What is IFR and IFD?
The Investment Firms Regulation (IFR) and Investment Firms Directive (IFD) introduced a tailored regulatory framework for investment firms in the European Union. These frameworks focus on prudential requirements, governance, and supervisory processes specific to investment firms, enhancing financial stability, client protection, and market integrity.
Key objectives of IFR and IFD
⇢ Establishing proportional prudential requirements
The IFR/IFD frameworks align capital, liquidity, and risk management requirements with the size, complexity, and business model of investment firms, ensuring proportionality while addressing potential risks to financial stability.
⇢ Enhanced risk management
Implement K-factor calculations to assess risks related to clients, markets, and the firm itself, promoting robust risk management practices.
⇢ Improved governance and supervision
Strengthen governance structures and supervisory oversight to ensure firms operate with integrity and transparency.
Who does IFR and IFD affect?
IFR and IFD impact all MiFID-authorized investment firms operating within the EU, including portfolio managers, brokers, and proprietary trading firms. Key stakeholders such as compliance officers, risk managers, and executive boards must be prepared to implement these changes.
Key challenges of IFR and IFD compliance
⇢ K-Factor calculations
Firms need to implement new K-factor calculations to assess various risk exposures, requiring adjustments to existing risk management frameworks.
⇢ Data management and reporting
The new requirements demand significant investment in systems that ensure accurate and timely data reporting, including the collection and processing of new data points.
⇢ Governance and remuneration policies
Firms must align their governance structures and remuneration policies with the new standards, which may involve substantial organizational changes.