Ongoing monitoring of CIF Prudential Requirements

On the 19^th of May 2022, the Cyprus Securities and Exchange Commission (CySEC) published Circular C513 and reminds all Cyprus Investment Firms (CIF) about their obligation to employ appropriate administrative and accounting procedures, for the ongoing monitoring of their prudential requirements (Capital Adequacy Requirements). In addition, it emphasises the actions that need to be taken in case own funds and/or concentration limits fall below the minimum requirements.

Pursuant to the provisions of the Investment Firms Regulation and Directive (IFR/IFD), CIF should monitor their own funds’ requirements and concentration risks, by establishing an internal control framework that ensures:

1. effective and efficient operations;
2. adequate identification, measurement, and mitigation of risks;
3. the reliability of financial and non-financial information reported both internally and externally;
4. sound administrative and accounting procedures; and
5. compliance with laws, regulations, supervisory requirements and the investment firms’ internal policies, processes, rules, and decisions.

In this respect, Class 2 and Class 3 CIF must notify CySEC as soon as they become aware that their own funds fall below the relevant requirements, as well as Class 2 CIF whether they exceed their concentration limits. CySEC emphasises that it is unacceptable for a CIF to delay reporting such incidents through the normal submission of Prudential Forms 165-01/165-02.

At all times, a CIF shall ensure that its own funds’ requirements are met as per the IFR/IFD framework and the below rules:

A. Investment Firms shall have their funds equal or above to the HIGHEST of

1. The fixed overheads requirements = 0.25 of the preceding year’s fixed overheads,
2. The CIF Initial Capital Requirement,
3. The sum of the K-Factors
   • Risk to Client (for “Straight Through Process CIF”)
   • Risk to Client + Risk to Market + Risk to Firm (for “Market Maker or Dealing on Own Account CIF”).

*It is worth noting that for Class 3 CIF the Sum of the K-Factors is not applicable.

B. The initial capital of an Investment Firm is consisted by the

1. Common Equity Tier 1 capital (‘CET1’),
2. Additional Tier 1 capital (‘AT1’),
3. Tier 2 capital (‘T2’)

At ALL times, CIF must meet the following conditions:

• CET1 / the highest of point B to be greater or equal to 56%
• (CET1 + AT1) / the highest of point B to be greater or equal to 75%
• (CET1 + AT1 + T2) / the highest of point B to be greater or equal to 100%

Lastly, CySEC mandates all Cyprus Investment Firms to:

• Adopt the appropriate internal control mechanisms, which facilitate the ongoing monitoring of all their prudential requirements, considering the nature, scale, and complexity of their activities and business model.
• Notify CySEC prior to the normal submission of the Prudential Forms 165-01/165-02 and without undue delay, when they do not comply with their own funds’ requirements or exceed their concentration limits. For that purpose, a CIF needs to submit the Prudential Forms 165-01/165-02, based on their categorisation, via the TRS system, under exceptional reporting.
• Ensure that their internal control framework abides always by the applicable laws, regulations, and supervisory requirements.

The SALVUS Risk Management team has unique and extensive expertise in designing and developing regulatory reporting solutions. We can support you in implementing the required reports for monitoring your prudential requirements on a daily basis and preparing the quarterly prudential forms on your behalf.

Please contact us at info@salvusfunds.com or call us at +357 7000 7898 if you would like to ask additional questions or for support about meeting your prudential requirements.

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