Telephone 020 3813 2890 for a free no obligation chat about your regulatory requirements with one of our compliance consultants.
Registered in England and Wales as limited company number 07626537 - Registered Office 120 Pall Mall, London, SW1Y 5EA
Here to help with Regulation and Compliance
IFR & IFD: K-Factor Calculations
New Capital Requirements for Investment Firms: K-factors
30th September 2019
Currently, investment firms in the European Union (EU) are subject to the prudential framework established under the Capital Requirements Regulation (CRR) and Capital Requirements Directive (CRD IV). Within the UK, such investment firms are known as either IFPRU firms or BIPRU firms.
However, under the new Investment Firm Regulation and Investment Firms Directive (IFR/IFD), a new prudential framework will be implemented that is more suited to the particular risks that investment firms face and will apply depending upon the size and nature of the firm. Those firms that are systemically important investment firms (Class 1 Investment Firms) will still be subject to the CRR/CRD IV prudential framework, whilst all other investment firms will come under the new IFR/IFD.
The new IFR/IFD prudential framework will see tailored capital requirements be implemented, including some based on new K-factors.
But what are K-factors?
K-factors will apply to those investment firms that fall under the new IFD and are essentially risk parameters that are used in the classification of investment firms and the new calculation methodology for capital requirements.
They are quantitative indicators that aim to identify risks that an investment firm may pose to clients, markets or liquidity, as well as to the firm itself.
These K-factors will mean that, in the future, investment firms will have to calculate their capital requirements on the basis of these new risk metrics. Furthermore, the K-factors will serve to determine whether an investment firm is to be classified as a small, non-interconnected company (i.e. Class 3 investment firm).
The K-factors have been divided into three groups by the European Commission, which then, in turn, consist of subgroups related to the respective risk:
A) risks to customers ("RtC"):
1. K-AUM – Assets under management
2. K-CMH – Client money held
3. K-ASA – Assets safeguarded and administered
4. K-COH – Client orders handled
B) risks to market access or liquidity ("RtM"):
1. K-CMG – Clearing member guarantee
2. K-NPR – Net position risk
C) risks to the firm itself ("RtF"):
1. K-CON – Concentration risk
2. K-DTF – Daily trading flow
Since K-factors will apply to those that fall under IFD, they will therefore apply to Class 2 Investment Firms (Non-systemically Important Investment Firms, above certain thresholds) and Class 3 Investment Firms (Small and Non-interconnected Investment Firms below the Class 1 and Class 2 Thresholds).
At present, the new rules are expected to take effect from January 2021.
Read our latest articles, news and views affecting compliance and regulation in the UK Financial Services Industry.
Please contact our Compliance Support Team for a free no obligation discussion of your regulatory requirements and how our regulatory & compliance consultants can help your business move forward compliantly.
Call by Telephone:
(020) 3813 2890