Securities And Banking Update - Capital ideas

Investment firms within the scope of the Capital Requirements Directive ("CRD") have much to do in 2007 in order to prepare for FSA's new post-transitional rules which come into effect on 1 January 2008. In a nutshell, firms must ensure that they:

can perform their Pillar 1 capital adequacy calculations, meet the new Pillar 1 capital requirements and satisfy FSA's new prudential reporting requirements;

have developed and documented an Internal Capital Adequacy Assessment Process ("ICAAP") as required under Pillar 2; and

can make the public disclosures required under Pillar 3.

This article highlights some key points concerning what is required for each Pillar.

Pillar 1

By the beginning of 2008, firms must be able:

to calculate capital resources and capital requirements in accordance with the rules set out in GENPRU and BIPRU at whatever levels are applicable; and

to meet the comprehensive set of new reporting requirements specified in FSA Instrument 2006/67 Annex C, which can be found under Instruments in the Handbook section of FSA's website.

In addition to these broad requirements, some firms may have more immediate, specific issues to deal with during 2007, including:

preparing their first consolidated return on FSA 009 in compliance with the consolidation rules set out in BIPRU 8;

determining whether the group includes a non-EEA sub-group and therefore should submit FSA 028;

assessing whether the firm needs to apply for limitations on its principal dealing permission in order to qualify for the limited licence or limited activity categories;

if the group is an investment firm group and includes no BIPRU firms which are neither limited licence nor limited activity, assessing whether it is advantageous to seek a waiver from consolidated capital requirements.

Pillar 2

The development of an ICAAP is likely to be the most challenging CRD implementation task facing BIPRU investment firms in 2007. It is also likely to be important to the firm since FSA has stated "the ICAAP will be a key input into, but not sole determinant of, the level at which Individual Capital Guidance is given".

In brief, the ICAAP is a process which management must develop for assessing the amount of capital and other resources needed to cover the firm's current risks and its future requirements, taking into account future plans and growth prospects, adverse market scenarios and wind-down costs...