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ICAAP Policy Rule for investment firms and investment institutions under the Financial Supervision Act

Policy rule

Published: 24 July 2015

Investment firms are required to periodically make an assesment of the risks to which they are exposed, the degree to which these risks are mitigated and the amount of capital needed to hedge any residual risk1. This internal capital adequacy assessment process or ICAAP is a comprehensive assessment of all the risks to which an institution is or may be exposed. The ICAAP requirement also applies to investment fund managers that have the right to perform specific activities or provide specific services2.

The ICAAP Policy Rule for investment firms and investment institutions (Beleidsregel ICAAP beleggingsondernemingen en beleggingsinstellingen Wft 2015) provides a clarification of DNB's expectations regarding the ICAAP of investment firms and investment fund managers and can serve as a guideline in compiling the ICAAP document.

Due to the heterogeneous nature of the Dutch financial sector, the policy rule is only meant to offer guidance – not all the risks described in the policy rule equally apply to all investment firms and investment funds.

At the same time, the list of risks is not exhaustive, and each firm or fund can add their own specific risks. Institutions are required to make their own assessment of all the risks that are relevant to them, and must substantiate them in the ICAAP document.

In view of the proportionality principle, DNB takes the nature, scale and complexity of the institution's activities into account in assessing ICAAP compliance. Consequently, we expect large, complex institutions to make a more comprehensive ICAAP assessment compared to smaller institutions with relatively uncomplicated activities. We will also apply the proportionality principle in our supervisory review and evaluation process (SREP)3 of an institution's ICAAP.

The overview included in Annex 1 of the policy rule will help institutions in compiling the ICAAP document and sets out which information needs to be included as a minimum. However, this is not a prescriptive document and institutions are free to compile their ICAAP document in a different format.

[1] Pursuant to Section 3:17(2), opening words and under c, of the Financial Supervision Act (Wet op het financieel toezicht – Wft) and Section 24a(1) of the Decree on Prudential Rules for Financial Undertakings (Besluit prudentiële regels Wft – Bpr), an investment firm must have sound, effective and comprehensive strategies and procedures in place enabling it to ensure that the size, composition and distribution of its actual own funds match the size and nature of the short-term and long-term risks to which it is or may be exposed.

[2] This concerns investment fund managers that have the right to perform specific activities or provide specific services under Section 2:67a(2) of the Wft: (a) managing individual assets; (b) providing advice on financial instruments in a professional or business capacity; (c) custody and administration of units in investment funds and undertakings for collective investment in transferable securities (UCITS); and/or receiving and transmitting orders regarding financial instruments from customers in a professional or business capacity.

[3] See Section 3:18a of the Wft and Section 97ff. of CRD IV