Which prudential rules apply to a Cypriot investment firm, and how are groups supervised?

The exam material describes the regime of the Capital Requirements Regulation, Regulation (EU) No 575/2013 (CRR), and the Capital Requirements Directive (CRD IV). CySEC applied it to every CIF through Directive DI144-2014-14 on prudential supervision and Directive DI144-2014-15 on its own discretions under the CRR. Since 26 June 2021 the EU has had a separate package for investment firms: the Investment Firms Regulation, Regulation (EU) 2019/2033 (IFR), which applies directly, and the Investment Firms Directive, Directive (EU) 2019/2034 (IFD), which Cyprus transposed by Law 165(I)/2021 on 5 November 2021. CySEC has since repealed DI144-2014-14.

CySEC's implementation guide sorts firms into classes. Class 1 firms deal on own account or underwrite and have assets of €30 billion or more; they must be authorised as credit institutions. Class 1-minus firms remain CIFs but keep applying the CRR, together with Law 97(I)/2021, which carries the CRD rules for them. This covers firms that deal on own account or underwrite and have assets of €15 billion or more, such firms that CySEC designates once they reach €5 billion, and firms allowed to opt in. Every other CIF is Class 2 or Class 3 and applies the IFR and Law 165(I)/2021.

A Class 3, or small and non-interconnected, firm meets every test in IFR Article 12. Its assets under management are below €1.2 billion. The client orders it handles are below €100 million a day for cash trades and €1 billion a day for derivatives. Its on- and off-balance-sheet total is below €100 million, and its gross revenue from investment services averages below €30 million over two years. It holds no client money, safeguards no client assets, and has no daily trading flow, net position risk, clearing margin or trading counterparty exposure. A firm that fails any one test becomes Class 2, unless it falls into Class 1 or Class 1-minus; if it fails only a size test, this happens after three months.

Initial capital, set by Law 165(I)/2021 section 9, is €750,000 for a firm that deals on own account or underwrites or places instruments on a firm-commitment basis. It is also €750,000 for a firm operating an OTF that deals, or may deal, on own account. It is €75,000 for a firm offering only reception and transmission, execution, portfolio management, investment advice or placing without a firm commitment, and not permitted to hold client money or securities. It is €150,000 for all other CIFs; see How does a firm become a Cypriot Investment Firm, and what must it keep doing?. After authorisation, own funds must always cover the highest of three amounts: the fixed overheads requirement, which is a quarter of the previous year's fixed overheads; the permanent minimum capital, equal to initial capital; and the K-factor requirement, which reflects the risks the firm poses and faces. Class 3 firms have no K-factor requirement.

The exam material describes a consolidated waiver that CySEC could grant to a group of investment firms meeting a list of conditions, such as no firm dealing on own account and no credit institution in the group. That waiver was CRR Article 15, which the IFR deleted with effect from 26 June 2021. Since then a parent investment firm or holding company has applied the IFR on a consolidated basis (Article 7). For a sufficiently simple group, CySEC may instead allow the group capital test (Article 8). The parent then holds own funds at least equal to the book value of its holdings in group investment firms, financial institutions, ancillary services undertakings and tied agents, plus its contingent liabilities towards them. CySEC may accept less, but never less than the subsidiaries' individual requirements plus those liabilities; subsidiaries outside the EU count with a notional requirement. The parent needs systems to monitor and control where group entities get their capital and funding. CySEC takes these decisions as group supervisor.

The exam material also lists transitional rules: CySEC required 100% of unrealised fair-value losses to count in CET1 from 1 January 2015, and deductions from CET1 were phased in at 40% in 2018, rising by ten points a year to 90% in 2023. It applies that schedule to deferred tax assets and to significant holdings in financial sector entities; in the CRR the 2018 to 2023 percentages applied only to deferred tax assets that relied on future profitability and existed before 1 January 2014 (Article 478(2)). All of this has ended: the fair-value phase-in at the end of 2017, grandfathering of older instruments on 31 December 2021 and the deduction schedule on 31 December 2023. A later, narrower filter for fair-value gains and losses on certain public-sector debt ended on 31 December 2025, so unrealised gains and losses now count in full. The IFR's own five-year transitional caps ended on 26 June 2026.