7.3 Articulation and justification of own funds requirements

In determining additional own funds requirement in accordance with Article 40 (3) of Directive (EU) 2019/2034, at a time specified in paragraph 271, competent authorities should set:

• a. an absolute amount of additional own funds requirement as a result of the conclusion based on the SREP assessment; and
• b. the ratio of the absolute amount referred to in point (a) to the investment firm’s own funds requirement determined in accordance with Article 11 of Regulation (EU) 2019/2033 at the time of the setting of that absolute amount referred to in point (a) (“D”) in accordance with the following formula:

𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝑎𝑎𝑎𝑎𝐴𝐴𝐴𝐴𝑎𝑎𝐴𝐴 𝐴𝐴𝑜𝑜 𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝐴𝐴𝑎𝑎𝐴𝐴𝑎𝑎𝑎𝑎𝐴𝐴 𝐴𝐴𝑜𝑜𝑎𝑎 𝑜𝑜𝐴𝐴𝑎𝑎𝑎𝑎𝐴𝐴 𝑟𝑟𝐴𝐴𝑟𝑟𝐴𝐴𝑎𝑎𝑟𝑟𝐴𝐴𝑎𝑎𝐴𝐴𝑎𝑎𝐴𝐴

Competent authorities should ensure 𝐷𝐷 that the applicable additional own funds requirement should at all times be equal to the higher of the absolute amount referred to in paragraph 295, point (a) or, the amount of additional own funds requirement necessary to maintain, in cases where D is increasing and until a new absolute amount is being set as a result of the conclusion of the SREP assessment by competent authorities, the ratio referred to paragraph 295, point (b).

When communicating the prudential requirements to investment firms, competent authorities should substantiate their decision to impose additional own funds requirement giving a clear account of the full assessment of the elements listed in paragraph 273 in accordance with Article 40(5) of Directive (EU) 2019/2034. The justification should be investment firm-specific and should provide a clear indication of the main drivers underlying the additional own funds requirement, including the risks and elements of risks contributing to such additional own funds requirement. In justifying additional own funds requirement competent authorities should refer to all relevant risk categories, i.e. risks associated to an unorderly wind-down, risk-to-clients, risk-to-markets, risk-to firms and other risks.

In the justification of additional own funds requirement pursuant to paragraph 273, points (b) to (d), competent authorities should also identify the main deficiencies to be covered by these requirements until they are addressed, in line with paragraphs 291 to 293. Taking into consideration appropriate supervisory measures in accordance with Title 10, competent authorities should request investment firms to identify appropriate actions to rectify these deficiencies and communicate expected timelines for rectifying the deficiencies.