Cyprus Investment Firms – CIF Class 2 – Changes to Capital Adequacy Reports – Financial Services

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Cypriot investment firms

This article should be read in conjunction with the article “Cypriot Investment Firms – Changes to Capital Requirements and Reporting”.

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

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

COREP PERIODS

  • March, June, September and

  • Unaudited December results + audited December results

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

Indeed, ESMA has changed the way capital requirements for investment firms are calculated to take into account off-balance sheet positions instead of focusing 100% on balance sheet positions, as firms investment companies, unlike banks, do not take large deposits or have large personal and business loan portfolios. Therefore, the new CRR requirements are a more suitable combination of the P&L and balance sheet risks captured by the K-factors.

Read more about the reasoning for the changes here.

So what has really changed for Cypriot class 2 investment firms?

What has changed is the replacement of credit risk by K-factors; that is, focus on off-balance sheet items rather than on-balance sheet items.

What are these K factors

These K-factors take into consideration client funds held off-balance sheet, client orders, cash held daily, thus representing a more accurate and realistic interpretation of the capital requirements required by CIFs.

Important point:

CIFs should ensure that they have incorporated the appropriate systems and controls to extract the information below accurately and efficiently on a day-to-day 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 arrived at the previous figures used in CREP reports.

More details on the K-factors below

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

  • Client risk: how can the investment firm harm its clients?

  • Market risk: how much exposure do investment firms have based on their positions?

  • Business risk: captures counterparty risk and operational trading risks

In order to be able to complete the new COREP forms and K-factors, investment firms will need to be able to automatically generate (which is not a strict requirement) the information below and apply it if applicable to their activity:

  • Total monthly assets under management

  • Total daily funds held by clients – Segregated and non-segregated

  • Assets protected and administered

  • Total Daily Customer Orders Fulfilled – Cash Value

  • Total daily client orders processed – Derivatives

  • Clearing margin given – additional detail from CMG

  • Daily trading feed – spot trades

  • Daily trading feed – derivatives transactions

  • Five, if available counterparties or group of related counterparties where the largest amount of client money is held

  • Five, if available counterparties or group of related counterparties where the largest number of securities is held

  • Five, if available counterparties or group of related counterparties where the largest amount of the firm’s own cash is deposited held

  • Five, if available counterparties or group of related counterparties from which most of the companies profits are derived

  • Five, if available, largest trading book exposures

  • Five, if any, largest non-trading book exposures calculated taking into account off-book assets

Other Changes


  • The ICAAP will be called ICARA

The ICAAP (Internal Capital Adequacy Assessment Process) will also have to change, now it is called ICARA and must take into consideration the interrelationships of customer orders, customer funds, daily order flow which supersedes credit risk. Therefore, for those who prepare the actual ICAAP, this is a major change as the whole set of ICAAP scenarios and stress tests will need to be re-thought based on operational risk, market risk and K-factors instead of operational risk, market and credit risk.

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




Form 165-01

XX_yyyymmdd_FORM165-01 (XX= CIF TRS code)

XX_yyyymmdd_FRMX165-01

The deadlines do not change remain the same as before:




Class 2

Form 165-01 ‘Declaration for class 2’

Quarterly

March 31 (Q1)


June 30 (T2)
September 30 (Q3)


December 31 (Q4)

May 12 (Q1)


August 11 (Q2)


November 11 (Q3)


February 11 (Q4)


  • Electronic submissions to CySEC

Electronic submissions will continue to take place via the CySEC portal.

They must not be digitally signed before submission

All email communications with CySEC must include the CIF’s full name and TRS username in the subject line.

All submissions must include the following forms/documents:

  • Form 165-01

  • Solo Trial Balance or Consolidated Trial Balance*

  • Individual balance sheet or consolidated balance sheet*

  • Solo Profit & Loss a/c or Consolidated Profit & Loss a/c*

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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