Liquidity requirements for investment firms

Liquidity Requirements

Under IFR and IFD, Class 2 and Class 3 investment firms must hold liquid assets equivalent to at least one-third of their Fixed Overhead Requirement (FOR). The FOR is calculated as one-quarter of the firm's fixed overheads from the previous year, making the liquid asset requirement equivalent to one-twelfth of an investment firm’s fixed overheads (essentially one month of fixed expenses).

If an investment firm provides guarantees to its clients, it must increase its liquid assets by 1.6% of the total value of guarantees provided.

Liquid asset criteria

The following assets qualify as liquid assets under IFR and IFD:

1. Level 1, 2A and 2B liquid assets, as well as Level 2B securitisations, as defined in Delegated Regulation (EU) 2015/61. These must meet eligibility criteria and applicable haircuts as specified in the regulation.
2. Collective Investment Undertakings (CIUs), up to an absolute amount of €50 million (or the equivalent in domestic currency), subject to eligibility criteria similar to those in Regulation (EU) 2015/61. The €500 million threshold in Article 15(1) of that Regulation does not apply and the same applicable haircuts are followed.
3. Financial instruments not covered in point (1) or (2) above, but which are traded on a venue with a liquid market as defined in Article 2(1) of Regulation (EU) No 600/2014 and Commission Delegated Regulation (EU) 2017/567. These instruments are subject to a 55% haircut.
4. Unencumbered short-term deposits at credit institutions.

Note: 

• Cash is a Level 1 liquid asset and it is expected that investment firms will typically hold their entire liquid asset requirements in cash.
• Cash, short-term deposits and financial instruments belonging to clients (whether held in the firm’s own name or not) are not considered liquid assets.

Derogations from liquidity requirements:

• Small and non-interconnected (SNI) investment firms may be exempt from liquidity requirements if their competent authority determines that the firm is not exposed to liquidity risks. EBA/GL/2022/10 outlines the criteria that authorities can consider when granting exemptions.
• In exceptional circumstances, investment firms may temporarily reduce their liquidity requirements, but they must restore compliance within 30 days.
• Investment firms that are classified as SNIs, or those that do not deal on their own account, underwrite financial instruments or place instruments on a firm commitment basis, may include receivables (from trade debtors, fees or commissions receivable within 30 days) as liquid assets, provided that receivables:
  • Account for up to one-third of the minimum liquidity requirements.
  • Are not used to meet any additional liquidity requirements imposed by authorities due to firm-specific risks.
  • Are subject to a 50% haircut.

Because of this additional flexibility, it is unlikely that the Central Bank will grant a full derogation from liquidity requirements, although requests are assessed on a case-by-case basis.

How Can We Help?

At Forvis Mazars, our Prudential Risk experts understand that regulatory compliance is critical to the strategic priorities of financial institutions. We specialise in helping financial services firms navigate complex regulatory requirements. Our team works closely with clients to identify their regulatory obligations and develop strategies for full compliance.