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    EBA Issues SREP Guidelines and Standards for Investment Firms

    July 21, 2022

    The European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA) jointly published the final guidelines on common procedures and methodologies for the supervisory review and evaluation process (SREP) for investment firms. EBA also published the final draft regulatory technical standards on Pillar 2 add-ons for investment firms. Both the publications are based on the Investment Firms Directive and Regulation (IFD and IFR) and aim to harmonize supervisory practices regarding the supervisory review and evaluation process of investment firms.

    SREP is one of the main tools for supervision, through which competent authorities form a comprehensive view on the business model and risk profile of the supervised entity as well as its overall viability and sustainability. The guidelines specify common SREP procedures and methodologies that are proportionate to the different sizes and business models of investment firms as well as the nature, scale, and complexity of their activities. As part of SREP, a scoring system is introduced to facilitate the comparability across firms. The joint guidelines also specify the monitoring of key indicators and the use of supervisory measures as a result of the SREP assessment and put forward provisions on the application of SREP in the cross-border context. In specific, the guidelines  set out the common process and criteria for the assessment of the main SREP elements, including:

    • business model
    • governance arrangements and firm-wide controls
    • risks to capital and capital adequacy
    • liquidity risk and liquidity adequacy

    The recently published draft regulatory technical standards on Pillar 2 add-ons are meant to ensure a consistent European Union-wide determination of additional capital requirements to cover risks or elements of risks not covered or insufficiently covered by Pillar 1 requirements. The draft standards are relevant for class 2 and class 3 investment firms. The approach specified in these standards builds on the structure of own funds requirements set out in Article 11 of IFR, differentiating between class 2 and class 3 investment firms and reflecting various objectives of the own funds requirements. On the one hand, competent authorities are expected to determine, for class 2 and class 3 investment firms, additional own funds requirement to cover the risk of an unorderly wind-down, which could pose threats to their clients, counterparties, and the wider markets in which they operate in case of their failure. On the other hand, for class 2 investment firms only, competent authorities should determine additional own funds requirement to decrease the likelihood of a failure of the investment firm, by covering material risks related to their ongoing activities, including risks to clients, to markets, to the investment firms itself, and risks that are not addressed by any own funds requirements. The draft standards will be submitted to the European Commission for endorsement before being published in the Official Journal of the European Union. The technical standards should be in force when the SREP Guidelines IFD become applicable.


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    Keywords: Europe, EU, Banking, Securities, Investment Firms, IFR, IFD, SREP, Pillar 2, Basel, Regulatory Capital, Liquidity Risk, ESMA, EBA

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