CySEC identifies weaknesses in brokers’ recovery plans
The Cyprus Securities and Exchange Commission (CySEC) has reviewed a sample of the Recovery Plans submitted by qualifying Cyprus investment firms (CIFs) in 2020. A CIF’s recovery plan should be in place to enable it to deal with periods of financial distress, recover from financial losses and improve its financial position.
CySEC expects the recovery plan to include a clear assignment of roles and accountability for each procedure within the recovery, together with the escalation process assigned.
It is important for the qualifying CIF to identify the actions required during the recovery process, who will be responsible for each action, and in which order these actions need to be executed. A lack of clarity of responsibilities and procedures is likely to result in delay and confusion in decision-making, which could make otherwise valid recovery options worthless, or of limited benefit.
Moreover, a detailed description on how the recovery plan fits within the overall risk management framework of the qualifying CIF is expected.
In some recovery plans, it has been observed that qualifying CIFs declared critical functions that indicate unawareness of the criteria that should be fulfilled for a function to be categorized as critical, as defined in the Commission Delegated Regulation (EU) 2016/778. For example, some CIFs identified their compliance function as a critical function.
CySEC expects that a qualifying CIF will identify at least two scenarios that will be severe enough to bring the CIF close to default. In some cases, CySEC observed that the scenarios used by qualifying CIFs did not bring the indicators to the red level as required.
Qualifying CIFs should use scenarios relevant to their business model. In addition, the scenarios should be explained clearly and in detail, identifying the impact that they would have on the qualifying CIF’s recovery indicators. Qualifying CIFs should ensure that at least one scenario affects the firm on a stand-alone basis and at least one scenario affects the financial market in its entirety. Qualifying CIFs should use scenario testing to test the effectiveness of their recovery options and to test the adequacy of their recovery indicators.
The recovery options presented should be feasible and have an actual impact within the right timeframe. In some cases, the options given by CIFs were not specific, where others could not be considered as feasible or that could have an actual impact on the recovery of the qualifying CIF. For example, an option presented was the “reduction of costs”. This is not considered to be a detailed option, as it does not give a clear picture of the specific costs to be reduced, how and if this is feasible or not.
Good communication with the CySEC is important during periods of financial stress in order to ensure that all the necessary measures are taken.
Finally, CySEC reminds qualifying CIFs that the preparation of the recovery plan is an ongoing process and should be reviewed regularly and updated when the circumstances change in order to have a plausible plan to respond to any periods of financial stress.
CySEC expects qualifying CIFs to take into consideration all the above points while preparing their next recovery plan, which is due to be submitted to CySEC, via TRS only, by September 30, 2022.