SYSC 7.1 Risk control
[Note: ESMA has also issued guidelines under article 16(3) of the ESMA Regulation covering certain aspects of the MiFID compliance function requirements. See http://www.esma.europa.eu/content/Guidelines-certain-aspects-MiFID-compliance-function-requirements.]
Application to a common platform firm
19For a common platform firm:
- (1)
the MiFID Org Regulation applies, as summarised in SYSC 1 Annex 1 3.2G, SYSC 1 Annex 1 3.2-AR and SYSC 1 Annex 1 3.2-BR; and
- (2)
the rules and guidance apply as set out in the table below:
Subject
Applicable rule or guidance
Risk assessment
Risk management
Risk control: remuneration
Risk control: additional provisions
Additional rules for CCR firms
Application to an MiFID optional exemption firm and to a third country firm
19For a MiFID optional exemption firm and a third country firm:
- (1)
the rules and guidance in this chapter apply to them as if they were rules or as guidance in accordance with SYSC 1 Annex 1 3.2CR(1); and
- (2)
those articles of the MiFID Org Regulation in SYSC 1 Annex 1 2.8AR and 3.2CR apply to them as if they were rules or as guidance in accordance with SYSC 1 Annex 1 3.2CR(2).
Risk assessment
1 SYSC 4.1.1 R requires a firm to have effective processes to identify, manage, monitor and report the risks it is or might be exposed to.
3A UCITS investment firm19 must establish, implement and maintain adequate risk management policies and procedures, including effective procedures for risk assessment, which identify the risks relating to the firm's activities, processes and systems, and where appropriate, set the level of risk tolerated by the firm.
10A management company should be aware that COLL 6.11 contains requirements implementing article 12 of the UCITS implementing Directive in relation to risk control and internal reporting that will apply to it.
14 Full-scope UK AIFMs should be aware that FUND 3.7 and articles 38 to 47 of the AIFMD level 2 regulation contain further requirements in relation to risk management.
Risk management
A UCITS investment firm19 must adopt effective arrangements, processes and mechanisms to manage the risk relating to the firm's activities, processes and systems, in light of that level of risk tolerance.
The management body13 of a common platform firm must approve and periodically review the strategies and policies for taking up, managing, monitoring and mitigating the risks the firm is or might be exposed to, including those posed by the macroeconomic environment in which it operates in relation to the status of the business cycle.
[Note: 13article 76(1) of CRD]
13 13For a common platform firm included within the scope of SYSC 20 (Reverse stress testing), the strategies, policies and procedures for identifying, taking up, managing, monitoring and mitigating the risks to which the firm is or might be exposed include conducting reverse stress testing in accordance with SYSC 20. A common platform firm which falls outside the scope of SYSC 20 should consider conducting reverse stress tests on its business plan as well. This would further senior personnel's understanding of the firm's vulnerabilities and would help them design measures to prevent or mitigate the risk of business failure.6
66Other firms should take account of the risk management rules (SYSC 7.1.3 R and SYSC 7.1.4 R) as if they were guidance (and as if "should" appeared in those rules19 instead of "must") as explained in SYSC 1 Annex 1 3.3 R(1)19.
A UCITS investment firm19 must monitor the following:
-
(1)
the adequacy and effectiveness of the firm's risk management policies and procedures;
-
(2)
the level of compliance by the firm and its relevant persons with the arrangements, processes and mechanisms adopted in accordance with SYSC 7.1.3 R;
-
(3)
the adequacy and effectiveness of measures taken to address any deficiencies in those policies, procedures, arrangements, processes and mechanisms, including failures by the relevant persons to comply with such arrangements or processes and mechanisms or follow such policies and procedures.
A UCITS investment firm19must, where appropriate and proportionate in view of the nature, scale and complexity of its business and the nature and range of the investment services and activities undertaken in the course of that business, establish and maintain a risk management function that operates independently and carries out the following tasks:
-
(1)
implementation of the policies and procedures referred to in SYSC 7.1.2 R to SYSC 7.1.5 R; and
-
(2)
provision of reports and advice to senior personnel in accordance with SYSC 4.3.2 R.
Where a UCITS investment firm19 is not required under SYSC 7.1.6 R to maintain a risk management function that functions independently, it must nevertheless be able to demonstrate that the policies and procedures which it has adopted in accordance with SYSC 7.1.2 R to SYSC 7.1.5 R satisfy the requirements of those rules and are consistently effective.
3Other firms should take account of the risk management rules (SYSC 7.1.5 R to SYSC 7.1.7 R) as if they were guidance (and as if should appeared in those rules19 instead of must) as explained in SYSC 1 Annex 1 3.3 R(1)19.
4In setting the method of determining the remuneration of employees involved in the risk management function:
- (1)
firms that SYSC 19D applies to will also need to comply with the dual-regulated firms Remuneration Code; and
- (2)
firms that the remuneration part of the PRA Rulebook applies to will also need to comply with it.16
14In setting the method of determining the remuneration of employees involved in the risk management function full-scope UK AIFMs will need to comply with the AIFM Remuneration Code.
15In setting the method of determining the remuneration of employees involved in the risk management function, BIPRU firms will also need to comply with the BIPRU Remuneration Code.
In setting the method of determining the remuneration of employees involved in the risk management function, firms that SYSC 19A applies to will also need to comply with the Remuneration Code.
Risk control: additional provisions
-
(1)
[deleted]13
13 -
(2)
The term 'risk management function' in SYSC 7.1.6 R and SYSC 7.1.7R, and for a common platform firm in article 23(2) of the MiFID Org Regulation,19 refers to the generally understood concept of risk assessment within a firm, that is, the function of setting and controlling risk exposure.
32917 - (3)
For a firm that is not an SMCR firm20, the risk management function is not a controlled function itself, but is part of the systems and controls function or the PRA's systems and controls controlled function (CF28).17
- (4)
For an SMCR firm20, the risk management function is a PRA controlled function (SMF4).17
The documentation maintained by a BIPRUfirm under SYSC 4.1.3 R should include its policy for credit risk, including its risk appetite and provisioning policy and should describe how it measures, monitors and controls that risk. This should include descriptions of the systems used to ensure that the policy is correctly implemented.
Residual risk
Market risk
Interest rate risk
Operational risk
A BIPRUfirm must implement policies and processes to evaluate and manage the exposure to operational risk, including to low-frequency high severity events. Without prejudice to the definition of operational risk, BIPRUfirms must articulate what constitutes operational risk for the purposes of those policies and procedures.
15Additional rules for CRR firms
-
(1)
13The management body of a CRR firm has overall responsibility for risk management. It must devote sufficient time to the consideration of risk issues.
-
(2)
The management body of a CRR firm must be actively involved in and ensure that adequate resources are allocated to the management of all material risks addressed in the rules implementing the CRD and in the EU CRR as well as in the valuation of assets, the use of external ratings and internal models related to those risks.
-
(3)
A CRR firm must establish reporting lines to the management body that cover all material risks and risk management policies and changes thereof.
[Note: article 76(2) of CRD]
-
(1)
13A CRR firm that is significant must establish a risk committee composed of members of the management body who do not perform any executive function in the firm. Members of the risk committee must have appropriate knowledge, skills and expertise to fully understand and monitor the risk strategy and the risk appetite of the firm.
-
(2)
The risk committee must advise the management body on the institution’s overall current and future risk appetite and assist the management body in overseeing the implementation of that strategy by senior management.
-
(3)
The risk committee must review whether prices of liabilities and assets offered to clients take fully into account the firm's business model and risk strategy. Where prices do not properly reflect risks in accordance with the business model and risk strategy, the risk committee must present a remedy plan to the management body.
[Note: article 76(3) of CRD]
15A CRR firm which is not a significant IFPRU firm may combine the risk committee with the audit committee.
[Note: article 76(3) of CRD]
-
(1)
13A CRR firm must ensure that the management body in its supervisory function and, where a risk committee has been established, the risk committee have adequate access to information on the risk profile of the firm and, if necessary and appropriate, to the risk management function and to external expert advice.
-
(2)
The management body in its supervisory function and, where one has been established, the risk committee must determine the nature, the amount, the format, and the frequency of the information on risk which it is to receive.
[Note: article 76(4) of CRD]
13In order to assist in the establishment of sound remuneration policies and practices, the risk committee must, without prejudice to the tasks of the remuneration committee, examine whether incentives provided by the remuneration system take into consideration risk, capital, liquidity and the likelihood and timing of earnings.
[Note: article 76(4) of CRD]
-
(1)
13A CRR firm's risk management function (article 23 of the MiFID Org Regulation19) must be independent from the operational functions and have sufficient authority, stature, resources and access to the management body.
-
(2)
The risk management function must ensure that all material risks are identified, measured and properly reported. It must be actively involved in elaborating the firm's risk strategy and in all material risk management decisions and it must be able to deliver a complete view of the whole range of risks of the firm.
-
(3)
A CRR firm must ensure that the risk management function is able to report directly to the management body in its supervisory function, independent from senior management and that it can raise concerns and warn the management body, where appropriate, where specific risk developments affect or may affect the firm, without prejudice to the responsibilities of the management body in its supervisory and/or managerial functions pursuant to the CRD and the EU CRR.
[Note: article 76(5) of CRD]
13The head of the risk management function must be an independent senior manager with distinct responsibility for the risk management function. Where the nature, scale and complexity of the activities of the CRR firm do not justify a specially appointed person, another senior person within the firm may fulfil that function, provided there is no conflict of interest. The head of the risk management function must not be removed without prior approval of the management body and must be able to have direct access to the management body where necessary.
[Note: article 76(5) of CRD]
- (1)
17This guidance is relevant to an SMCR banking firm20 that has appointed a head of the risk management function.
- (2)
Taking account of the nature, scale and complexity of its activities, the firm should have appropriate procedures to ensure that the removal or any other disciplinary sanctioning of the head of the risk management function does not undermine the independence of the risk management function.
- (3)
It will be appropriate, in many cases, for the procedures in (2) to include that any approval for the removal of the head of the risk management function requires the approval of a majority of the management body, including at least a majority of its members who do not perform any executive function in the firm.
- (4)
It will also be appropriate, in many cases, for any other disciplinary sanctioning of the head of the risk management function to require the approval of a majority of the management body, including at least a majority of its members who do not perform any executive function in the firm.