IFPR comes into force on 1 January 2022. It builds on the FCA’s financial resilience framework of FG20/1, and additionally the FCA's two Consultation Papers (CPs) on IFPR and near-final rules as contained within the FCA Policy Statement PS21/6, with another CP and two further Policy Statements and rules to be published in 2021. The IFPR will affect all current BIPRU, IFPRU, matched principal brokers and exempt-CAD firms, amongst others. This article considers the changes to capital requirements for firms caught within the scope of IFPR.
The Own Funds (capital) Requirement (OFR) under IFPR replaces Pillar 1 requirements for current IFPRU and BIPRU firms. The OFR will be the higher of the Permanent Minimum Requirement (PMR) and Fixed Overhead Requirement (FOR) for Small and Non-interconnected Firms (SNI), and the higher of PMR, FOR and the K-Factor Requirement (KFR) for non-SNIs.
The PMR limits replace the current base/initial capital requirements as follows:
€50,000 > £75,000 €125,000 > £150,000 €730,000 > £750,000
Note that there will be no matched principal exemption under IFPR, so those €125,000 matched principal brokers will not move to £150,000 rather they will move to a PMR of £750,000 over a 5 year period.
The FOR will be based on 3 months’ relevant expenses of the last year’s audited accounts. However if there is to be a material change in relevant expenditure for the current year, then the FOR should be adjusted. A material change is a projected increase or decrease in relevant expenditure for the current year of 30% or more, or an increase or decrease in the FOR of £2m or more.
The KFR is the sum of the following three categories:
- Risk to Market (RtM):
- K-NPR (net position risk)
- K-CMG (clearing margin given)
- Risk to Customer (RtC):
- K-AUM (assets under management- managing or advising (ongoing) on investments)
- K-ASA (client assets safeguarded and administered)
- K-CMH (client money held)
- K-COH (client orders handled)
- Risk to Firm (RtF):
- K-TCD (trading counterparty default)
- K-DTF (daily trading flow)
- K-CON (concentration risk)
Note for K-ASA this includes assets delegated to third parties and assets which have been delegated to the firm to safeguard and administer. K-ASA is not applicable to the regulated activity of “arranging safeguarding and administration of assets”.
K-AUM includes AUM delegated by the firm to a third party, but excludes AUM delegated to the firm by a UK CPMI or equivalent third country firm subject to similar requirements.
Note that Transitional Provisions (TPs) will be in place for five years from the IFPR implementation date of 1 January 2022, so that firms can adjust to the potentially higher capital requirements of the IFPR. However the TPs are only for the minimum requirements (PMR, FOR and KFR) and do not affect the internally assessed capital requirements of a firm.
The individual elements of each K-factor are calculated using the following coefficients:
K-NPR/K-CMG: As per the current market risk and clearing margin rules in the Capital Requirements Regulation (UK CRR)
K-AUM: AUM * 0.02%
K-ASA: ASA * 0.04%
K-CMH: Segregated client money * 0.4%, Non-segregated client money * 0.5%
K-COH: Client order volumes * 0.1% for cash trades, 0.01% for derivatives trades
K-TCD: 1.2* Exposure Value * Risk Factor * Credit Valuation Adjustment
K-DTF: Daily volumes * 0.1% for cash trades, 0.01% for derivatives trades
K-CON: Based on individual exposures for each firm, similar to the Large Exposure rules of the UK CRR. All firms must monitor and control concentration risk, while those who deal on own account must also report on concentration risk.
Have you assessed the impact of the capital requirements under the IFPR on your business and financial models? If you have not already done so, the clock is ticking to the IFPR implementation date on 1 January 2022. You may need more capital to be injected into your firm under the capital requirements of IFPR.