CySEC issued Circular C462 to inform the CIFs that is amending Circular C417 regarding the prudential treatment of crypto assets. Therefore, the prudential treatment of crypto assets will be as follows:
A. Calculation of own funds and capital adequacy ratio (Pillar I)
- Direct investment in crypto assets on a non-speculative basis (banking book exposure)
When a CIF invests directly in crypto assets on a non- speculative basis (banking book exposure), it should deduct this from its own funds. - Direct investment in crypto assets on a speculative basis (trading book exposure)
When a CIF invests directly in crypto assets on a speculative basis, it should treat these as investments in a derivative product subject to both of the following risks:
i. Counterparty Credit Risk (“CCR”) calculated in accordance with Section 1 ‘Trading counterparty default’ of the IFR and the CIF should apply a 32% potential future exposure percentage (PFCE) per Art. 29(7) of IFR
ii. Market Commodity Risk is calculated according to Articles 355 to 361 of the CRR. - Direct investment of CIFs’ clients in crypto assets and/or in financial instruments relating to crypto assets with the CIF acting as the counterparty to these transactions
When a CIF acts as the counterparty to its clients’ trades by taking the opposite position to each client’s transaction in crypto assets, and/or in financial instruments on crypto assets, the CIF is subject to Counterparty Credit risk and Market Commodity Risk, in accordance with the methodologies set out in point 2 above, as the CIF is acting as a market maker for its clients.
B. Internal Capital Adequacy Assessment Process (‘ICAAP’) (Pillar II)
CIFs should assess the risks emanated from trading in crypto assets, and/or in financial instruments relating to crypto assets, for their own account or for their clients within the Internal Capital Adequacy Assessment Process (ICAAP). The assessment and discussion of the risks associated with the activity in crypto assets should be included together with a sensitivity analysis that shows how the risks identified affect the CIFs’ projections. In addition, any mitigations should also be discussed, stating any additional capital that should be held in relation to the identified risks.
C. Pillar III disclosures
CIFs should disclose within their Pillar III disclosures any material crypto-asset holdings and include information on:
- the exposure amounts of different crypto-asset exposures,
- the capital requirement for such exposures and
- the accounting treatment of such exposures
D. Enhancement of risks management procedures associated with crypto assets
CIFs, which trade in crypto assets, and/or in financial instruments relating to crypto assets, should revisit their risk management procedures and strategies and ensure that all risks associated with this product are duly taken into consideration.