Cyprus Investment Firms - Class 2 CIFs - Changes on Capital Adequacy Reports

AO - ARTICLE

Cyprus Investment Firms

This article should be read in conjunction with the article "Cyprus Investment Firms - Changes to Capital Requirements and Reporting".

Following the new CRR it is evident that most Cyprus CIF (Cyprus Investment Firm) companies will fall under the definition of  Class 2 investment firms. 

This implies that they will continue to submit their quarterly CORREP reports every quarter like in the past.

COREP PERIODS

• March , June,  September, and

• December unaudited + December audited results

Class 2 CIFs will continue to submit their quaerterly reports but this time without taking into consideration the calculation of credit risks. 

Indeed ESMA has changed the way the capital requirements for investment firms is calculated in order to take into account off balance sheet positions instead of focussing 100% on, on balance sheet positions as investment firms unlike banks do not take large deposits or have large portfolios of retail and corporate loans. Consequently the new CRR requirements is a better suited combination of income statement and balance sheet risks captured by the K - Factors.

Read more about the reasoning of changes here.

So what has really changed for Class 2 Cyprus Investment Firms?

What did change is the replacement of Credit Risk with the K Factors; i.e focus on off balance sheet instead of balance sheet items.

What are these K Factors

These K factors take into consideration  clients funds held off balance sheet, client orders, daily money held,  hence representing a more accurate and realistic interpretation of the capital requirements needed by the CIFs.

Important Point: 

The CIFs need to make sure they have incorporated the appropriate systems and controls to extract the below information in an accurate and efficient manner on a daily basis. The CIF will have to demonstrate to the regulator that it has the capacity to extract these figures on a daily basis and can demonstrate how it came up with previous figures used in the CREP reports.

More details about the K - Factors below

The below K factors aim to capture the risks the investment firm poses to itself, its liquidity and its clients;

• Risk to Client: How can the investment firm harm its clients
• Risk to Market: How big the investment firms’ exposure is based on its positions
• Risk to Firm: Captures counterparty risk and trading operational risks

To be able to complete the new COREP forms and the K factors the investment firms will need to be able to generate automatically (not a strict requirement) the below information and apply it if applicable to their business:

• Total monthly assets under management
• Total daily client money held – Segregated and non segregated
• Assets safeguarded and administered
• Total daily client orders handled - Cash value
• Total daily client orders handled  - Derivatives
• Clearing Margin given - CMG additional detail
• Daily trading flow - cash trades
• Daily trading flow - derivative trades
• Five, if available counterparties or group of connected counterparties where the largest amount of client money are held
• Five, if available counterparties or group of connected counterparties where the largest amount of securities are held
• Five, if available counterparties or group of connected counterparties where the largest amount of firms own cash are deposited held
• Five, if available counterparties or group of connected counterparties where the largest amount of firms’ earnings is derived
• Five, if available, largest trading books exposures
• Five, if available, largest non-trading books exposures calculated including assets not recorded in the book

Other Changes

• ICAAP will be called ICARA

The ICAAP (Internal Capital Adequacy Assessment Process) will also need to change, now it is called ICARA and needs to take into consideration interrelations of clients orders, clients funds, daily order flow which replace credit risk. Hence for those preparing the actual ICAAP this is a major change as the entire ICAAP and stress testing scenarios will need to be redesigned based on operational risk, market risk and K Factors instead of operational risk, market and credit risks. 

• Forms submitted to CySEC

Forms 061,Form 082 and Form 082 are now replaced by Form 165-01 too as per below instructions:

• Deadlines

The deadlines do not change remain the same as before:

• Electronic Submissions to CySEC

Electronic submissions will continue to take place through CySEC’s portal.

They should not be digitally signed before the submission

All email communication with CySEC must include, in the subject, the CIF’s full name and its TRS’s username.

All submissions must include the following forms / documentation:

• Form 165-01
• Solo Trial balance or Consolidated Trial balance*
• Solo Balance sheet or Consolidated Balance sheet*
• Solo Profit and Loss a/c or Consolidated Profit and Loss a/c*

Disclaimer: The information provided in this article is for general informational purposes only and should not be construed as legal or tax advice. Please consult with a professional tax advisor for advice on your specific situation.

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