MIFIDPRU 4.13 K-CMG requirement

MIFIDPRU 4.13.1R
  1. (1)

    1Subject to (2), the K-CMG requirement applies to a MIFIDPRU investment firm for portfolios for which the firm has been granted a K-CMG permission.

  2. (2)

    A MIFIDPRU investment firm must include a position specified in MIFIDPRU 4.11.8R within the calculation of its K-NPR requirement if that position:

    1. (a)

      is included in a portfolio for which the firm has been granted a K-CMG permission;

    2. (b)

      is a proprietary position of the firm that results from a trade that has settled;

    3. (c)

      is not included in the calculation of the required margin under the margin model of the clearing member or authorised central counterparty in MIFIDPRU 4.13.9R(2)(b); and

    4. (d)

      is not a position to which the clearing member or authorised central counterparty has applied a “haircut” of the type specified in MIFIDPRU 4.13.6R(2).

MIFIDPRU 4.13.2G

1MIFIDPRU 4.13.1R(2) is intended to cover the risks arising from proprietary trades that form part of a portfolio for which a firm has a K-CMG permission. Where trades have settled, the resulting proprietary position of the firm may no longer be included within the margin requirement calculated by the clearing member or authorised central counterparty for that portfolio and therefore would not contribute to the firm’s K-CMG requirement. The firm should therefore include these positions within its calculation of the K-NPR requirement to take account of the resulting market risk. For these purposes, a firm is not required to apply this approach to a position that results from client servicing.

MIFIDPRU 4.13.3G

1In an application for a K-CMG permission, a firm must identify each portfolio for which it wishes to calculate a K-CMG requirement.

MIFIDPRU 4.13.4R

1MIFIDPRU 4.11.8R(2) includes positions held outside the trading book that give rise to foreign exchange or commodities risk. The FCA considers that it is unlikely that such positions would be eligible for a K-CMG permission. Therefore, even if the FCA has granted a K-CMG permission in relation to all portfolios in the firm’s trading book, a firm may need to calculate a K-NPR requirement in relation to positions it holds outside of the trading book.

MIFIDPRU 4.13.5R

1The K-CMG requirement of a MIFIDPRU investment firm must be calculated using the following formula:

K-CMG requirement = TM * 1.3

where TM is the third highest amount of total margin as calculated under MIFIDPRU 4.13.6R required from the firm on a daily basis over the preceding 3 months.

MIFIDPRU 4.13.6R

1For the purposes of MIFIDPRU 4.13.5R, the total margin must be calculated as the sum of the following in relation to all clearing members and to the extent that MIFIDPRU 4.13.9R(2)(c)(i) applies, all authorised central counterparties:

  1. (1)

    the amount of margin required by the margin model referenced in MIFIDPRU 4.13.9R(2)(e); plus

  2. (2)

    the value of any “haircut” applied by the clearing member or authorised central counterparty to positions included in the portfolio that represent settled trades and which the clearing member or authorised central counterparty is treating as collateral to secure the present or future obligations of the MIFIDPRU investment firm.

MIFIDPRU 4.13.7G

1MIFIDPRU 4.13.6R requires a MIFIDPRU investment firm to determine the amount of margin that is required under the relevant margin model of each clearing member (or, for a self-clearing firm, of each authorised central counterparty) for portfolios in respect of which the firm has been granted a K-CMG permission. For these purposes, the clearing member’s (or, where applicable, authorised central counterparty’s) margin model must satisfy the criteria in MIFIDPRU 4.13.14R. The effect of MIFIDPRU 4.13.6R is that if, notwithstanding the requirement under the margin model, the MIFIDPRU investment firm agrees with the clearing member or authorised central counterparty to provide a different amount of margin, it is the amount required under the model that must be used for the purposes of calculating the firm’s K-CMG requirement and not the amount of margin that is actually provided by the firm. This ensures that the firm’s K-CMG requirement is not artificially reduced by commercial negotiations that may result in the clearing member or authorised central counterparty accepting a lower amount of margin than the model requires.

MIFIDPRU 4.13.8G

1The calculation in MIFIDPRU 4.13.5R means that for each trading day during the calculation period, the firm must calculate the total combined margin in accordance with MIFIDPRU 4.13.6R provided to all clearing members in aggregate in respect of the relevant portfolios. The K-CMG requirement is then calculated on the basis of the third highest daily aggregate amount.

MIFIDPRU 4.13.9R

1To obtain a K-CMG permission for a portfolio, a firm must:

  1. (1)

    complete the application form in MIFIDPRU 4 Annex 7R and submit it using the online notification and application system;

  2. (2)

    in the application, demonstrate to the satisfaction of the FCA that:

    1. (a)

      the firm is not part of a group containing a credit institution;

    2. (b)

      the clearing and settlement of the transactions in the relevant portfolio take place under the responsibility of a clearing member of an authorised central counterparty;

    3. (c)

      the clearing member in (b) is one of the following:

      1. (i)

        a MIFIDPRU investment firm (which may be the firm itself, where it is self-clearing);

      2. (ii)

        a UK credit institution;

      3. (iii)

        a designated investment firm;

      4. (iv)

        a third country investment firm; or

      5. (v)

        a credit institution established in a third country;

    4. (d)

      transactions in the relevant portfolio are either:

      1. (i)

        centrally cleared in an authorised central counterparty; or

      2. (ii)

        settled on a delivery-versus-payment basis under the responsibility of the clearing member in (b);

    5. (e)

      the firm is required to provide total margin calculated on the basis of a margin model that satisfies the criteria in MIFIDPRU 4.13.14R and is operated by:

      1. (i)

        where the clearing member in (b) (where applicable, including the firm itself) is a MIFIDPRU investment firm or a third country investment firm, the authorised central counterparty in (b); or

      2. (ii)

        in any other case, the relevant clearing member in (b);

    6. (f)

      the reasons for the firm’s choice of calculating a K-CMG requirement for the portfolio have been clearly documented and approved by the firm’s management body or risk management function; and

    7. (g)

      the choice of the portfolio to be subject to a K-CMG requirement has not been made with a view to engaging in regulatory arbitrage between the K-NPR requirement and the K-CMG requirement in a disproportionate or prudentially unsound manner.

MIFIDPRU 4.13.10R
  1. (1)

    1A firm that has been granted a K-CMG permission for a portfolio must notify the FCA immediately if it becomes aware that any of the conditions in MIFIDPRU 4.13.9R are no longer met in relation to the portfolio.

  2. (2)

    The notification in (1) must be made using the form in MIFIDPRU 4 Annex 8R and submitted via the online notification and application system.

MIFIDPRU 4.13.11G

1The FCA may revoke a K-CMG permission for a portfolio where one or more of the conditions in MIFIDPRU 4.13.9R is no longer met in relation to that portfolio. The FCA may review the appropriateness of any K-CMG permissions as part of any SREP it undertakes in relation to the firm in accordance with MIFIDPRU 7.

MIFIDPRU 4.13.12R

1A firm that is an indirect client of a clearing member may obtain a K-CMG permission if:

  1. (1)

    the indirect clearing arrangement satisfies all of the conditions in MIFIDPRU 4.13.9R and both the clearing member and the client of the clearing member that is providing clearing services to the firm are entities that are listed in MIFIDPRU 4.13.9R(2)(c); and

  2. (2)

    the FCA is satisfied that the relevant arrangement does not result in undue risks.

MIFIDPRU 4.13.13R
  1. (1)

    1A firm that is relying on a K-CMG permission must ensure that:

    1. (a)

      the individuals in the firm who are responsible for the firm’s risk management function, or for the oversight of that function, have a reasonable understanding of the operation of the margin model referred to in MIFIDPRU 4.13.9R(2)(e); and

    2. (b)

      the firm integrates this understanding of the margin model into its ICARA process for the purposes of considering whether:

      1. (i)

        the resulting K-CMG requirement is sufficient to cover the relevant risks to which the firm is exposed; and

      2. (ii)

        the K-CMG permission remains appropriate in relation to the portfolio(s) for which it was granted.

  2. (2)

    For the purposes of (1), a firm may use suitable advice or analysis provided by an appropriate third party, but the firm is responsible for ensuring that the individuals in (1)(a) have the necessary knowledge and understanding of the margin model.

  3. (3)

    An appropriate third party under (2) includes:

    1. (a)

      a suitably qualified professional adviser;

    2. (b)

      the relevant clearing member; or

    3. (c)

      another undertaking within the same investment firm group as the firm where individuals within that undertaking have the requisite knowledge and understanding of the margin model.

MIFIDPRU 4.13.14R
  1. (1)

    1The criteria referred to in MIFIDPRU 4.13.9R(2)(e) are that:

    1. (a)

      the margin requirements are sufficient to cover losses that may result from at least 99% of the exposures movements over an appropriate time horizon with at least a two-business day holding period; and

    2. (b)

      the margin model used by the clearing member or authorised central counterparty to call the margin is always designed to achieve a level of prudence similar to that required in the provisions on margin requirements in article 41 of EMIR.

  2. (2)

    If the parameters of a margin model operated by a clearing member or authorised central counterparty do not meet the criteria in (1)(a), those criteria shall nonetheless be deemed to be met if:

    1. (a)

      an adjustment mechanism is applied to produce an alternative margin requirement; and

    2. (b)

      the alternative requirement in (a) is at least equivalent to the margin requirement that would be produced by a margin model that meets the criteria in (1)(a).

  3. (3)

    An adjustment mechanism under (2) may be applied by either of the following, provided that the conditions in (4) are met:

    1. (a)

      the relevant clearing member; or

    2. (b)

      the MIFIDPRU investment firm that has been granted the relevant K-CMG permission.

  4. (4)

    The conditions are that the MIFIDPRU investment firm that has been granted the relevant K-CMG permission:

    1. (a)

      can provide to the FCA upon request a reasonable explanation of the adjustment that has been applied under (2); and

    2. (b)

      monitors and reviews the effectiveness of the adjustment mechanism on an ongoing basis as part of its ICARA process.

MIFIDPRU 4.13.15G
  1. (1)

    1MIFIDPRU 4.13.14R(2) permits the output of a margin model of a clearing member or authorised central counterparty to be adjusted to meet the criteria in MIFIDPRU 4.13.14R(1)(a). The adjustment is used solely to determine the K-CMG requirement of a firm. It does not affect the actual amount of margin that the clearing member or authorised central counterparty will receive from the firm, which will continue to be determined by the underlying (unadjusted) model.

  2. (2)

    For example, the clearing member’s or authorised central counterparty’s original margin model may produce margin requirements that are sufficient to cover losses that may result from at least 95% of the exposures movements over a two-business day holding period. This would not meet the minimum criteria in MIFIDPRU 4.13.14R(1)(a). To determine the firm’s K-CMG requirement, the output of that model may be adjusted to produce a requirement that would cover losses that may result from at least 99% of the exposures movements over that same holding period. If the conditions in MIFIDPRU 4.13.14R(3) and (4) are satisfied, the minimum criteria in MIFIDPRU 4.13.14R(1)(a) will be deemed to be met when the adjustment is applied. This is the case even though the actual margin received by the clearing member or authorised central counterparty is determined by the underlying (unadjusted) model.

MIFIDPRU 4.13.16G

1Where the margin model of a clearing member uses parameters that are more conservative than the minimum criteria in MIFIDPRU 4.13.14R(1), the output of the model may be adjusted downwards under MIFIDPRU 4.13.14R(2) to produce margin requirements that are consistent with the minimum criteria. The requirements in MIFIDPRU 4.13.14R(3) and (4) still apply to a downwards adjustment. A firm is not required to apply a downwards adjustment to a more conservative model.

MIFIDPRU 4.13.17G

1The FCA will consider whether the firm’s reasons for choosing a K-CMG requirement under MIFIDPRU 4.13.9R(2)(f) have taken adequate account of the nature of, and risks arising from, the firm’s trading activities, including whether:

  1. (1)

    the main activities of the firm are essentially trading activities that are subject to clearing and margining under the responsibility of a clearing member; and

  2. (2)

    other activities performed by the firm are immaterial in comparison to those main activities.

MIFIDPRU 4.13.18G
  1. (1)

    1For the purposes of MIFIDPRU 4.13.9R(2)(g), the fact that a K-CMG permission for a portfolio may result in a K-CMG requirement that is lower than the equivalent K-NPR requirement for that portfolio does not automatically mean that the choice to apply a K-CMG requirement has been made with a view to engaging in regulatory arbitrage in a disproportionate or prudentially unsound manner.

  2. (2)

    When considering whether the condition in MIFIDPRU 4.13.9R(2)(g) is satisfied, a firm should consider whether the K-CMG requirement that would result from the relevant K-CMG permission more closely reflects the underlying economic risk of the relevant portfolio when compared with the equivalent K-NPR requirement for the same portfolio.

  3. (3)

    The FCA considers that even in circumstances where the K-CMG requirement is considerably lower than the equivalent K-NPR requirement, this does not automatically prevent a firm from meeting the conditions for a K-CMG permission. A significant difference between the two requirements may result from the calculation of the K-CMG requirement being better adapted for capturing the economic risks of the particular portfolio in question. For example, the margin model underlying the K-CMG requirement may have been specifically designed for firms that specialise in trading that type of portfolio. A firm that is applying for a K-CMG permission should provide a clear explanation of how the conditions in MIFIDPRU 4.13.9R(2) are satisfied for the portfolio. The firm should keep the appropriateness of a K-CMG permission under regular review as part of its ICARA process.

MIFIDPRU 4.13.19R
  1. (1)

    1Except where (2) applies, a firm that has a K-CMG permission for a portfolio must calculate a K-CMG requirement for that portfolio for a continuous period of at least 24 months from the date that the permission is granted.

  2. (2)

    The requirement in (1) does not apply if:

    1. (a)

      the FCA revokes the relevant K-CMG permission in relation to that portfolio on its own initiative in the circumstances described in MIFIDPRU 4.13.11G; or

    2. (b)

      the business strategy or operations of the trading desk with responsibility for the portfolio have changed to such an extent that it has become a different trading desk.

MIFIDPRU 4.13.20R
  1. (1)

    1Where a firm that has been granted a K-CMG permission in relation to a portfolio subsequently chooses to calculate a K-NPR requirement for that portfolio, the firm must submit the notification in (2) to the FCA before the firm begins to calculate the K-NPR requirement.

  2. (2)

    The notification in (1) must:

    1. (a)

      confirm that the requirement in MIFIDPRU 4.13.19R(1) has been met in relation to the portfolio, or that the circumstance in MIFIDPRU 4.13.19R(2)(b) applies;

    2. (b)

      specify the date on which the K-CMG permission should cease to apply to the firm; and

    3. (c)

      be made using the form in MIFIDPRU 4 Annex 9R and submitted using the online notification and application system.

MIFIDPRU 4.13.21G

1Where a firm has submitted a notification in MIFIDPRU 4.13.20R(2), the FCA will not normally grant another K-CMG permission for the same portfolio until at least 24 months after the previous K-CMG permission ceased to apply.