Own Funds and Initial Capital
The initial capital and own funds requirements are set out in Parts 3 and 4 of the IFPR Regulations.
Non-S-NII (Class 2) firms are required at all times to have own funds (consisting of the sum of Common Equity Tier 1, Additional Tier 1 capital and Tier 2 capital, subject to certain conditions) which amount at least to the highest of the following:
- The permanent minimum capital requirement
- The fixed overheads requirement
- The K-factor requirement
S-NII (Class 3) firms, in turn, are required to have own funds equal to the higher of their permanent minimum capital requirement or their fixed overheads requirement.
The Permanent Minimum Capital Requirement
The permanent minimum capital requirement, which is required on an ongoing basis, acts as a floor for all levels of capital required under the IFPR, and must amount at least to the initial capital requirement.
The initial capital requirements for non-S-NII and S-NII (Class 2 & 3) investment firms are based on their activities, as summarised below:
£750,000: dealing on own account or underwriting or placing on a firm commitment basis (including for operators of organised trading facilities authorised to deal on own account).
£75,000: reception and transmission of orders, execution of orders on behalf of clients, portfolio management, investment advice, placing not on a firm commitment basis. These firms are not permitted to hold client money or securities belonging to clients.
£150,000: all other firms, including (but not limited to) those operating an MTF, and those operating an OTF with a limitation that prevents it from carrying out matched principal trading and dealing on own account.
The table below reflects the transitional provisions that will allow existing firms to reach their new minimum capital requirements over a 5-year period, in incremental steps. It should be noted that these requirements will now be denominated in GBP, as opposed to EUR.
The Fixed Overheads Requirement
The fixed overheads requirement must amount to at least one quarter of the investment firm’s fixed overheads of the preceding year, calculated using figures from the applicable accounting framework.
The IFPR uses “K-factors” - a methodology for calculating ongoing capital requirements”.
The K-factor requirements are a mixture of activity and exposure-based requirements, which are designed to create a capital requirement that is more directly proportional to the risk profile of an investment firm than was achievable under the previous CRD/CRR framework.
The K-factors specifically target those services and business practices that are most likely to generate risks for a particular investment firm. K-factors are divided into three groups, and they aim to capture the risk an investment firm can pose to clients, to market access or liquidity and to itself. The overall K-factor requirement must amount to at least the sum of the K-factors in respect of these three areas of risk.
The general principles and further details concerning the calculation of the three groups of K-factors – Risk-to-Client (RtC), Risk-to-Market (RtM) and Risk-to-Firm (RtF) – can be found Chapters 1, 2, 3 and 4 of Part 4 of the IFPR Regulations.