From 26 June 2021, investment firms will be facing a new prudential regulatory system under the EU’s Investment Firms Regulation (IFR) and the Investment Firms Directive (IFD). Thanks to the new categorisation of investment firms, the prudential regime is designed specifically for the activities of investment firms. This presents investment firms with an opportunity to explore RegTech solutions like Suade to meet their regulatory obligations and deliver value to their organisation at the same time. We have already written an article about the benefits of a master data strategy for investment firms. Our expertise and partnership with Simmons & Simmons guarantee an empowering solution. Two avenues should be explored. Firstly, with a successful master data strategy firms can use the data produced for new reporting requirements to empower business decisions. Secondly, a master data strategy can also help firms determine how to meet new capital requirements with minimal adverse effects on their activities.
A master data strategy is a tool by which firms can easily manage their data across different business units and regulatory reports. Existing approaches to data often result in disparate, highly complex systems that significantly complicate the sharing of data across business units in a firm. As a result, a new prudential regime like IFR/IFD becomes a significant cost due to time and resource intensive processes for adjusting to the new regime. Developing a master data strategy across an entire firm can turn a new prudential regime from a source of cost into an opportunity for profit.
Data produced for the new reporting requirements can inform important business decisions. The new requirements include reporting on the level and composition of own funds, own funds requirements, own funds requirement calculations, concentration risk, and liquidity risk. For liquidity reporting, for instance, calculations of fixed overheads under Article 43 IFR can empower investment firms to identify risky cash outflows. Data produced under Article 49 IFR on capital can inform decisions that affect the solvency of an investment firm. The requirement to determine common equity tier 1 capital, additional tier 1 capital, and tier 2 capital may present a new regulatory burden. It does not, however, have to be a source of cost alone. Combined with calculations of concentration risk under Article 54 IFR, detailed data on capital holdings can empower investment firms to make quick and effective decisions on suitable investments. The more data an investment firm produces, the more effective its evaluation of capital, liquidity, and concentration risk. A master data strategy can help investment firms use the new reporting requirements to maximise profits.
Firms can use the regulatory data to optimise their capital holdings. Changes to capital requirements in IFR/IFD will likely require increases in capital holdings for investment firms. Article 9 IFR provides a minimum ratio of capital to outflows that must not fall below 100%. Capital outflows are the higher of overheads (Article 13 IFR), initial capital (Article 14 IFR and Article 9 IFD), or a K-factor (Article 15 IFR). The K-factor determines the risk of a firm to its clients, the market, and itself. With an effective master data strategy, investment firms can use the data from these calculations to optimise capital holdings and maximise growth. Data on the K-factor can inform the risk of an investment. Liquidity data from overheads can help investment firms evaluate the effects of a potential stress scenario. Investment firms can use the data to optimise their capital holdings without impeding growth.
In sum, whilst the IFR/IFD regime presents new regulatory challenges, firms can use data to minimise the regulatory burden. An effective master data strategy can help investment firms use the new prudential regime to their advantage.
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