1. Prudential Committee update 1 April 2014

2. IMA presentation at Covington & Burling
Speakers:
Irving Henry, Prudential Specialist, IMA
Jared Siddle, Head of Risk, Vanguard
Andrew Lowin, Technical Director, Kinetic Partners
Agenda: An introduction to the IMA’s Prudential Committee and its current issues

3. Introduction to the IMA’s Prudential Committee
Chairman: Jared Siddle, Head of Risk, Vanguard
Secretary: Irving Henry, Prudential Specialist, IMA
Meetings: scheduled quarterly, but more often if required
Sub-committees: Remuneration and COREP
Related committees: Business and Enterprise Risk, and Risk and Regulation

4. The Prudential Committee’s terms of reference
To consider all issues affecting IMA Member firms in the area of prudential regulation, including capital requirements, risk management, consolidated supervision and other prudential requirements.
To advise the IMA Executive on the impact and significance of current issues and proposed developments in the area of prudential regulation, and to assist in prioritising such issues and developments.
To assist the IMA Executive in developing responses to regulatory proposals in the area of prudential regulation.
To assist the IMA Executive in developing initiatives relevant to Member firms in the area of prudential regulation, independent of specific regulatory proposals.
To advise the IMA Executive on how best to consult the wider membership on particular issues.
As requested, to assist the IMA Executive in its representational and lobbying activities.

5. Who the Prudential Committee engages
Financial Conduct Authority
HM Treasury
European Securities and Markets Authority
European Banking Authority (for firms in scope of CRD IV / R / IFPRU)
European Commission
Basel Committee on Banking Supervision / CPSS
International Organisation of Securities Commissions
Financial Stability Board

6. CRDIV Scope

7. Investment Firm Definition and CRD Scope
MiFID Art. 4(1) vs. CRR Art. 4(2) Investment Firm Definition
MiFID Investment Firm - one undertaking MiFID Services and/or Activities unless Exempt (e.g. as a consequence of either MiFID Art. 2 or 3)
CRR Investment Firm - per CRR Art. 4(2) any MiFID Investment Firm which
is not a Credit Institution
is not a Local Firm (i.e. one which trades in Derivatives for its own account only or only with other Members of the same Futures and Options Exchange)
but exclude MiFID Investment Firms which are permitted only to undertake one or more of the following MiFID Activities
A1 – Reception and Transmission of Orders…
A2 – Execution of Orders on behalf of Clients
A4 – Portfolio Management
A5 – Investment Advice
and are expressly prohibited from undertaking MiFID Ancillary Service B1 – Safekeeping and Administration of Client Assets/Money…. or Safeguarding and Administering Client Assets and/or Money

8. Investment Firm Definition and CRD Scope cont…
An IFPRU Firm is, therefore, a MiFID Investment Firm which is not excluded by the CRR Art. 4(2) Definition
Typical, but not exhaustive, examples which tip MiFID Investment Firms into being classified as IFPRU Investment Firms are those permitted, by their Part IV Permission and/or MiFID Passport, to undertake any one or more of the following MiFID:
Ancillary Activity B1 (which could now bring into CRD scope some Exempt CAD Firms)
Activity A3 (Dealing on Own Account)
Activity A6 (Underwriting of Financial Instruments and/or Placing on a Firm commitment basis)
Activity A7 (Placing of Financial Instruments without a Firm commitment basis) and/or
Activity A8 (Operation of a Multilateral Trading Facility)

9. Investment Firm Definition and CRD Scope cont…
A BIPRU Firm is, therefore, a MiFID Investment Firm which is excluded by the CRR Art. 4(2) Definition (other than an Exempt CAD Firm)
Typical, but not exhaustive, examples of permitted Activities of MiFID Investment Firms which do not, in themselves, tip the Firm into being classified as IFPRU Investment Firms are those which hold the following Regulated Activities and Limitations
Only undertake one or more of the following MiFID Activities
A1 Reception and Transmission of Orders…
A2 Execution of Orders on behalf of Clients
A4 Portfolio Management
A5 Investment Advice
Hold relevant Limitations which prevent it undertaking MiFID Activities which would make them an IFPRU Firm, for example A7 (Placing…..without a Firm Commitment basis) which can be seen as part of Regulated Activity of ‘Arranging (bringing about)’
Do not hold MiFID Passports permitting the Firm to undertake MiFID Activities other than A1, 2, 4 and 5.

10. Investment Firm Definition and CRD Scope cont…
Regulated Activities that do not, in themselves, bring Firms into IFPRU Scope:
Arrange Safekeeping and Administration of Client Assets
Control Client Money
Dealing in Investments as Principal with Matched Principal Limitation
Dealing in Investments as Principal with Box Management Limitation

11. Initial Requirement, Own Funds and Own Fund Requirements

12. Own Funds/Capital Resources
BIPRU Firms
GENPRU 2.2 (same as previously incl. Tier 3 Capital)
IFPRU Firms
CRR Part 2
Common Equity Tier 1 (‘CET1’) – Chapter 2
Additional Tier 1 (‘T1’) – Chapter 3
Additional Tier 2 (‘T2’) – Chapter 4
IFPRU Firms must hold at least:
4.5% of Risk Weighted Assets by CET1
6.0% of Risk Weighted Assets by CET1 plus Additional T1
8.0% of Risk Weighted Assets by Total Own Funds (incl. Additional T2)
These are ‘at least’ thresholds, there is, for example, no reason why a Firm cannot meet its 8.0% of Risk Weighted Assets entirely from CET1

13. Capital Resources Requirement – BIPRU Firms
BIPRU (same as previously) i.e. ‘Capital Resources Requirement’
Limited Liability basis still applies
Higher of Base Capital Requirement (i.e. €50k) and Variable Capital Requirement
Where the Variable Capital Requirement is the higher of
Sum of Credit Risk Capital Component and Market Position Risk Capital Requirement; and the
Fixed Overhead Requirement
GENPRU/BIPRU
BIPRU 3 Credit Risk (BIPRU 3.5 Simplified Standardised approach remains available)
BIPRU 7 Market Risk
BIPRU 13/14 (where BIPRU Firms hold a Dealing as Principal with a Matched Principal Limitation)
GENPRU 2.1 Capital Resources Requirement including Fixed Overhead Requirement

14. Capital Resources Requirement – Fixed Overhead Requirement
Investment Firms
Fixed Overhead Requirement basis of calculation will be subject to
EBA Regulatory Technical Standard (at this link)
Basis of Fixed Overheads calculation will apply to all Firms subject to the Fixed Overhead Requirement, i.e.
IFPRU Investment Firms holding Limited Authorisation
BIPRU Firms
UCITS Firms; and
AIFM Firms
EBA RTS Article 1
Defines which expenditure may be deducted from the most recent Audited Financial Statement’s Audited Expenditure in order to determine Audited Fixed Expenditure
Fixed Overhead Requirement remains 25% of Audited Fixed Expenditure

15. Own Funds Requirement – IFPRU Firms
Limited Authorisation (€50k/125k) IFPRU Investment Firms
Risk Weighted Asset/Exposure = 100%
Credit Risk Weighted Amount - CRR Art. 92(3)(a) & Title II
Credit Risk
Annex II and Credit Derivatives – CRR Art. 92(3)(f)(i) & Title II
Repo. Securities/Commodities lending/borrowing – CRR Art. 92(3)(f)(ii) & Title II
Margin Lending on Securities/Commodities – CRR Art. 92(3)(f)(iii) & Title II
Long Settlement – CRR Art. 92.(3)(f)(iv)
Risk Weighted Asset/Exposure = 1,250%
Non-Trading Book Foreign Currency – CRR Art. 92(3)(c) & Art. 351
Non-Trading Book Settlement Risk – CRR Art. 92(3)(c) & Title V
Non-Trading Book Commodity Risk – CRR Art. 92(3)(c) & Art 356
Fixed Overhead Requirement – CRR Art. 97 (and EBA RTS)

16. IFPRU Limited Licence Investment Firm

17. Standardised Credit Risk (as distinct from Simplified)
With effect from 1 January 2014 IFPRU Investment Firms are not permitted to use the Simplified Standardised Credit Risk Approach (i.e. that available at BIPRU 3.5) as the Capital Resources Regulations (‘CRR’) does not include this basis. IFPRU Investment Firms are no longer subject to BIPRU (except BIPRU 12 Liquidity).
CRR Title II outlines the basis of calculating the Standardised Credit Risk Approach.
Standardised Credit Risk Approach requires Exposures to be calibrated in terms of the entity to which the Firm is exposed by way of its Credit Rating (or if none exists a Default Weighting percentage) Credit Ratings are calibrated in terms of External Credit Assessment Institutions (‘ECAI’) or Export Credit Agency (‘ECA’) basis.
The current accredited ECAI can be found at this Link.
ECAI tables can be found at this Link and at this Link.
FCA Table linking ECAI to Credit Step at this Link.
Each Exposure Type is assigned its own ECAI Credit Step Table, for example;
CRR Art. 133 = Equity
CRR Art. 120 = Rated Institutions
CRR Art. 121 = Un-Rated Institutions
CRR Art. 122 = Corporates
CRR Art. 123 = Retail
CRR Art. 128 = Particularly High Risk
There are examples where the Weighting under the Standardised Basis results in a lower Weighting (e.g. 20% instead of 100%) than under the Simplified Standardised Approach (for example where non-UK Credit Institutions hold Cash denominated in another currency than its domestic currency, e.g. a French Bank holding STG).

18. Country by Country Reporting

19. Country by Country Reporting
From when – 31 July 2014
By whom – all CRDIV Institutions, its Branches and all Subsidiaries, if any.
What;
From 1 July 2014 and beyond;
Name, Nature of Activities and Geographical Location of the Institution;
Turnover;
Average number of employees on a full time equiv. basis;
By 31 December 2015 only (except Globally Systemic Institutions);
Profit or Loss before Tax;
Corporation Tax Paid; and
Public Subsidies Received (if any).

20. Country by Country Reporting (‘CbCR’)
Format;
In accordance with accepted Accounting Standards; and
In relation to the Institutions most recent Financial Year.
How often – at any time prior to 31 December in each year.
How – The Annual Report would best form part of the Institution’s Statutory Financial Statement (1 July 2014 on the Institutions Website as unlikely to coincide with Financial Year End and Audit) in order to meet the ‘accepted Accounting Standards’.
Globally Systemic Institutions must submit this report to HMRC by 1 July 2014.
UK CbCR Regulations
UK CbCR Guidance

21. Significant IFPRU Firms

22. Significant IFPRU Firms
Defining a “Significant IFPRU”
An IFPRU Firm would be defined as “Significant” if any one of its
Total Assets exceed £530m (from FSA001 20A + 20B)
Total Liabilities exceed £380m (from FSA001 41A)
Annual Fees and Commission Income received in relation to a Regulated Activity exceeds £160m (applies on a rolling basis) (from FSA002 7A) – was £120m in CP
Client Money received or held by the Firm exceeds £425m (from CMAR 9A) or
Assets belonging to Clients but held by the Firm in the course of, or connected with, a Regulated Activity exceeds £7.8billion (from CMAR 11A)
IFPRU 1.2.9G and PS13/10 – 2.45 states that the FCA has the power to deem Significant IFPRU Firms which fall below all of these Thresholds and equally may formally Waive some of the requirements laid upon a Significant IFPRU Firm
The Policy Statement also stated that ‘some degree Supervisory Judgement’ may be appropriate as ‘size’ does not, necessarily, equate to ‘complexity’

23. Significant IFPRU Firms
IFPRU 1.2.1G - Significant IFPRU Firms should adhere to CRD
Art. 76 – Establishment of an Independent Risk Committee
SYSC R (which may be Waived by the FCA per IFPRU 1.2.9(2)(c))
Art. 88 – Establishment of an Independent Nominations Committee
SYSC 4.3A.9R (which may be Waived by the FCA per IFPRU 1.2.9(2)(b))
Art. 91 – the limitation on the number of directorships an individual may hold
SYSC 4.3A.7R (which may be Waived by the FCA per IFPRU 1.2.9)2)(a))
Art. 95 – Establishment of an Independent Remuneration Committee
SYSC 19A.3.12R (which may be Waived by the FCA per IFPRU 1.2.9(2)(d))
Art. 100 – ICAAP Stress Testing to facilitate Art. 97 SREP
Significant IFPRU Firms
Art. 129 – Capital Conservation Buffer (where these apply)
Art. 130 – Countercyclical Buffer (where these apply)

24. Significant IFPRU Firms
IFPRU 1.2.1G - Significant IFPRU Firms should adhere to CRR:
Art. 6(4) – Solo Liquidity Reporting Scope
Applies to Significant ILAS IFPRU Firms but not to;
Exempt Full Scope Investment Firms as Non-ILAS Investment Firms irrespective of Significance; and
Art. 450 – Remuneration Disclosure
What is dis-closable
Relaxation possible via Proportionality Levels

25. Remuneration Code

26. Remuneration – UK still to consult on this
Overview
CRD IV reproduces, to a large extent, remuneration provisions introduced by CRD III. Note that remuneration rules under CRD III were ALREADY subject to the principal of proportionality
Regulatory Technical Standards must be published by 31 March 2014 and set out criteria to identify staff whose activities have a direct contribution to the “risk profile” of the firm
CRDIV Remuneration Code likely only to apply to the first full/complete Performance Period post 31 December 2013
FCA published proportionality guidance for IFPRU and BIPRU Investment Firms
Bonus Limits
Article 94(1)(g) of the Directive sets out the following “hard limits” to apply to the variable component of a salary:
Basic ratio 1:1
Can be increased to 1:2 ratio subject to the firm getting
Shareholder approval of >66% of votes if 50% quorate reached; or
Shareholder approval of >75% if quorum is not present
A maximum of 25% of the total variable remuneration may be discounted with reference to factors reflecting risks inherent to the instrument. (EBA guidance on this point to be published by 31 March 2014)

27. SYSC19A Remuneration Code – Significance/Proportionality
SYSC19A General Guidance on Proportionality
Section B Table 2
Proportionality Level 1 Firm
UK Credit Institutions and €730 Full Scope Investment Firms with Total Assets which exceed £50bn
Proportionality Level 2 Firm
UK Credit Institutions and €730 Full Scope Investment Firms with Total Assets which exceed £15bn but not £50bn
Proportionality Level 3 Firm
€730 Full Scope Investment Firms with Total Assets which don’t exceed £15bn and all Limited Licence and Limited Activity Investment Firms (irrespective of size)

28. SYSC19C Remuneration Code – Proportionality
SYSC19C General Guidance on Proportionality
FCA’s SYSC19C Proportionality Guidance
Automatically Proportionality Level 3 Firm
By definition all BIPRU Limited Licence Firms (irrespective of size)
Remuneration Disclosure (BIPRU 11.5)
BIPRU (1) – Information of RemCode
BIPRU (2) – Link between Performance and Pay
BIPRU (6) – Aggregate Quantitative – Business Area
BIPRU (7) – Aggregate Quantitative – Snr. Man & Other RemCode Staff:
(a) – Fixed vs. Variable + numbers of staff.
(b) – Paid in cash, shares etc.
(c) – Outstanding Deferred, split vested and unvested.
(d) – Deferred awards in performance yr., paid out/reduced.
(e) – Golden Hello and Severance paid and number paid to.
(f) – amount of severance payments awarded in performance period, number and highest amount.

29. Remuneration Code and Groups
Highest Proportionality Level applies across Group
Lower Proportionality Level Firms within the Group may be granted Proportionality Level that would otherwise apply on a Solo Basis via application to the FCA

30. Other CRDIV Implementation Issues

31. CRD IV: Some UK Issues yet to be Clarified
The Treatment of Groups: UK Consolidation Groups approach, e.g. if a Group contains a Significant IFPRU Firm.
The interaction of CRD IV and Financial Conglomerates Directive
The Group application of Governance Obligations due to being a Significant IFPRU Firm
Basis of calculating the Deferred Tax Asset deductions in terms of the Transitional Period
Defined Benefit Pension Scheme FRS17 Deficits (CRR no longer has relevant prudential filters). And also impact from DTAs from this.
The loss of the Simplified Credit Risk approach – FCAs expectations.

32. CRD IV: AIFMD and UCITS CPMI’s (from 22 July 2014):
BIPRU CPMI (IPRU(INV)11 plus BIPRU/GENPRU)
IFPRU CPMI (IPRU(INV)11 plus IFPRU)
‘Initial Capital’ in Article 4(51) of the Regulation (Base Capital - €125k);
‘Own Funds’ in Article 4(118); and,
‘fixed overheads’ requirement in Article 97 of the Regulation (supplemented by an EBA technical standard).
IFPRU only applies to the portfolio manager’s MiFID business, but IFPRU 2.2 (Internal Capital Adequacy Assessment Process) and IFPRU 2.3 (Supervisory Review and Evaluation Process: Internal capital Adequacy Standards) apply to the whole of the business.

33. CRD IV: Issues to consider
The amount and nature of capital;
Reporting requirements (‘CoRep/FinRep’);
The ICAAP and SREP processes, and stress testing;
SYSC controls;
Recovery and resolution plans;
Existing waivers;
Consolidation.

34. AIFM Own Funds and Own Funds Requirement

35. Types of AIFM – Summary Applicable Prudential Regime
Transitional UK AIFM = Remain subject to existing Prudential obligations (not beyond 21 July 2014).
Small Authorised UK AIFM;
Existing Prudential Requirement continue to apply or IPRU(INV)5 is only an Operator.
Small Registered UK AIFM (i.e. Sub-Threshold Internally Managed AIF which does not undertake Regulated Activities) = No Prudential requirements apply.
Full Scope UK AIFM;
CPM = IPRU(INV) 11
CPMI;
BIPRU CPMI = Higher of GENPRU/BIPRU and IPRU(INV)11
IFPRU CPMI = Higher of IFPRU and IPRU(INV)11

36. Key Prudential Requirement Definitions
Funds Under Management;
Used for calculating;
Funds Under Management Requirement IPRU(INV) for CPM/CPMI and Internally Managed AIF.
Funds Managed by the Firm, calculated as the sum of the absolute value of all assets of all Funds Managed by the Firm including assets acquired through the use of leverage and, for such purposes, derivative instruments shall be at their market value. This includes Funds where the Firm has delegated the management function but excludes Funds it is managing as a delegate.
Assets Under Management;
Professional Negligence Capital Requirement (Regulation Art. 14); and
PII Capital Requirement (Regulation Art. 15).
Same as FuM post

37. Professional Liability Risks Management – AIFMR Art
Professional Liability Risks Management – AIFMR Art does this look familiar?
An equivalent to the CRD Pillar 2 Requirement;
Essentially an Operational Risk Management Framework, Stress Testing and Capital Requirement.
AIFMD Regulation Art. 13;
Effective internal operational risk management policies and procedures.
Maintain and historical loss database.
Scenario and Stress Tests.
Obligation to monitor and manage Risks.
Policies, procedures and predetermined Management Action to be properly documented;
At least documented annual review (e.g. similar to the annual ICAAP review document);
AIFM shall maintain adequate financial resources

38. Other Issues

39. Other issues ICAAP update
Review of EU’s capital adequacy rules for investment firms
Recovery and Resolution
Financial stability / macro-prudential regulation

40. Prudential matters: Further information
For further information, please visit the IMA’s website and contact Irving Henry
Tel:
Website: