Regulation (EU) 2019/2033 of the European Parliament and of the Council of 27 November 2019 on the prudential requirements of investment firms and amending Regulations (EU) No 1093/2010, (EU) No 575/2013, (EU) No 600/2014 and (EU) No 806/2014 (Text with EEA relevance) (c. 2033)

PART FOUR U.K. CONCENTRATION RISK

Article 35 U.K. Monitoring obligation

1. Investment firms shall monitor and control their concentration risk in accordance with this Part by means of sound administrative and accounting procedures and robust internal control mechanisms.

2. For the purposes of this Part, the terms ‘credit institution’ and ‘investment firm’ include private or public undertakings, including the branches of such undertakings, provided that those undertakings, if they were established in the Union, would be credit institutions or investment firms as defined in this Regulation, and provided that those undertakings have been authorised in a third country that applies prudential supervisory and regulatory requirements at least equivalent to those applied in the Union.

Article 36 U.K. Calculation of the exposure value

1. Investment firms that do not meet the conditions for qualifying as small and non‐interconnected investment firms set out in Article 12(1) shall calculate the exposure value with regard to a client or group of connected clients for the purposes of this Part by adding together the following items:

(a) the positive excess of the investment firm’s long positions over its short positions in all the trading book financial instruments issued by the client in question, the net position for each instrument calculated in accordance with the provisions referred to in points (a), (b) and (c) of Article 22;

(b) the exposure value of contracts and transactions referred to in Article 25(1) with the client in question, calculated in the manner laid down in Article 27.

For the purposes of point (a) of the first subparagraph, an investment firm that, for the purposes of the RtM K‐factor requirement, calculates own funds requirements for the trading book positions in accordance with the approach specified in Article 23 shall calculate the net position for the purposes of the concentration risk of those positions in accordance with the provisions referred to in point (a) of Article 22.

For the purposes of point (b) of the first subparagraph of this paragraph, an investment firm that, for the purposes of K‐TCD, calculates own funds requirements by applying the methods referred to in Article 25(4) of this Regulation shall calculate the exposure value of the contracts and transactions referred to in Article 25(1) of this Regulation by applying the methods set out in Section 3, 4 or 5 of Chapter 6 of Title II of Part Three of Regulation (EU) No 575/2013.

2. The exposure value with regard to a group of connected clients shall be calculated by adding together the exposures to the individual clients within the group, which shall be treated as a single exposure.

3. In calculating the exposure value with regard to a client or a group of connected clients, an investment firm shall take all reasonable steps to identify underlying assets in relevant transactions and the counterparty of the underlying exposures.

Article 37 U.K. Limits with regard to concentration risk and exposure value excess

1. An investment firm’s limit with regard to the concentration risk of an exposure value with regard to an individual client or group of connected clients shall be 25 % of its own funds.

Where that individual client is a credit institution or an investment firm, or where a group of connected clients includes one or more credit institutions or investment firms, the limit with regard to concentration risk shall be the higher of 25 % of the investment firm’s own funds or EUR 150 million provided that for the sum of exposure values with regard to all connected clients that are not credit institutions or investment firms, the limit with regard to concentration risk remains at 25 % of the investment firms’ own funds.

Where the amount of EUR 150 million is higher than 25 % of the investment firm’s own funds, the limit with regard to concentration risk shall not exceed 100 % of the investment firm’s own funds.

2. Where the limits referred to in paragraph 1 are exceeded, an investment firm shall meet the obligation to notify set out in Article 38 and meet an own funds requirement on the exposure value excess in accordance with Article 39.

Investment firms shall calculate an exposure value excess with regard to an individual client or group of connected clients in accordance with the following formula:

exposure value excess = EV – L

where:

EV = exposure value calculated in the manner laid down in Article 36; and

L = limit with regard to concentration risk as determined in paragraph 1 of this Article.

3. The exposure value with regard to an individual client or group of connected clients shall not exceed:

(a) 500 % of the investment firm’s own funds, where 10 days or less have elapsed since the excess occurred;

(b) in aggregate, 600 % of the investment firm’s own funds, for any excesses that have persisted for more than 10 days.

Article 38 U.K. Obligation to notify

1. Where the limits referred to in Article 37 are exceeded, an investment firm shall notify the competent authorities of the amount of the excess, the name of the individual client concerned and, where applicable, the name of the group of connected clients concerned, without delay.

2. Competent authorities may grant the investment firm a limited period to comply with the limit referred to in Article 37.

Article 39 U.K. Calculating K‐CON

1. The K‐CON own funds requirement shall be the aggregate amount of the own funds requirement calculated for each client or group of connected clients as the own funds requirement of the appropriate line in Column 1 in Table 6 that accounts for a part of the total individual excess, multiplied by:

(a) 200 %, where the excess has not persisted for more than 10 days;

(b) the corresponding factor in Column 2 of Table 6, after the period of 10 days calculated from the date on which the excess has occurred, by allocating each proportion of the excess to the appropriate line in Column 1 of Table 6.

2. The own funds requirement of the excess referred to in paragraph 1 shall be calculated in accordance with the following formula:

where:

OFRE = own funds requirement for the excess;

OFR = own funds requirement of exposures to an individual client or groups of connected clients, calculated by adding together the own funds requirements of the exposures to the individual clients within the group, which shall be treated as a single exposure;

EV = exposure value calculated in the manner laid down in Article 36;

EVE = exposure value excess calculated in the manner laid down in Article 37(2).

For the purpose of calculating K‐CON, the own funds requirements of exposures arising from the positive excess of an investment firm’s long positions over its short positions in all the trading book financial instruments issued by the client in question, the net position of each instrument calculated in accordance with the provisions referred to in points (a), (b) and (c) of Article 22 shall only include specific‐risk requirements.

An investment firm that, for the purposes of the RtM K‐factor requirement, calculates own funds requirements for trading book positions in accordance with the approach specified in Article 23 shall calculate the own funds requirement of the exposure for the purposes of the concentration risk of those positions in accordance with the provisions referred to in point (a) of Article 22.

Table 6

Column 1:Exposure value excess as a percentage of own funds	Column 2:Factors
Up to 40 %	200 %
From 40 % to 60 %	300 %
From 60 % to 80 %	400 %
From 80 % to 100 %	500 %
From 100 % to 250 %	600 %
Over 250 %	900 %

Article 40 U.K. Procedures to prevent investment firms from avoiding the K‐CON own funds requirement

1. Investment firms shall not temporarily transfer exposures exceeding the limit laid down in Article 37(1) to another company, whether within the same group or not, or enter into artificial transactions to close out those exposures during the 10‐day period referred to in Article 39 and create new exposures.

2. Investment firms shall maintain systems which ensure that any transfer as referred to in paragraph 1 is immediately reported to the competent authorities.

Article 41 U.K. Exclusions

1. The following exposures shall be excluded from the requirements set out in Article 37:

(a) exposures which are entirely deducted from an investment firm’s own funds;

(b) exposures incurred in the ordinary course of the settlement of payment services, foreign currency transactions, securities transactions and the provision of money transmission;

(c) exposures constituting claims against:

(i)

central governments, central banks, public sector entities, international organisations or multilateral development banks and exposures guaranteed by or attributable to such persons, where those exposures receive a 0 % risk weight under Articles 114 to 118 of Regulation (EU) No 575/2013;

(ii)

the regional governments and local authorities of countries that are members of the European Economic Area;

(iii)

central counterparties and default fund contributions to central counterparties.

2. Competent authorities may fully or partially exempt the following exposures from the application of Article 37:

(a) covered bonds;

(b) exposures incurred by an investment firm to its parent undertaking, to other subsidiaries of that parent undertaking or to its own subsidiaries, insofar as those undertakings are supervised on a consolidated basis in accordance with Article 7 of this Regulation or with Regulation (EU) No 575/2013, are supervised for compliance with the group capital test in accordance with Article 8 of this Regulation, or are supervised in accordance with equivalent standards in force in a third country, and provided that the following conditions are met:

(i)

there is no current or foreseen material practical or legal impediment to the prompt transfer of capital or repayment of liabilities by the parent undertaking; and

(ii)

the risk evaluation, measurement and control procedures of the parent undertaking include the financial sector entity.

Article 42 U.K. Exemption for commodity and emission allowance dealers

1. The provisions of this Part shall not apply to commodity and emission allowance dealers where all the following conditions are met:

(a) the other counterparty is a non‐financial counterparty;

(b) both counterparties are subject to appropriate centralised risk evaluation, measurement and control procedures;

(c) the transaction can be assessed as reducing risks directly relating to the commercial activity or treasury financing activity of the non‐financial counterparty or of that group.

2. Investment firms shall notify the competent authority before using the exemption referred to in paragraph 1.