IFD/IFR Regulation Affects Categorizations, Capital Calculations, And Reporting

Are The Complexities Of The New IFD/IFR Regulation To Investment Firms As Kryptonite Is To Superman

Even though investment firms have different primary business models versus lending institutions, to date, for regulatory purposes many have been considered credit institutions and accordingly report under the Basel-driven capital requirements regulation (CRR). The CRR approach is too broad to effectively account for the risks faced by both investment firms and credit institutions. The Investment Firms Regulation (IFR) seeks to create requirements proportionate to the size of the firms expected to comply, based on designated categories determined by thresholds that use K-factors (quantitative indicators). However, just as it may be surprising that kryptonite makes Superman weak, the IFD/IFR regulation unexpectedly makes things more complicated.

The K-factor methodology is the most significant change to the IFD/IFR regulation and may cause the most distress for organizations. Firms must continuously monitor eligibility thresholds and provide evidence of such to regulators, all while accounting for the risks covered by K-factors — market, credit and large exposure.

With the June 26, 2021 deadline looming, firms operating in Europe must implement the IFD/IFR regulation based on their designated category. Reporting for the impending IFD/IFR regulation will include new data collection, categorization, capital calculations, and requirements, plus, reporting will be more frequent. Layers of complications may leave firms feeling like they need Superman-style help.

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