CySEC on 2^nd February 2021, issued Circular C426 which analyses the new prudential framework that the investment firms will be subject to. More specifically, on 26^th June 2021, the Investment Firms Regulation (EU) 2019/2033 (‘IFR’) and Investment Firms Directive (EU) 2019/2034 (‘IFD’) comes into force, thus, all CIFs should comply with the new prudential regime which is different and independent from the Regulation EU No. 575/2013 (CRR) and Directive DI144-2014-14 which are applicable today.

Some of the main changes that the new prudential framework shall introduce are the following:

Initial capital requirements

New initial capital requirements for the authorization of all Investment Firms required pursuant to Art.15 of Directive 2014/65/EU (section 16 of the Law) to provide any of the investment services and/or perform any of the investment activities listed below:

The initial capital of an Investment Firm shall consist of the Common Equity Tier 1 capital (‘CET1’), Additional Tier 1 capital (‘AT1’) and Tier 2 capital (subject to certain conditions – Art. 9 of IFR).

European Banking Authority (‘EBA’) published seven final draft technical standards regarding IFD/IFR  

EBA published a package of seven (7) final draft Regulatory Technical Standards (RTS) related to the implementation of IFR and IFD which have been submitted to the European Commission.

These final draft RTS, which are part of the phase 1 mandates of the EBA roadmap on investment firms, will ensure a proportionate implementation of the new prudential framework for investment firms taking into account the different activities, sizes and complexity of investments firms.

The relevant RTS can be found here.

Reporting and disclosure requirements under IFR/IFD

On 4th June 2020, the EBA issued its draft Implementing Technical Standards (ITS) on reporting requirements for investment firms under Article 54(3) of IFR and on disclosures requirements under Article 49(2) of IFR.

Along with the ITS, EBA introduced a set of templates and instructions for class 2 investment firms (Annexes I and II of the Draft ITS) and a set of templates and instructions for class 3 firms (Annexes III and IV of the Draft ITS), where the supervisory reporting framework incorporates different and tailored reporting templates with different frequencies.

The templates mentioned above can be found here.

Actions to be taken by the CIFs

CIFs are urged to study the IFR/IFD carefully, along with the final draft RTS issued, so as to:

a) Identify the class they will be categorized at from 26th June 2021,*

b) Familiarise themselves with the new templates and the way their new capital requirement will be calculated,*

c) Identify the data needed to be collected and reported, especially in regards to the calculation of K-Factors,*

d) Review their internal records and systems and make the necessary changes to ensure that the required data for the K-Factors (i.e. assets under management, daily trading flow, clients’ orders held, etc) will be available to calculate their new capital requirements. This information should be readily available at all times.

CIFs should make their own assessment on the impact that the IFR and IFD will have on their own funds, concentration risk, liquidity risk, disclosure, reporting, remuneration requirements and take the necessary early actions to ensure compliance by the date of entry into force i.e. on 26^th June 2021.

*CIFs should also consult the CySEC practical guide for the new prudential framework for Investment Firms, which can be found here.

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CySEC issued on 6^th of April 2020 Circular C375, following ESMA’s public statements regarding the application of MiFID II / MiFIR requirements due to the outbreak of COVID-19, and adopted the recommendations of the below mentioned public statements. These public statements are referred to the recording of telephone conversations, the publication of reports by execution venues and firms as required under RTS 27 and 28 and the new tick size regime for systematic internalisers. In particular:

1. Clarification of issues related to the application of MiFID II requirements on the recording of telephone conversations

MiFID II states that mandatory records to be kept by firms include, amongst other things, recording of telephone conversations relating to, at least, transactions concluded when dealing on own account and the provision of client order services that relate to the reception, transmission and execution of orders.

According to the ESMA public statement, in case the recording of relevant conversations may not be practicable due to the exceptional circumstances created by the COVID-19 outbreak, investment firms must adopt other alternative arrangements to ensure full compliance with the existing regulatory requirements.

2. Clarification of issues related to the publication of reports by execution venues and firms as required under RTS 27 and 28

Taking into account the exceptional circumstances created by the COVID-19 outbreak, CySEC followed the recommendation of ESMA public statement regarding the publication of reports RTS 27 and 28 by execution venues and firms. To this end:

a. execution venues unable to publish RTS 27 reports due by 31 March 2020 may only be able to publish them as soon as reasonably practicable after that date and no later than by the following reporting deadline (i.e. 30 June 2020); and

b. firms may only be able to publish the RTS 28 reports due by 30 April 2020 on or before 30 June 2020

3. Actions to mitigate the impact of COVID-19 on the EU financial markets regarding the new tick size regime for systematic internalisers

In addition, ESMA issued a Public Statement on 20 March 2020 regarding the compliance with the new tick size regime for systematic internalisers, introduced to MiFIR by Regulation (EU) No 2019/2033 (‘Investment Firm Regulation’ or ‘IFR’).

ESMA understands that the compliance with the new tick size requirements as of 26 March 2020 could create unintended operational risks for EU market participants in the current market situation in the context of the increasing spread of the COVID-19 pandemic and therefore ESMA is issuing the abovementioned public statement to ensure coordinated supervisory actions needed in response to the effect of the aforementioned adverse events on the application of IFR for systematic internalisers.

ESMA expects competent authorities not to prioritise their supervisory actions in relation to the new tick-size regime introduced in MiFIR towards systematic internalisers, as of 26 March 2020 and until 26 June 2020, and to generally apply their risk-based supervisory powers in their day to-day enforcement of applicable legislation in this area in a proportionate manner.

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