IFR - Liquidity requirement for investment firms

Since the entry into force of the Regulation on the prudential requirements of investment firms (Investment Firms Regulation – IFR), investment firms are required to comply with the liquidity requirement under Article 43 of the IFR. An outline of this liquidity requirement is provided below. DNB has not used the option to exempt certain investment firms from the liquidity requirement since the introduction of the IFR.

Calculation of liquidity requirement and available liquidity

Investment firms must maintain an amount of liquid assets at least equal to 1/3 of the fixed overheads requirement. (For more information on the fixed overheads requirement, see the page Calculation of fixed overheads requirement (FOR) on our website.) This means that investment firms need to hold an amount of liquid assets to meet at least one month's fixed overheads. If an investment firm fails to comply with this requirement, it will have a liquidity shortfall. In that case, it must notify DNB, which can then take appropriate measures.

To meet the liquidity requirement, only liquid assets may be considered. This is subject to the requirements of Article 43 of the IFR and the requirements of Delegated Regulation (EU) 2015/61. (See this Link). The following assets of the investment firm are considered liquid assets:

A. Unencumbered short-term deposits with a credit institution (bank).

B. Cash

Certain other assets can only be considered liquid assets if specific conditions are met. We recommend that you consult the applicable laws and regulations for this purpose. These assets are as follows:

A. *Receivables from trade debtors as well as fees or commissions receivable within 30 days, where those receivables comply with the following condition: the eligible amount is capped at 1/6 of the liquidity requirement. Example: the liquidity requirement is €75,000 and total trade receivables is €500,000. The eligible amount to be considered liquid assets is 1/6 of €75,000 = €12,500. In other words, only €12,500 out of the total of €500,000 is eligible as liquid assets.

B. Government bonds with at least credit quality of category 1 (this includes Dutch government bonds).

C. Assets (e.g. government bonds, corporate bonds and equities) as listed in Articles 10 to 13 of the Delegated Regulation (EU) 2015/61.

D. Assets (shares or UCITS shares) as listed in Article 15 of the Delegated Regulation (EU) 2015/61 up to a maximum of €50 million.

E. Financial instruments not covered by points e and f that are traded on a trading venue for which a liquid market exists within the meaning of Article 2(1) point 17 of Regulation (EU) No 600/2014, see this Link and within the meaning of Articles 1 to 5 of Commission Delegated Regulation (EU) 2017/567, see this Link. These are eligible up to a percentage of 45%.

* Investment firms with a licence for trading for own account and for underwriting or placing of financial instruments on a firm commitment basis may not consider these assets as liquid assets.

Please note that receivables (payable on demand) from affiliates (parent/subsidiaries), staff/directors and/or shareholders are not to be considered as liquid assets.

Managing the liquidity position

Investment firms must have internal procedures in place to monitor and manage the liquidity requirement on an ongoing basis. After all, the liquidity requirement under Article 43 of the IFR must be met on an ongoing basis. When designing the internal procedures under the liquidity requirement, the investment firm must, having regard to Article 29(1) of the IFD, take into account the risk profile, scope of operation and complexity of its business and the risk tolerance set by the management body. These procedures must also reflect the interest of the investment firm in each member state in which it operates.

Liquidity reporting

Under Article 54(1) of the IFR, IFR Class 3 investment firms must only report the following lines on an annual basis: