What this chapter covers
Capital adequacy rules make sure that an investment firm holds enough capital, and today enough liquid assets, for the risks it runs. The exam material describes the Capital Requirements Regulation (CRR) and CRD IV as they applied to every Cypriot investment firm (CIF). Since 26 June 2021 most CIFs have followed the Investment Firms Regulation (IFR) instead and, since 5 November 2021, Law 165(I)/2021; only banks and the few Class 1-minus CIFs still apply the CRR. The first notes cover the regime, own funds and buffers, risk weights and large exposures.
The middle notes deal with risk governance: the board, the risk committee and the risk management function, the processes for each type of risk, country-by-country reporting and pay. Two notes then explain CySEC's supervisory review and evaluation process (SREP): what it is for and its five stages.
The last group covers the firm's own internal capital adequacy assessment process (ICAAP): its principles, the Pillar 1 risks, the risks Pillar 1 only partly captures, the Pillar 2 risks, the risk register and stress testing. Each note teaches what the exam material says and then what applies today; for Class 2 CIFs the ICAAP now sits within a wider assessment that also covers liquidity.
The 13 topics
Each note starts with a short answer and a table of the facts to remember.
Capital and the prudential regime
- Which prudential rules apply to a Cypriot investment firm, and how are groups supervised?Which regime applies to a CIF today, the four classes of firm, initial capital, the own funds floor, group supervision and the end of the transitional rules.€750,0009 min
- What counts as own funds, and which capital ratios and buffers must be met?CET1, AT1 and Tier 2, the CRR ratios and their IFR equivalents, the capital buffers and the maximum distributable amount.4.5% / 6% / 8%2.5%9 min
- How are sovereign and public-sector exposures risk-weighted, and what are the large exposure limits?Risk weights for governments, central banks and public sector entities, equivalent third countries, and the large exposure limits.25%€150 million7 min
Risk management and governance
- Who governs risk in a CIF: the board, the risk committee and the risk management function?The board's duties on risk, the risk committee, the risk management function, recovery plans and the reporting of high earners.€100 million8 min
- What processes must a CIF have for credit, market, liquidity, operational and leverage risk?The processes for credit, residual, concentration, market, interest rate, operational, liquidity and leverage risk.3%8 min
- What must a CIF report country by country, and what rules govern variable pay?The six country-by-country items, return on assets, pay policy principles, the variable pay rules and the remuneration committee.100% / 200%3 to 5 years9 min
Supervisory review
- What is the SREP, how intense is it, and what does it decide?What CySEC's supervisory review is for, its legal basis today, how often and how deeply a firm is reviewed, and what the outcome means.9 min
- What are the five stages of CySEC's SREP, and what happens at each?Planning, the ICAAP review, additional information, supervisory measures and validation, and today's framework of ten components.6 min
Internal capital assessment and risk types
- What is the ICAAP for, who owns it, and what principles must it follow?The three aims of the ICAAP, who designs, approves and checks it, its principles, and the wider assessment Class 2 CIFs now carry out.3 to 5 years8 min
- What are the Pillar 1 risks, and how are credit, market and operational risk defined?Credit, market and operational risk defined, direct and indirect market risk, and what takes the place of Pillar 1 for IFR firms.8 min
- Which risks does Pillar 1 only partly capture, and what triggers each?Credit concentration, residual, securitisation, settlement and foreign exchange risk: what triggers each and how a CIF assesses it.6 min
- What are the Pillar 2 risks a CIF must assess in its ICAAP?Liquidity, business, legal and compliance, reputational, strategic and group risk, and other risks an ICAAP review may reveal.3 to 5 years6 min
- What goes in a risk register, and how do the three stress-testing methods differ?What a risk register records, and how sensitivity analysis, scenario analysis and reverse stress testing differ.6 min
The numbers to know
Every figure in this chapter, with the note that explains it.
| Figure | What it is | Note |
|---|---|---|
| €75,000 · €150,000 · €750,000 | Initial capital of a CIF, which is also its permanent minimum capital under the IFR: €75,000 for limited services without client assets, €750,000 for own-account dealing, firm-commitment underwriting or an OTF that deals on own account, and €150,000 for the others | Topic 1: Which prudential rules apply to a Cypriot investment firm, and how are groups supervised? |
| 56% · 75% · 100% | Shares of its own funds requirement that an IFR firm's CET1, Tier 1 and total own funds must reach | Topic 2: What counts as own funds, and which capital ratios and buffers must be met? |
| 4.5% · 6% · 8% | CET1, Tier 1 and total capital ratios under the CRR for banks and Class 1-minus CIFs, plus a capital conservation buffer of 2.5% in CET1 | Topic 2: What counts as own funds, and which capital ratios and buffers must be met? |
| 25% | Large exposure limit for one client or connected group: 25% of Tier 1 capital under the CRR, or 25% of own funds in a Class 2 CIF's trading book under the IFR | Topic 3: How are sovereign and public-sector exposures risk-weighted, and what are the large exposure limits? |
| €100 million | Average on- and off-balance-sheet assets over four years above which a Class 2 CIF needs risk and remuneration committees and applies the full variable pay rules | Topic 6: What must a CIF report country by country, and what rules govern variable pay? |
| 3 to 5 years | Horizon of the forward-looking capital plan and financial projections in a CIF's ICAAP | Topic 9: What is the ICAAP for, who owns it, and what principles must it follow? |