A CAPITAL MARKETS UNION
On 26 June 2021 the new prudential framework for investment firms in the EU (including for Cyprus Investment Firms (CIFs)) has entered into force. The new framework forms part of the European Union’s (EU’s) action plan for a Capital Markets Union and comprises of:
- The IFR Regulation, which is the Regulation (EU) 2019/2033 of the European Parliament and of the Council of 27 November 2019 on the prudential requirements of investment firms and amending Regulations (EU) No 1093/2010, (EU) No 575/2013, (EU) No 600/2014 and (EU) No 806/2014; and
- The IFD Directive, which is the Directive (EU) 2019/2034 of the European Parliament and of the Council of 27 November 2019 on the prudential supervision of investment firms and amending Directives 2002/87/EC, 2009/65/EC, 2011/61/EU, 2013/36/EU, 2014/59/EU and 2014/65/EU.
The New Classification System
The new IFR /IFD framework introduces a new classification system for investment firms based on their activities, systemic importance, size, and interconnectedness as summarily described below:
Class 1A: Consists of firms which are considered systematically important firms and must seek authorisation as a credit institution under the CRR2/CRDV capital framework.
Class 1B: Consists of investment firms that will remain under CySEC’s supervision but will be supervised as CRR2/CRDV for prudential requirements.
Class 2: An investment firm that no longer meets any of the criteria in Class 3 below and shall be subject to the new IFR/IFD regime.
Class 3: Consists of investments firms that are deemed to be small and non-interconnected investment firms and will be subject to the new IFR/IFD regime under some exceptions.
The New CIF Requirements
The new IFR/IFD framework imposes various requirements on CIFs, including:
- New capital requirements introduced by Article 9 IFD for investment firms; the composition of the initial capital should be in line with the provisions of the IFR;
- Investment firms are required to apply K-factors (i.e., quantitative indicators reflecting the risk) to capture the risk they pose to customers, to market access, or to the investment firm itself;
- The IFR provides that investment firms should calculate their own funds requirement and provides the thresholds applicable according to the particular class in which the investment fund was classified into;
- Subject to exceptions, investment firms under Classes 2 and 3 must monitor and control their concentration risk in order to not exceed the limits imposed by Article 37 IFR;
- Subject to exceptions, investment firms under Classes 2 and 3 must hold an amount of liquid assets as per the provisions of the law;
- Disclosure obligations for Class 2 investment firms as well as for some Class 3 firms;
- Reporting requirements on investments firms; and
- Other supervisory requirements on Class 2 and 3 investment firms with regards to internal capital adequacy assessment processes (ICAAPs) as well as internal governance processes on the treatment of risks.
The CIF Services Portfolio of ServPRO
ServPRO is a well-established team of accountants, auditors, advocates and consultants in Cyprus. Our areas of expertise are Accounting & Finance, Advisory & Consulting, Audit & Assurance, Corporate & Legal, Economic Substance and Taxation.
Our team has a stellar track record in delivering practical solutions to corporate and individual clients with a spherical, solution-driven and detail-oriented approach, while demonstrating an aptitude of professionalism, integrity and commercial acumen.
Visit our website page on Cyprus Investment Firms (CIFs) for more information on the legal framework governing investment firms in Cyprus and contact us today for an initial consultation on establishing and operating a CIF.
For more information on this topic contact us by telephone (+35722021100) or email ([email protected]).