MIFIDPRU 4.13 K-CMG requirement

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).

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.