The FSA recently published its further consultation paper on strengthening capital adequacy.

Capital Requirements Directive 3 (CRD 3) was the subject of consultation by the Commission during spring 2009 and was published in the Official Journal of the European Union on 14 December 2010. Under the original timetable of CRD 3 (and as reflected in CP 09/29) the relevant national laws, regulations and administrative provisions were to come into force by 1 January 2011. However, due to changes in the final wording, most of the CRD 3 amendments are now required to be implemented by 31 December 2011 at the latest.

Key changes

The CRD 3 changes highlighted in CP 11/9 include:

  • strengthening capital requirements in the trading book
  • higher capital requirements for re-securitisations
  • extending the prudent valuation framework
  • requiring enhanced public disclosures under pillar 3 of the capital framework
  • amending the FSA rules for various technical amendments to the CRD.

Impact on smaller firms

The good news is that the proposed changes in CRD 3 as detailed in the May consultation paper do not have an impact for smaller firms; they should only be relevant to banks and full scope firms that are carrying out principal broking. The changes, which are focused around market risk in the trading book, predominantly affect those firms with a value at risk model permission. However, as detailed in the consultation paper CP 09/29, for firms applying the standard method to equity risk, the CRD 3 amendments will require them to calculate specific risk on equity positions by applying an 8% cut to the sum of their net short and net long positions, with the reduced 4% previously applied being removed.

An important reminder

From January 2011, the new BIPRU 10 amendments came into force. The changes had a significant impact as they exempted limited license and limited activity firms from the scope of BIPRU 10. This meant that FSA 008 submissions were not required for these exempted firms.

However, full scope firms, irrespective of size, do have to apply BIPRU 10. One item to highlight as a reminder is that institutions are now no longer exempted from the large exposure rules. The relevant rule is found in BIPRU 10.6, where it states that firms can have exposures exceeding 25% of their capital resources "so long as the total amount of such exposures does not exceed €150m".

However, irrespective of whether the exposure exceeds €150m or not, the exposure cannot exceed 100% of the firm's capital resources. This is where a number of firms have been caught out as the FSA focuses on ensuring that concentration risk is managed, even where the exposure is with recognised established banks. It must be highlighted that BIPRU 10.6.33 allows the FSA to waive the 100% limit on a case-by-case basis in exceptional circumstances. We remind firms to look at their current banking exposures and apply for any waivers as early as possible where the limits prescribed in BIPRU 10.6 are exceeded.

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