New prudential regulatory framework for investment firms is expected to come into force in all EU member states on June 26, 2021.
Crucial amendments are about to take place upon the enforcement of the new prudential framework that will alter the regulatory requirements currently applicable to Cyprus Investment Firms (CIFs).
The new regulatory framework consists of Regulation (EU) 2019/2033 of the European Parliament and of the Council of 27 November 2019 on the prudential requirements of investment firms and amending Regulations (EU) No 1093/2010, (EU) No 575/2013, (EU) No 600/2014 and (EU) No 806/2014 (the “IFR”) and Directive (EU) 2019/2034 of the European Parliament and of the Council of 27 November 2019 on the prudential supervision of investment firms and amending Directives 2002/87/EC, 2009/65/EC, 2011/61/EU, 2013/36/EU, 2014/59/EU and 2014/65/EU (the “IFD”).
IFR will become applicable in Cyprus on June 26, 2021 whereas Cyprus, as an EU member state, should transpose IFD into national legislation by June 26, 2021.
IFR and IFD will apply to all investment firms authorised and supervised under the MiFID II. One of the main changes that will be made in the current regulatory landscape upon the enforcement of IFR and IFD will be the classification of Investment Firms.
A new classification system will be introduced based on the activities, systemic importance, size and interconnectedness of the investment firms.
Categorisation of investment firms
Investment firms will be categorised as follows:
Class 1A which will consist of the systemically important firms and will require a credit institution authorisation supervised under CRR2 CRDV capital framework.
Class 1B will consist of the investment firms that will remain as investment firms under CySEC’s supervision, but will be supervised CRR2/CRDV for prudential requirements.
Class 2 will cover the investment firms which will not meet any of the conditions of the investment firms of Class 3 and which will be subject to IFR/IFD regime.
Class 3 will be the investment firms which qualify as small and non-interconnected investment firms provided they meet all the conditions of this Class as set out by CySEC. Investment firms under this class will be subject to the new IFR/IFD regime with certain exceptions.
An investment firm will fall into a specific class (above) provided it meets the conditions of the class in question as set out by CySEC.
New initial capital requirements
It is important to note that new initial capital requirements for the authorisation of all investment firms based on their investment services and activities will come into force. The composition of the initial capital should be in compliance with the provisions of the IFR.
Risk assessment – the K-factor requirement
Investment firms should calculate the risk they impose to customers (RtC), to market access (RtM) or to the investment firm itself (RtF) – the K factors- in compliance with the provisions of IFR.
Own funds requirement, concentration of risk & liquidity requirements
Also, the IFR provides how investment firms should calculate their own funds and sets out the thresholds applicable based on the class which the investment firm belongs to.
Class 2 and Class 3 investment firms should calculate their concentration risk in compliance with the IFR. IFR further provides the liquidity requirements for the said investment firms (Class 2 and Class 3).
Own funds requirements of investment firms will be in force in accordance with Article 57 of the IFR.
Disclosure and reporting requirements
Certain disclosure and reporting requirements will be applicable to Class 2 and Class 3 investment firms upon the enforcement of IFR/IFD. Other reporting requirements will also apply for certain investment firms.
Additional supervisory requirements
Further requirements shall be applicable to investment firms falling under the scope of Class 2 and Class 3 regarding ICAAP and internal governance process.
Investment firm groups
Investment firm groups will examine the criteria under IFD (Article 46) to determine whether or not they fall under consolidated supervision.
The information provided by AGP Law Firm is for general informational purposes only and should not be construed as professional or formal legal advice. You should not act or refrain from acting based on any information provided above without obtaining legal or other professional advice.
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