EC Regulation Sets Out Methods for Measuring K-Factors Under IFR
The European Commission (EC) published the Delegated Regulation 2022/25, which supplements the Investment Firms Regulation (IFR or Regulation 2019/2033) with respect to the regulatory technical standards specifying the methods for measuring the K-factors referred to in Article 15 of the IFR. Regulation 2022/25 sets out provisions for methods to measure the risk-to-client K-factors and risk-to-firm K-factors. Regulation 2022/25 shall enter into force on the twentieth day following that of its publication in the Official Journal of the European Union.
Some of the K-factors, such as the net position risk K-factor (K-NPR), the concentration risk K-factor (K-CON), and the trading counterparty default K-factor (K-TCD), do not require further specifications as IFR details the methods for measuring them. However, in other cases such as assets under management (AUM), client money held (CMH), client orders handled (COH), assets safeguarded and administered (ASA), and daily trading flow (DTF), the methods for measuring those factors would benefit from further clarifications. For the purposes of measuring its risk-to-client K-factors in accordance with Article 16 of IFR, Regulation 2022/25 sets out that an investment firm shall include within each of the AUM, CMH, ASA, and COH factors, respectively, any amounts that relate to the investment services and activities of the investment firm, carried out by any tied agents registered to act on its behalf. Regulation 2022/25 also sets out provisions for the methods for measuring
- the assets under management in case of non-discretionary advisory arrangements of an ongoing nature and discretionary portfolio management
- client money held and assets safeguarded and administered
- the execution of orders in client orders handled
- the reception and transmission of orders in client orders handled
- cash trades for the purposes of client orders handled and daily trading flow
- derivatives for the purpose of client orders handled and daily trading flow
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Effective Date: January 31, 2022
Keywords: Europe, EU, Banking, Securities, IFR, Regulatory Technical Standards, K-Factor Regime, Investment Firms, Regulatory Capital, EC
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