6.6 Citu risku novērtēšana

Competent authorities should assess Risk-to-Firm arising from different risk factors such as: operational risks from the daily trading flow (DTF), concentration risk due to large exposures (CON), and exposure to the default of trading counterparties (TCD). In their assessment competent should also consider sources of risk to the investment firm such as the material changes in the book value of assets, the failure of clients or counterparties, the positions in financial instruments, foreign currencies and commodities and the obligations to defined benefit pension schemes in accordance with Article 29 of Directive (EU) 2019/2034. Where relevant, they should also consider other factors that may pose risk to the investment firm.

In assessing Risk-to-Firm, competent authorities should take into account the volume, nature and complexity of the investment firm’s activities.

6.5.2 Assessment of inherent Risk-to-Firm

Through the assessment of inherent Risk-to-Firm, competent authorities should determine the main drivers and evaluate the significance of the prudential impact of this risk for the investment firm. The assessment of inherent Risk-to-Firm should therefore be structured around the following main steps:

• a. preliminary assessment;
• b. assessment of the nature and scale of investment activities that incur a risk for the investment firm;
• c. assessment of the systems and processes regarding these activities.

Competent authorities should assess Risk-to-Firm in both current and prospective terms.

Where relevant, competent authorities should also conduct a more granular assessment, potentially at the level of single clients.

Preliminary assessment

To determine the scope of the assessment of Risk-to-Firm, competent authorities should first identify the sources of Risk-to-Firm to which the investment firm is or may be exposed.

As a minimum, competent authorities should consider the following:

• a. the business model and risk appetite;
• b. the weight of the K-factor amount for Risk-to-Firm compared to the total K-factor amount;
• c. forecasts of the K-factor amount for Risk-to-Firm, if available;
• d. the cost of operational losses to the firm versus revenues.

Competent authorities should perform the preliminary analysis considering the change in the above over time to form an informed view of the main drivers of the investment firm’s Risk-to-Firm.

Daily trading flow

Competent authorities should form a view on the degree of operational risk related to trading on own account. This risk may arise from system or human errors due to the complexity of processes, procedures, and IT systems (including the use of new technologies), to the extent that they might lead to errors, delays, misspecification, security breaches.

Competent authorities should focus on these sources of inherent risk, where relevant:

• a. volume, exposure, number and complexity of transactions implemented;
• b. unavailability or loss of integrity of IT systems;
• c. types of financial market infrastructures (FMIs) used to process transactions: voice, electronic platforms (MTF, OTF);
• d. algorithmic trading.

Concentration risk

Competent authorities should form a view on the degree of concentration risk to which the investment firm is exposed. Specifically, competent authorities should assess the risk that the investment firm will incur significant losses stemming from a concentration of exposures to a small group of counterparties or to highly correlated financial assets.

Competent authorities should conduct this assessment considering different categories of concentration risk, including:

• a. single-name concentrations (including a client or group of connected clients as defined for large exposures);
• b. sectoral concentrations;
• c. geographical concentrations;
• d. product concentration; and
• e. collateral and guarantees concentration.

Competent authorities should pay particular attention to hidden sources of concentration risk that can materialise under stressed conditions, when the level of correlation can increase compared to normal conditions and when additional exposures can arise from off-balance sheet items.

For groups, competent authorities should consider the concentration risk that can result from consolidation, which may be not evident at an individual level.

Trading counterparty default risk

Competent authorities should assess the trading counterparty default risk faced by investment firms arising from exposures to transactions in financial instruments.

For this assessment, competent authorities should focus on the following sources of inherent risk, where relevant:

• a. the quality of counterparties and relevant credit valuation adjustments (CVAs);
• b. the complexity of the financial instruments underlying the relevant transactions;
• c. the wrong-way risk arising from the positive correlation between the counterparty credit risk and the credit risk exposure;
• d. the exposure to counterparty credit and settlement risks in terms of both current market values and nominal amount, compared to the overall credit exposure and to own funds;
• e. the proportion of transactions processed through financial market infrastructures (FMIs) that provide payment versus delivery settlement;
• f. the proportion of relevant transactions to central counterparties (CCPs) and the effectiveness of their loss protection mechanisms such as margin levels and default fund contribution; and
• g. the existence, significance, effectiveness and enforceability of netting agreements (close-out netting).

Material changes to the book value of assets

Competent authorities should form a view on the risks incurred by the investment firm’s due to material changes in the book value of assets. This risk might lead to losses if the value to which assets are recorded does not properly reflect their real market value.

Competent authorities should focus on assets whose value has been estimated through models and proxies instead of inputs directly inferred from the market.

Credit risk (failure of clients or counterparties)

Credit risk may arise from granting loans to allow a client to carry out a transaction, direct loans to staff, intraday credit risk due to overdraft, guarantee and contingent credit exposures, hold to maturity or illiquid bond positions, margin loans to clients, accruing/unpaid fees and commissions, direct credit exposures to their managed funds via loans, seed investments and guarantees.

Competent authorities should focus on these sources of inherent risk if the relevant data is available:

• a. nature of credit risk in the investment firm taking into account the types of counterparties and exposures;
• b. off-balance sheet exposures, in particular guarantees given or received;
• c. impairment risk.

Competent authorities should form a view on the degree of risk of impairment or depreciation of assets outside the trading book that is not captured by K-factors such as the K-TCD. This risk may arise from revaluations when for instance a counterparty’s probability of default increases significantly or a subsidiary’s value has decreased since acquisition.

Competent authorities should focus on these sources of inherent risk where relevant:

• a. changes in creditworthiness of counterparties;
• b. complexity of transactions and high leverage (notably LBOs);
• c. exceptional events triggering revaluation.

Positions in financial instruments, foreign currencies and commodities

Competent authorities should form a view on the risks incurred by the investment firm’s due to the exposure to financial instruments, foreign currencies and commodities. These sources of risk might lead to losses in case of adverse movements in the financial market, currencies market and commodity markets.

Competent authorities should focus on the nature of the financial instruments held by the investment firm, on the overall exposure of the investment firm to the currency market (also considering, for instance, the correlation of the currencies in which the investment firm has an exposure) and on the exposure to specific commodities.

Risks related to employee benefits and pension risk

Competent authorities should form a view on the risks incurred by the investment firm’s remuneration and pension scheme. This risk might lead to losses if payments are excessive relative to the firm’s income, including endangering the firm’s profitability and solvency.

Competent authorities should focus on the risk resulting from a structural gap between assets and liabilities related to employee benefits, where relevant.

6.5.3 Assessment of Risk-to-Firm management and controls

To achieve a comprehensive understanding of the investment firm’s Risk-to-Firm profile, competent authorities should review the governance and risk management framework that reduce the risk arising from the trading flow, concentration and counterparty default. To this end, competent authorities should assess the following elements while taking into account the volume, nature and complexity of the investment firm’s activities:

• a. the investment firm has a sound, clearly formulated and documented risk strategy regarding trading flow, concentration and counterparty default, approved by their management body;
• b. the investment firm’s risk strategy properly reflects the investment firm’s appetite for these risks and is consistent with the overall risk appetite;
• c. the investment firm has an appropriate organisational framework for the management, measurement, monitoring and control of concentration and counterparty default risks, with sufficient (both qualitative and quantitative) human and technical resources;
• d. the investment firm has clearly defined policies and procedures for the identification, management, measurement and control of Risks-to-Firm, including limits reflecting risk appetite set by the Board;
• e. the investment firm has an appropriate framework for identifying, understanding and measuring Risks-to-Firm, in line with the investment firm’s size and complexity, and that this framework is compliant with relevant minimum requirements in accordance with the relevant EU and national implementing legislation; and
• f. the investment firm has a strong and comprehensive control framework and sound safeguards to mitigate its Risks-to-Firm in line with its risk management strategy and risk appetite.

6.5.4 Summary of findings and scoring

Following the above assessment, competent authorities should form a view on the investment firm’s Risk-to-Firm. This view should be reflected in a summary of findings, accompanied by a risk score based on the considerations specified in Table 7. If, based on the materiality of certain risk factors, competent authorities decide to assess and score them individually, the guidance provided in this table should be applied, as far as possible, by analogy.

Competent authorities should consider all these factors in parallel and not in isolation and understand the drivers behind Risk-to-Firm.

Table 7. Supervisory considerations for assigning a Risk-to-Firm score