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SII Compliance Forum Tim Lewis: CRD Update 19 July 2006 Capital Requirements Directive Update: Overview 1. Today’s regulatory capital requirements – designated investment business firms, banks 2. When the CRD changes happen/what is changing 3. Action points for firms Notice

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Sii compliance forum tim lewis crd update 19 july 2006 l.jpg

SII Compliance ForumTim Lewis: CRD Update 19 July 2006


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Capital Requirements Directive Update: Overview

1. Today’s regulatory capital requirements – designated investment business firms, banks

2. When the CRD changes happen/what is changing

3. Action points for firms


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Notice

This presentation is a general overview of the forthcoming requirements for Securities & Investment Institute compliance officers only. It is not intended to be advice and must not be relied on as such. Firms should seek specific advice on their own positions.


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Today’s requirements

ISD

EU

CAD

BCD

FGD

UK Law

FSMA

IPRU (INV)

IPRU (BANK)

FSA

PRU

SYSC


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Today’s requirements

1. Investment Services Directive (“ISD”)

List of investment activities/instruments (different to UK “regulated activities”) performed by “investment firm”.

Exemptions – if apply, outside ISD and CAD.

2. Capital Adequacy Directive (“CAD”)

Capital requirements for most ISD “investment firms” based on types of “investment activity” performed.

CAD “exemptions” for some firms.


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Today’s requirements

1. IMRO/SFA/PIA rules  IPRU(INV)

Covers firms:

  • within Capital Adequacy Directive (“CAD”) (e.g. segregated managers, agency brokers, principal brokers);

  • exempt from CAD but within Investment Services Directive (“ISD”) (e.g. advice/arranging only, no client money); and

  • outside both directives (e.g. pure UCITS managers, some private equity firms).

    2. Banking Supervisory Policy  IPRU(BANK)


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Today’s requirements: ISD firms

1. Own funds

€50,000 (if no client assets/money); or

€125,000 (hold client money or assets); or

€730,000 (full principal trader)

2. Financial resources

(a) Investment mangers/non-principal brokers - ¼ or 6/52 of annual audited expenses some add-ons (e.g. for foreign exchange exposure “market risk”)

(b) Principal brokers

Based on ¼ annual audited expenses and trading book “market risk” add-ons

3. Large exposures limits

NB Does not apply to all ISD firms

4. Consolidated reporting

NB Investment managers and non-principal brokers currently exempt/waiver


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Today’s requirements: Banks

1. Liquidity

2. Banking book

Risk of counterparty defaulting on obligation (asset)

Risk of current/future loss (contingent liability)

_______________Capital_____________ ≥ Individual Capital Risk weighted assets Ratio%

3. Trading book

Risk add-ons

4. Large exposures limits

5. Consolidated reporting

Mandatory


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Today’s requirements: Summary

SCOPE

Solo/Consolidated

Minimum Capital

  • Banking book

    • or

    • Expenditure Based Requirement

Trading Book

Large Exposures

Liquidity (banks)


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CRD – what is it?

  • “Recasting” of current Banking Consolidation and Capital Adequacy Directives

  • Legislation implementing Basel II in EU for banks and investment firms

  • Will result in new FSA rules

  • Will result in new rules across EEA

  • NB: MiFID replaces ISD on 1 November 2007 so is relevant


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SCOPE

Solo/Consolidated

Pillar I Minimum Capital

Pillar II

Supervisory Review

Supervisory Review Process (“SREP”)

monitoring

Individual Capital Adequacy

Assessment Process (“ICAAP”)

using

Supervisor Risk Assessment Systems (“RAS”)

resulting in

Individual Capital Guidance (“ICG”)

Pillar III

Market Discipline

Public Disclosure of

Systems & Controls

Banking Book

(i) Standardised

(ii) IRB Foundation

(iii) IRB Advanced

orFixed Overheads Requirement

Trading Book

Concentration risk

Operational Risk

(i) Basic Indicator

(ii) Standardised

(iii) Advanced Measurement


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CRD changes: 1 January 2007

  • New FSA rules GENPRU/BIPRU

  • 1 set of rules to cover wide range of firms (banks, brokers, managers) – so more complex, harder to navigate

  • Affects “BIPRU firms”, i.e.:

    • Banks

    • “ISD firms” which are limited licence firms, i.e. (i) not “exempt CAD firms” (ii) do not trade as principal (iii) do not underwrite; e.g. segregated portfolio managers, UCITS investment managers, corporate finance firms, agency brokers

    • “ISD firms” which arelimited activity firms(certain limited principal dealing, meets certain other conditions – not dealt with further here)

    • “ISD firms” which trade as principal and/or underwrite (“full scope firms”)

    • Firms in same group as a bank, limited licence, limited activity or full scope firm (NB these changes are NOT covered today)


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CRD changes: 1 January 2007

  • New mechanical capital requirement under “Pillar I”:

    • Limited licence firms: higher of

      (a) €50,000 (no client money/assets); €125,000 (client money/assets); €730,000 (MTF operators); €125,000 plus an excess for FuM (UCITS firms)

      (b) ¼ adjusted audited expenditure; and

      (c) credit risk + market risk

    • Full scope firms: higher of

      (a) €730,000; and

      (b) credit risk + market risk + operational risk

      - Banks: higher of

      (a) €5 million; and

      (b) credit risk + market risk + operational risk

  • NB Pillar I operational risk charge only applies to full scope firms and banks


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CRD changes: 1 January 2007

  • EEA parent undertaking in group must meet new mechanical group capital requirement. For limited licence firms this is the higher of:

    • ¼ group expenses; and

    • a “credit risk requirement” plus a “market risk” requirement for the group

      For full scope firms and banks this is credit risk + market risk + operational risk for the group

  • Existing waivers/guidance lapse, circumstances in which waivers available change

  • Group “waiver” only changes the requirement from parent’s consolidated accounts to parent’s unconsolidated accounts

  • No transitional provision

  • Options

    • move outside of “group” (definition roughly follows accounting definition)

    • move activities to separate/single entity

    • insert more capital

    • go offshore


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CRD changes: 1 January 2007

  • New definition of capital

  • Changes to SYSC required by CRD


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CRD changes: 1 November 2007

  • MiFID implemented – replaces and widens ISD

  • New MiFID activities: investment advice, placing without firm commitment, MTF operator

  • For some firms, will change capital category, i.e.

    • firm previously within ISD but not within CAD (i.e. exempt CAD firm);

    • firm previously outside ISD which is subject to MiFID– could be limited licence or exempt CAD firm.

  • “Exempt CAD firms” - investment advice/reception and transmission, no client money/assets

  • Until 1 November 2007, continue with current IPRU(INV) rules (as non-ISD or ISD firm)

  • FSA draft rules expected Q3: INVPRU. NOT subject to GENPRU/BIPRU

  • FSA has indicated capital will be:

    €50,000; or

    €25,000 + professional indemnity insurance; or

    professional indemnity insurance


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CRD changes: 1 January 2008

Changes apply to BIPRU firms

Pillar II

Individual Capital Adequacy Assessment Process (“ICAAP”):

process for senior management to assess how much additional capital (if any) is required in the business to meet certain risks in addition to the mechanical Pillar I minimum

Part of the amendments to risk management rules

Non-relationship managed firms must send form to FSA reflecting ICAAP results

FSA can challenge with Supervisory Review and Evaluation Process (“SREP”)

Pillar III

Disclose publicly (e.g. on a website) how the firm/its group addresses certain risks, e.g. details of risk management policies


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BIPRU firms: summary at 2008

1. Pillar I: limited licence

(a) €50,000 (no client money/assets); €125,000 (client money/assets); €730,000 (MTF operators); €125,000 plus an excess for FuM (UCITS firms)

(b) ¼ fixed overheads requirement; and

(c) credit risk + market risk

2 Pillar I: full scope BIPRU/banks

(a) €730,000 (full scope) or €5 million (bank); and

(b) credit risk + market risk + operational risk

3. Pillar I: Large exposures/Concentration rules limits

4. Pillar I: Consolidated reporting

Applies to limited licence/limited activity firms for the first time

5. Pillar II

Individual Capital Adequacy Assessment Process

6. Pillar III

Disclosure


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Recap: today’s requirements

ISD

EU

CAD

BCD

FGD

UK Law

FSMA

IPRU (INV)

IPRU (BANK)

FSA

PRU


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Changes post-CRD

CAD Recast

BCD recast

FGD

EU

UK Law

FSMA

BIPRU firms

IPRU (INV): non-MiFID/non-UCITS firms

PRU

GENPRU new!

IPRU (BANK)

FSA

[INVPRU:] MiFID/non-BIPRU firms

BIPRU new!

SYSC updated!

UPRU new! – UCITS firms


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CRD Action points

NOW

  • How will your firm(s) be classified from 1 January 2007/1 November 2007?

  • What capital requirement your firm will need to comply with? Is additional capital, waivers or restructuring necessary?

  • Will the new group capital requirements will apply to your firm? Is additional capital, waivers or restructuring necessary?

    BEFORE OCTOBER 2006

  • Apply for any waivers which you will need to rely on.

    BEFORE 1 JANUARY 2007

  • Comply with the new CRD rules


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Presented byTim Lewis

Travers Smith

10 Snow Hill

London EC1A 2AL

Telephone: 020 7295 3321

E-mail: [email protected]


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