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16 June 2021 Supervision Supervision label Supervision Q&A

Question 1:

Can investment firms apply for exemption from the limits with regard to concentration risk for certain exposures, as meant in Article 41(2) of the IFR?

Answer:

Yes, for covered bond exposures we may grant exemption of 80% of the nominal value. It is possible to apply for exemption for intragroup exposures (see Question 2)

Based on Article 41(2) of the IFR we may fully or partially exempt exposures from the application of the limits as specified in Article 37 of the IFR. This concerns exposures to (i) covered bonds and (ii) exposures incurred by an investment firm to its parent company, to other subsidiaries of that parent company or to its own subsidiaries (i.e. intragroup exposures).

Question 2:

How can an investment firm apply for exemption from the limits with regard to concentration risk for intragroup exposures?

Answer:

Based on Article 41(2), under b, of the IFR we may grant exemption from the limits with regard to concentration risk for intragroup exposures, provided both conditions listed in Article 41(2), under b, of the IFR are met. Investment firms must submit the following information when applying for exemption.

  1. An up-to-date organisation chart of the group, and a specification of the entities wishing to apply for the intra-group exemption.

  2. A description of the group's risk management policies and controls and how they are formulated and applied centrally.

  3. The contractual basis of the group-wide risk management framework, if any, and additional documentation, such as the risk policies of the group companies for credit risk, market risk, liquidity risk and operational risk.
  4. iv. A description of the parent company's scope for enforcement of group-wide risk management.

  5. A description of the mechanism that ensures prompt transfer of own funds and repayment of liabilities by any of the group entities in the event of financial difficulties.

  6. A letter, duly signed by a legal representative of the parent company and approved by the management body, stating that the investment firm at group level meets all conditions included in Article 41(2) of the IFR.

  7. A legal opinion from an independent, external third party or an internal legal department, approved by the parent company's management body, confirming that there are no impediments – beyond any restrictions imposed by company law – to the transfer of assets or repayment of liabilities by the parent company under applicable laws and regulations (including tax law) or legally binding agreements.

  8. A statement signed by the legal representatives and approved by the management bodies of the parent company and the group entities wishing to apply Article 41(2) of the IFR, stating that there are no practical impediments to the financing of the transfer of funds or repayment of liabilities.

We will then assess whether the application meets the conditions of Article 41(2) of the IFR before granting the exemption. 

Question 3:

How can investment firms apply for permission to temporarily exceed the limits with regard to concentration risk and restore compliance within a limited period, as meant in Article 38(2) of the IFR?

Answer:

Under Article 38(2) of the IFR we may grant temporary permission to investment firms that exceed the limits with regard to concentration risk as referred to in Article 37 of the IFR to restore compliance within a limited period. We will grant permission provided i) the exposures were not the result of regular transactions involving credit risk and ii) the exposures do not exceed 100% of the required own funds. To ensure we can assess whether the conditions of Article 38(2) of the IFR are met, investment firms must submit the following information when applying for permission.

  1. An overview of the size of exposures, the (group of affiliated) customers to which the investment firm is exposed, and the investment firm's regulatory capital.

  2. An explanation of why the excess occurred and why the investment firm was unable to foresee and prevent it.

  3. An overview of historical limit breaches and the (group of affiliated) customers to which the investment firm was exposed.

  4. A plan demonstrating how the investment firm will restore compliance in the foreseeable future.

We will then assess whether the application meets the conditions of Article 38(2) of the IFR before granting permission. 

Sector(s)

  • Investment firms