CRR II: A focus on greater transparency and enhanced standards for investment funds

The updated Capital Requirements Regulation, known as CRR II and laid out in Regulation (EU) 2019/876, will come into force end of June 2021. While the update in general encompasses numerous topics in relation to Pillar I of the regulation, only some of them will be immediately relevant for the fund industry and associated service providers.

CRR II provisions for investments funds, both UCITs and AIFs, will affect Asset Management companies, as they are likely to be challenged by their investors, the credit institutions and banks, to provide an increased level of data transparency. In addition to providing this transparent data, asset managers and their service providers will be required to have an independent certification for the regulatory data and reports they provide. All these measures, while potentially challenging for the funds industry, have a clear goal of introducing a higher degree of standardization and precision to the quantitative aspects of CRR.

“While all these measures represent a potential challenge for the fund industry, they have the clear objective of introducing a higher level of standardization and precision in the quantitative aspects of the CRR,” says Gerhard Jovy.

Overview and impact of CRR II

In the following we would like to highlight the relevant updates to the Credit Risk Regulation affecting investment funds and examine the impacts.

• Articles 117 and 118 are updated by extending the list of multilateral banks and international organizations
• Article 128 is updated by excluding AIFs from the category of “items associated with particular high risk” to which they were assigned in the old regulation. This means that AIFs will now be treated as other investment funds, which will be discussed later in this document
• Articles 273 and 274 provide new rules for calculation of exposure for derivatives. This is relevant for counterparty risk and credit value adjustment (CVA) calculations.
• Article 132 is probably the most remarkable update, laying out new rules for treatment of investment funds, including UCITs and AIFs

With the first three points being of rather low impact for calculation and reporting of CRR relevant figures on investment funds, the last point is poised to have strong repercussions for the asset managers and the service providers performing calculations and report creation on their behalf.

Article 132 implies increased transparency

According to the now largely extended Article 132, risk weight for the investment funds will be either 1250 % (instead of previously 100%) or calculated based on the qualified lookthrough approach. For a qualified lookthrough approach the following conditions must be fulfilled.

• For a UCITs or AIFs, for which both regular (CRR) reporting and prospectuses are available, calculation of the risk weight must be based on positions data of the fund. This data must be provided by either the asset manager or custodian to the entity performing the calculation
• Both the risk weight calculation results and the data they are based upon must be certified by a third-party

Fallback risk weighting for non-transparent funds increases by a factor of 12.5

The extended Article 132 means that under CRR II not calculating risk weight for investment fund on a look-through approach will increase the own capital charge for an investment in such a fund by a factor of 12.5. For credit institutions and banks investing into funds will only be attractive if the transparency requirement as outlined above are fulfilled. On the other hand, any fund not fulfilling those requirements will have a serious competitive disadvantage if offered to institutions from the banking sector.

What is valid for investment fund, is as well applicable to service providers performing calculations for those funds: every reporting solution used by the asset management companies, under CRR II will have to be able to collect data from the custodians or asset managers, calculate the average risk weight of the fund and undergo a regular certification of the calculation process.

Liquidity report becomes standard for investment funds

The transparency requirement in application to funds will also be relevant for the Liquidity Coverage Ratio (LCR) of the credit institutions and banks. Update of Article 416 means implies that investments into funds will be qualified as liquid only as long as the transparency requirements are fulfilled and liquidity classification is available for the positions of the fund. This effectively means that liquidity reporting in accordance to the template C72.00 in Annex XXV of EBA-ITS-2019-01 will become a standard for investment funds.

Conclusion: Time to act

By the end of June 2021, the updated CRR II will come into force. The result will be stricter requirements for the disclosure of risk figures. The new regulations not only affect the banking sector, but precisely asset managers and their reporting obligations to clients.
“One of the key issues under CRR II will be the mentioned look-through of investment funds, as the new fallback risk weight for non-transparent funds increases by a factor of 12.5”, Jovy concludes. As a result, investment managers rely on sufficient granularity of look-through data. The same level of granularity is required for fund-of-funds structures; i.e., target-date funds managed by third-party firms.

About the Capmatix Asset Management platform

Capmatix regulatory reporting platform provides an end-to-end solution and services various regulatory reports including CRR II reports with look through data collection and integration. We support you managing the relevant data sets, performing all calculations, producing and disclosing the full set of CRR II / Solva reports.

Furthermore, the reports can be certified via us in partnership with 3rd party auditors. The integration with the certification body is seamless and cost effective.

With our turn-key solution Investment Managers can ensure timely and accurate delivery of CRR II reports to their clients by the June implementation deadline and beyond.

As a multi regulatory solution, the same Capmatix platform can be scaled up to address all; Solvency II, SFDR, PRIIPS KID, EPT, ICT/DCPT, MIFID calculations and production and distribution of all data templates and reports.
Please contact us for more information or to schedule a call to find out more on how we can assist you.

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