2.1 Overview of the common SREP framework

Competent authorities should ensure that the SREP of an investment firm covers the following components:

• a. categorisation of the investment firm and periodic review of this categorisation;
• b. monitoring of key indicators;
• c. business model analysis (BMA);
• d. assessment of internal governance and firm-wide controls;
• e. assessment of risks to capital;
• f. assessment of risks to liquidity;
• g. assessment of the adequacy of the investment firm’s own funds;
• h. assessment of the adequacy of the investment firm’s liquidity resources;
• i. overall SREP assessment; and
• j. supervisory measures (and early intervention measures, where necessary).

2.1.1 Categorisation of investment firms

Competent authorities should categorise each investment firm for which the supervisory review and evaluation referred to in Article 36 of Directive (EU) 2019/2034 is to be carried out into one of the following categories:

• • Category 1 – investment firms meeting at least one of the following criteria:
• i. their value of the total assets and off-balance sheet exposures is equal to or exceeds EUR 1 billion; or
• ii. their value of the total assets and off-balance sheet exposures is equal to or exceeds EUR 250 million and they perform activities referred to in point (3) or (6) of Section A of Annex I to Directive 2014/65/EU¹⁰ ; or
• iii. they are considered significant based on supervisory judgement of the competent authority.
• • Category 2 – investment firms whose value of the total assets and off-balance sheet exposures is below EUR 1 billion and is equal to or exceeds EUR 250 million, and that perform neither of activities referred to in point (3) or (6) of Section A of Annex I to Directive 2014/65/EU.
• • Category 3 – investment firms whose value of the total assets and off-balance sheet exposures is below EUR 250 million and that do not meet the conditions for qualifying as a small and non-interconnected investment firm set out in Article 12(1) of Regulation (EU) 2019/2033.
• • Small and non-interconnected investment firms as set out in Article 12(1) of Regulation (EU) 2019/2033.

¹⁰ Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU (OJ L 173 12.6.2014, p. 349).

The categorisation should be used by competent authorities as a basis for applying the principle of proportionality, as specified in Section 2.4, and not as a means to reflect the quality of an investment firm.

Among categories 1 to 3, competent authorities may categorise an investment firm on a case-by-case basis in a category one notch higher or lower in the list than according to the criteria listed in paragraph 15. For this purpose, competent authorities should consider aspects such as the scale and complexity of operations, scale of trading activities, amount of client money held, the risk profile of the investment firm, and any other relevant aspects. Where such reclassification is carried out, competent authorities should aim at ensuring sufficient homogeneity and comparability between investment firms of the same category.

Competent authorities should base the categorisation on supervisory reporting data and on information derived from the preliminary business model analysis (see Section 4.2). The categorisation should be reviewed yearly or in the event of a significant change in activities. In case of a change of category for an investment firm the last year of a full completed SREP cycle should be taken into account in determining the timeline for the next assessment of the SREP elements.

2.1.2 Continuous assessment of risks

Competent authorities should continuously assess the risks to which the investment firm is or may be exposed through the following activities:

• a. monitoring of key indicators as specified in Title 3;
• b. business model analysis as specified in Title 4;
• c. assessment of internal governance and firm-wide controls as specified in Title 5;
• d. assessment of risks to capital as specified in Title 6; and
• e. assessment of risks to liquidity as specified in Title 8.

The assessments should be conducted in accordance with the proportionality criteria specified in Section 2.4. The assessments should be reviewed in light of new information.

Competent authorities should ensure that the outcomes of the assessments outlined above:

• a. are clearly documented in a summary of findings;
• b. are reflected in a score assigned in accordance with the specific guidance provided in the element-specific title of these guidelines;
• c. support the assessments of other elements or prompt an in-depth investigation into inconsistencies between the assessments of these elements;
• d. contribute to the overall SREP assessment and score; and
• e. result in supervisory measures, where appropriate, and inform the decisions taken for these measures.

2.1.3 Periodic assessment of capital and liquidity adequacy

Competent authorities should periodically review the adequacy of the investment firm’s own funds and liquidity to provide sound coverage of the risks to which the investment firm is or may be exposed through the following assessments:

• a. SREP capital assessment as specified in Title 7; and
• b. SREP liquidity assessment as specified in Title 9.

Competent authorities should perform periodic assessments taking into account the minimum engagement and proportionality criteria specified in Section 2.4. Competent authorities may perform more frequent assessments. Competent authorities should review the assessment in light of material new findings from the risk assessment where competent authorities determine that the findings may have a material impact on the investment firm’s own funds and/or liquidity resources.

Competent authorities should ensure that the outcomes of the assessments:

• a. are clearly documented in a summary;
• b. are reflected in the score assigned to the investment firm’s capital adequacy and liquidity adequacy, in accordance with the guidance provided in the element-specific title;
• c. contribute to the overall SREP assessment and score; and
• d. take into account and inform the supervisory requirement for the investment firm to hold own funds and/or liquidity resources in excess of the minimum requirements specified in Regulation (EU) 2019/2033, as appropriate.

2.1.4 Overall SREP assessment

Competent authorities should continuously assess the risk profile of the investment firm and its viability through the overall SREP assessment as specified in Title 10. Through the overall SREP assessment, competent authorities should determine the potential for risks to cause the failure of the investment firm given the adequacy of its own funds and liquidity resources, internal governance, controls and/or business model or strategy, and from this, the need to take early intervention measures, where applicable, and/or determine whether the investment firm can be considered to be failing or likely to fail.

The assessment should be continuously reviewed in light of findings from the risk assessments or the outcome of the SREP capital and SREP liquidity assessments.

Competent authorities should ensure that the outcomes of the assessment:

• a. are reflected in the score assigned to the investment firm’s overall viability, in accordance with the guidance provided in Title 10;
• b. are clearly documented in a summary of the overall SREP assessment that includes the SREP scores assigned (overall and for individual elements) and any supervisory findings made since the last assessment; and
• c. form the basis for the supervisory determination of whether the investment firm can be considered to be ‘failing or likely to fail’; for investment firms subject to Directive 2014/59/EU this determination should be performed in accordance with Article 32 of that Directive, also having regard to the EBA Guidelines on ‘failing or likely to fail’¹¹ .

2.1.5 Dialogue with investment firms, application of supervisory measures and communicating findings

¹¹ EBA Guidelines on the interpretation of the different circumstances when an institution shall be considered as failing or likely to fail under Article 32(6) of Directive 2014/59/EU (EBA/GL/2015/07)

Following the minimum engagement model, as specified in Section 2.4, competent authorities should engage in dialogue with investment firms to assess individual SREP elements, as provided in the element-specific titles.

Based on the overall SREP assessment and building on assessments of the individual SREP elements, competent authorities should take supervisory measures as specified in Title 10.

Where findings from the monitoring of key indicators, assessment of SREP elements or any other supervisory activity necessitate the application of supervisory measures to address immediate concerns, competent authorities should not wait for the completion of the assessment of all SREP elements and update of the overall SREP assessment, but decide on the measures required to rectify the situation assessed, and then proceed with updating the overall SREP assessment.

As outlined in Section 2.4, competent authorities should also engage in dialogue based on the outcomes of the overall SREP assessment, alongside associated supervisory measures, and inform the investment firm at the end of the process about the capital and liquidity requirements as well as supervisory measures with which it is obliged to comply.