Commission Delegated Regulation (EU) 2023/1668 of 25 May 2023 supplementing Directive (EU) 2019/2034 of the European Parliament and of the Council with regard to regulatory technical standards specifying the measurement of risks or elements of risks not covered or not sufficiently covered by the own funds requirements set out in Parts Three and Four of Regulation (EU) 2019/2033 of the European Parliament and of the Council and the indicative qualitative metrics for the amounts of additional own funds (Text with EEA relevance)
Risk of disorderly wind-down
1. Competent authorities shall, having regard to the legal form, business model, the business and risk strategy, and the scale and complexity of the activities of an investment firm, during their supervisory review and evaluation process carried out in accordance with Article 36 of Directive (EU) 2019/2034, measure the risk of disorderly wind-down of the investment firm’s business by determining the amount of capital that would be considered adequate for that firm to be wound down in an orderly manner under plausible scenarios.
2. The measurement referred to in paragraph 1 shall be proportionate to the complexity, risk profile, and scope of operation of the investment firm, and to the potential impact of its wind-down on clients and markets, and shall include the following:
(a)
an estimation of the realistic time frame to wind down the investment firm;
(b)
an assessment of operational and legal tasks of the investment firm during the wind-down process over a realistic time frame;
(c)
the identification and assessment of material fixed and variable costs;
(d)
the identification and assessment of material risks or elements of risks that could materialise during the wind-down process;
(e)
any other aspect relevant for the wind-down process.
3. Where Directive 2014/59/EU of the European Parliament and of the Council ( 4 ) applies, available information on recovery actions and governance arrangements in the investment firm’s recovery or group recovery plan shall be taken into account by competent authorities for the purpose of paragraph 2, points (b) and (c), if the competent authorities consider that information sufficiently credible and reliable.
4. For investment firms subject to the initial capital requirement laid down in Article 9(1) of Directive (EU) 2019/2034, competent authorities shall include in their measurement the following:
(a)
the closure costs, including litigation costs for the purpose of paragraph 2, point (c), of this Article;
(b)
the loss in revenues and loss in the net realisable value of assets expected to be incurred due to the wind-down process for the purpose of paragraph 2, point (d), of this Article.
5. Competent authorities shall identify and quantify material costs, risks or elements of risks and shall determine the capital considered adequate to absorb them in accordance with paragraphs 1 and 2 of this Article.
Competent authorities shall use the relevant indicative qualitative metrics referred to in Article 6(1) and shall combine them with static and historical trend analysis, delivering their expert judgement as appropriate.
6. The capital considered adequate to cover the risk of disorderly wind-down of an investment firm’s business measured in accordance with this Article shall be at least equal to the fixed overheads requirement of that investment firm calculated in accordance with Article 13 of Regulation (EU) 2019/2033.
Material risks or elements of risks not covered or not fully covered by the K-Factor requirement set out in Part Three, Title II, of Regulation (EU) 2019/2033
1. Where the investment firm does not meet the conditions for qualifying as a small and non-interconnected investment firm as set out in Article 12(1) of Regulation (EU) 2019/2033, competent authorities shall, having regard to the business model, legal form, the business and risk strategy, and the scale and complexity of the activities of the investment firm, during their reviews carried out in accordance with Articles 36 and 37 of Directive (EU) 2019/2034, measure any material risk or material element of risk deriving from the investment firm’s ongoing activities, which that firm poses to itself, to its clients and to the market, and which is not covered or not fully covered by the K-factor requirement set out in Part Three, Title II, of Regulation (EU) 2019/2033.
Competent authorities shall determine the capital that would be considered adequate to cover the relevant risks related to the K-factor requirement.
2. The measurement referred to in paragraph 1 shall be made separately for each risk category set out as ‘Risk-to-Client’ (RtC), ‘Risk-to-Market’ (RtM) and ‘Risk-to-Firm’ (RtF) in Article 15 of Regulation (EU) 2019/2033.
By way of derogation from the first subparagraph, for investment firms subject to an initial capital requirement lower than the requirement laid down in Article 9(1) of Directive (EU) 2019/2034, where competent authorities deem a more granular quantification not feasible or overly burdensome, the measurement shall be performed on an aggregate level.
3. The measurement referred to in paragraph 2 shall identify and quantify material risks or elements of risks for each risk category, including risks from the use of the alternative internal model approach as referred to in Article 22, point (c), of Regulation (EU) 2019/2033, based on the indicative qualitative metrics set out in Article 6(2), (3) and (4), of this Regulation and on expert judgement to be delivered by competent authorities.
4. Competent authorities shall ensure that the capital considered adequate to cover material risks related to the K-factor requirement is not lower than the total K-factor requirement.
Material risks or elements of risks not covered by the own funds requirements set out in Parts Three and Four of Regulation (EU) 2019/2033
1. Where the investment firm does not meet the conditions for qualifying as a small and non-interconnected investment firm as set out in Article 12(1) of Regulation (EU) 2019/2033, competent authorities shall, having regard to the business model, the legal form, the business and risk strategy, and the scale and complexity of the activities of the investment firm, during their supervisory review and evaluation process set out in Article 36 of Directive (EU) 2019/2034, measure any material risk or material element of risk deriving from any of the investment firm’s ongoing activities, other than those referred to in Article 2 of this Regulation and not already covered by the own funds requirements of that firm set out in Parts Three and Four of Regulation (EU) 2019/2033, by determining on a risk-by-risk basis the additional capital considered adequate to cover material risks or elements of risks.
2. The measurement referred to in paragraph 1 shall comprise the identification, assessment and, where appropriate, the quantification of the following risk areas:
(a)
the risks posed to the security of the investment firm’s network and information systems to ensure confidentiality, integrity and availability of their processes, data, and assets;
(b)
the interest rate risk and credit risk arising from non-trading book activities.
For investment firms subject to an initial capital requirement lower than the requirement laid down in Article 9(1) of Directive (EU) 2019/2034, where competent authorities deem a more granular quantification not feasible or overly burdensome, the measurement shall be performed on an aggregate level.
3. When performing the measurement referred to in paragraphs 1 and 2, competent authorities shall use the relevant indicative qualitative metrics referred to in Article 6(5) and combine them with static and historical trend analysis, delivering their expert judgement as appropriate.
Total material risk not covered or not fully covered by the own funds requirements set out in Parts Three and Four of Regulation (EU) 2019/2033
1. Competent authorities shall calculate the total amount of additional capital considered adequate to cover material risks or material elements of risk posed by the investment firm’s ongoing activities as the sum of the capital considered adequate calculated in accordance with Articles 2 and 3.
2. Competent authorities shall measure the total material risk not covered or not fully covered by the own funds requirements set out in Parts Three and Four of Regulation (EU) 2019/2033 by determining the level of additional own funds required as the difference between the higher of the amounts calculated in accordance with Article 1 or paragraph 1 of this Article and the own funds requirements set out in Part Three or Part Four of Regulation (EU) 2019/2033.
General qualitative metrics for the determination of the additional own funds requirement
1. When determining the amount of the additional own fund requirements for the purposes of Articles 1, 2 and 3, competent authorities shall take into account the following:
(a)
the outcomes of the internal capital adequacy assessment process and the internal risk assessment process by the investment firm set out in Article 24 of Directive (EU) 2019/2034;
(b)
data reported in accordance with Articles 54 and 55 of Regulation (EU) 2019/2033;
(c)
the outcome of the reviews carried out in accordance with Articles 36 and 37 of Directive (EU) 2019/2034;
(d)
the results of any other supervisory activities;
(e)
other relevant inputs, including supervisory judgement.
2. Competent authorities shall ensure comparability in the quantification of the additional own funds requirement imposed across all investment firms under their supervisory remit.
Indicative qualitative metrics
1. For the purposes of Article 1(5), second subparagraph, the indicative qualitative metrics shall be the following:
(a)
the number of tied agents compared to total staff;
(b)
the average duration of a wind-down in the jurisdiction, taking into consideration the complexity of the investment firm’s business;
(c)
the share of non-cancellable contracts and their residual duration;
(d)
the identification of markets where the investment firm is the main service provider;
(e)
the value and liquidity of fixed assets that the investment firm would have to dispose of during a wind-down;
(f)
the average severance payments payable in case of a wind-down, taking into consideration employment legislation and contracts with employees.
2. For the purposes of Article 2, with regard to the measurement of the RtC, the indicative qualitative metrics shall be the following:
(a)
the amount of client money held over the preceding 5 years;
(b)
the amount of assets under management over the preceding 5 years;
(c)
the amount of assets safeguarded and administered for clients over the preceding 5 years;
(d)
the amount of losses or damages incurred by the investment firm due to breaches of its legal or contractual obligations over at least the preceding 5 years, including losses arising from the following:
(i)
unsuitable advice given to investors and related investors’ compensation;
(ii)
failure to establish, implement and maintain appropriate procedures to prevent breaches;
(iii)
trading or valuation errors;
(iv)
business disruption, system failures, failure of transaction processing or process management;
(v)
an action of the investment firm’s tied agents or appointed representatives for which the investment firm is liable;
(e)
specifically for investment firms holding client money, any inability of the investment firm to timely return client money when required and associated financial consequences over the past 5 years.
3. For the purposes of Article 2, with regard to the measurement of the RtM, the indicative qualitative metrics shall be the following:
(a)
the variability of the value of the positions, including due to changing market conditions;
(b)
the share of complex and illiquid products in the investment firm’s trading book, in terms of volume and net income;
(c)
specifically for investment firms using internal models, the availability of regular back-testing of models used for regulatory purposes.
4. For the purposes of Article 2, with regard to the measurement of the RtF, the indicative qualitative metrics shall be the following:
(a)
the daily trading flow and average daily trading flow over the preceding 5 years;
(b)
any significant operational events related to daily trading flow and associated financial losses over the preceding 5 years, including processing errors;
(c)
the variability of the investment firm’s income and revenues over the preceding 5 years;
(d)
any losses incurred due to variations in positions in financial instruments, foreign currencies and commodities over the preceding 5 years;
(e)
the default rate of clients or counterparties, and associated losses over the preceding 5 years;
(f)
any losses due to material changes in the book value of assets, including due to changes in market conditions and in the creditworthiness of counterparties;
(g)
the amounts and variability of payments or contributions under a defined benefit pension scheme over the preceding 5 years;
(h)
any concentration of the investment firm’s assets, including concentration of clients and counterparties, as well as sectoral and geographical concentration;
(i)
the share of off-balance sheet exposure compared to the investment total assets and related credit risk.
5. For the purposes of Article 3, the indicative qualitative metrics shall be the following:
(a)
any indication of significant financial risks not addressed by the own funds requirements set out in Article 11 of Regulation (EU) 2019/2033, in particular:
(i)
the average of total operational risk losses over gross income over the preceding 5 years;
(ii)
any significant operational events and associated financial losses over the preceding 5 years;
(iii)
the share of the investment firm’s net income coming from services or activities that are not listed in Section A of Annex I to Directive 2014/65/EU of the European Parliament and of the Council ( 5 ) ;
(b)
any indication of significant information and communication technology (ICT) risk, in particular:
(i)
the overall complexity of ICT architecture, including the share of outsourced ICT services;
(ii)
the number of material changes within the ICT environment over the preceding 5 years;
(iii)
any losses due to disruption caused by incidents affecting critical ICT services over the preceding 5 years;
(iv)
the number of cyberattacks and related losses over the preceding 5 years;
(c)
any indication of significant interest rate risk arising from non-trading book activities, in particular:
(i)
the volume of transactions based on interest rates or otherwise depending on interest rates, outside of the trading book of the investment firm;
(ii)
the investment firm’s hedging policy and potential misalignments between the position and the hedge, outside of the trading book of the investment firm.
6. Competent authorities may extend the list of indicative qualitative metrics set out in paragraphs 1 to 5 while ensuring that such additional metrics are proportionate to the investment firm’s size, complexity, business model, and operating model.
7. Competent authorities shall adjust the metrics set out in paragraphs 1 to 5 and shall use those adjusted metrics where any of the following conditions apply:
(a)
the metric is not appropriate given the specific legal form, structural changes, business and operating model of the investment firm;
(b)
the estimation of the metric is overly burdensome given the size and complexity of activities of the investment firm;
(c)
the estimation of the metric is not feasible due to the lack of reliable data, where such data do not fall under Articles 54 and 55 of Regulation (EU) 2019/2033 or Article 39(2), point (j), of Directive (EU) 2019/2034;
(d)
the estimation of the metric is not feasible due to the lack of reliable historical data, rendering the historical analysis period irrelevant. In such cases, competent authorities shall limit the period of historical analysis to the time that has elapsed since the last supervisory review and evaluation process set out in Article 36 of Directive (EU) 2019/2034.
Where it is not possible for competent authorities to adjust the metrics as referred to in the first subparagraph, competent authorities shall use alternative metrics as appropriate, while ensuring that such alternative metrics are proportionate to the investment firm’s size, complexity, business model, and operating model.
Entry into force
This Regulation shall enter into force on the twentieth day following that of its publication in the Official Journal of the European Union .
Source: EUR-Lex (Publications Office of the EU), © European Union, reuse permitted under Commission Decision 2011/833/EU.
