Calculation clarified
Investment firms that do not qualify as a 'small and not interconnected investment firm' have an own funds requirement composed, among other things, of the K-factors from the Investment Firm Regulation (IFR). The EBA recently published a Q&A(Refers to an external site) for the calculation of K-COH (client orders handled) and K-DTF (daily transaction flow), on its website, clarifying the relevant period for the calculating the COH K-factor. This Q&A also pertains to the calculation of K-DTF.
According to Article 20 of the IFR(Refers to an external site), for the purpose of calculating K‐COH, COH must be the rolling average of the value of the total daily client orders handled, measured throughout each business day over the previous six months, excluding the three most recent months. It must be calculated on the first business day of each month. This means that on 30 June of any given year, for example, the K-COH as calculated on 1 June must be taken into account rather than the K-COH as calculated on 1 July.
What we currently see happening quite frequently is that, for example, for the second quarter report of 2023 with reference date 30 June, institutions calculate K-COH as the daily averages for the months of March, February, January, December, November and October. They do so on the assumption that June, May and April are the three most recent months to be excluded. However, this is incorrect.
The following two examples serve to illustrate this.
The correct calculation takes the three most recent months from the first business day of the reference month when calculating K-COH. In the above example of the second quarter report of 2023 with reference date 30 June 2023 (i.e. calculating K-COH on 1 June 2023), the following periods must be excluded:
- 1 May 2023 - 31 May 2023 (monthly average of COH calculated on the first business day in June 2023)
- 1 April 2023 - 30 April 2023 (monthly average of COH calculated on the first business day in May 2023)
- 1 March 2023 - 31 March 2023 (monthly average COH calculated on the first business day in April 2023).
This means the following periods must be included:
- 1 February 2023 - 28 February 2023 (monthly average of COH calculated on the first business day in March 2023)
- 1 January 2023 - 31 January 2023 (monthly average of COH calculated on the first business day in February 2023)
- 1 December 2022 - 31 December 2022 (monthly average COH calculated on the first business day in January 2023).
Correct reporting from third quarter of 2023
The above clarification concerning Article 20 of the IFR(Refers to an external site) for K-COH also applies to Article 33 of the IFR(Links to an external site) for K-DTF. The method of excluding the three most recent months and the daily average trading volume of the remaining six preceding months is identical. After all, K-DTF must be measured throughout each business day over the previous nine months, excluding the three most recent months.
Institutions must report this correctly on the IFREP tabs I06.07, I06.08, I06.12 and I06.13. We expect them to do for the third quarter of 2023 at the latest.
