AIMA

The Alternative Investment Management Association

Alternative Investment Management Association Representing the global hedge fund industry

COREP reporting and CRD IV compliance – How are you positioned?

Priya Mehta, Associate Director

Buzzacott

Q1 2014

Capital Requirements Directive IV (CRD IV) now effective

CRD IV became effective from January 2014 and seeks to strengthen the existing prudential framework by setting out quantitative and qualitative enhancements to the definition of regulatory capital. Furthermore, capital buffers, liquidity requirements and leverage rules have been introduced for the first time for investment managers.

The relevant CRD IV requirements are set out in the European Directive 36/2013/EU and Regulation 575/2013 but need to be read jointly with the FCA’s consultation papers which clarify how rules are to be implemented in the UK. All these documents can now be found through a common link on the FCA’s website (http://www.fca.org.uk/firms/markets/international-markets/eu/crd-iv).

Who does CRD IV apply to?

The application of CRD IV is entirely dependent on the regulatory activities. Those with permissions for two or more of the following MiFID activities are caught:

  • Dealing on own account
  • Underwriting of financial instruments
  • Placing of financial instruments
  • Operating a Multilateral Trading Facility

Having permission to carry out the MiFID ancillary activity of ‘Safekeeping and administration of financial instruments for the account of clients, including custodianship and related services such as cash/collateral’ also puts a firm in the CRD IV category.

Investment firms not caught by the above are renamed as ‘BIPRU firms’ and continue to remain under CRD III.

What does this mean in practical terms?

If captured by CRD IV and categorised as an ‘IFPRU’ firm under the new Prudential Sourcebook, the immediate and the most important task is to assess whether existing capital is adequate to cover the capital requirements under CRD IV. Most CRD IV firms will realise that the existing risk capital requirements are now replaced by far more complex ‘Total Risk Exposure Amount’ (TREA). The old ‘Simplified Approach’ that calculated credit risk as 8% of the risk weighted assets is now discontinued and firms have to calculate credit risk with reference to ‘Exposure Classes’ and ‘Credit Quality Steps’.

CRD IV also introduces a new minimum Common Equity Tier 1 ratio of 4% of TREA, rising to 4.5% in 2015. This is potentially problematic for firms who have preference share capital or subordinated debt forming a part of their Tier 1 or Tier 2 capital.

COREP – are you ready?

The second important change is that of COREP reporting. Although firms will initially continue to prepare GABRIEL financial returns in the existing manner and frequency, they will also need to file additional returns to under COREP.  

COREP reporting is structured under the following 4 modules:

  • Own Funds incl. Leverage Ratios and IP Losses (COREP)
  • Large Exposures (COREP_LE)
  • Liquidity Coverage Ratio (COREP_LCR)
  • Net Stable Funding Ratio (COREP_NSFR)

Almost 50 returns may eventually be required by the above modules, capturing almost 2,000 line items of data. The good news is that not all returns are applicable to all firms and, in addition, many would only be applicable during the transitional period allowed by the FCA, for example, leverage rules do not apply till 31 December 2017.

The FCA has published a schedule of reference to help assess which returns would be applicable to which firms. For example, it is proposed that FSA003 - Capital Adequacy return is being replaced by five COREP Capital adequacy returns to be completed and submitted on a quarterly basis.

To further complicate matters, the FCA requires COREP returns to be converted to XBRL before submission through GABRIEL. The FCA have clarified that GABRIEL system will not provide this facility and the conversion of data will have to be performed using specialist conversion software such as that being supplied by ARKK solutions.

The key impact of all of this for firms is the requirement of technical expertise to decode COREP reporting and understand not just the underlying calculations, but also the content of the returns. Further, firms also have to deal with additional costs relating to the required software. 

And guess what will happen in a few years’ time?

As CRD IV was designed more with banks in mind, the Directive requires the EU Commission to carry out a review of what should be an appropriate prudential regime for investment sector firms. This is scheduled to be done by the end of 2015. So once investment firms finally get their heads around the new CRD IV rules these will almost certainly be replaced by a new regime. Watch this space…

fs@buzzacott.co.uk

www.buzzacott.co.uk

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