EBA Q&A Clarification on Net Position Risk Own Funds Requirements (K-NPR) for MiFID Investment Firms

Applicability and Impact

This Q&A may have a direct impact on the reporting and own funds/capital requirements for Class 2 Investment Firms that do not hold the MiFID permission of “Dealing on Own Account”.

Firms that do not hold this permission are not required to calculate their own funds requirement under K-NPR for FX Risk outside of the trading book. Previously, this was an area of confusion for Firms that may have been reporting on and calculating an FX risk K-NPR own fund requirement for non-trading book exposures and balances.

Background

Article 21 (1) of the Investment Firm Regulation (‘IFR’) rules out all Firms from calculating Risk to Market (‘RTM’) K-Factors requirements for Firms that do not have a trading book or “deal on own account”. Net position risk or “K-NPR” is an RTM K-Factor. However, this understanding was muddied by Article 21(4) of the IFR and the Final Report on the Draft RTS on the Implementation of the IFR/IFD. Article 21 (4) and the draft RTS state, that for the calculation of K-NPR under the Standardised Approach, investment firms must include all trading book positions as well as positions other than those in the trading book if they give rise to foreign exchange risk or commodity risk.

This led to confusion among Investment Firms as to whether Firms that do not “deal on own account” were required to calculate foreign exchange risk. Many Firms believed this meant that all positions that expose them to FX risk, such as operating cash balances held in a foreign currency, would give rise to a K-NPR K-Factor own fund requirement, even if they did not have permission to “deal on own account”.

Key Takeaway

The EBA has finalised a Q&A stating that foreign exchange risk under K-NPR is only applicable to Firms that “deal on own account”.

• Firms with a trading book must: Calculate a foreign exchange and/or commodity risk K-NPR requirement for all exposures that give risk to FX or commodity risk, including outside of the trading book.
• Firms without a trading book, or “deal on own account” permission: Are not subject to this requirement and will not be required to calculate or report on K-NPR or any RTM K-Factor.

Conclusion

The EBA have provided clarity by outlining the non-applicability of any form of K-NPR for Class 2 Investment Firms who do not “deal on own account”. Class 2 Investment Firms that do not “deal on own account” should:

• Review IFR reporting templates, specifically “C22”, to ensure they are only completing the applicable templates.
• Review Pillar 1 own funds requirements to ensure they are applying the correct treatment to K-NPR as a result of this EBA Final Answer.

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