UK IFPR: ICARA and the SNI distinction.

The classification and why it moves

A firm is small and non-interconnected only if it satisfies every condition in the set. The conditions cover the activity metrics the regime is built on — assets under management, client orders handled, assets safeguarded and administered, client money held, daily trading flow, net position risk, trading counterparty default exposure — together with balance sheet total and total annual gross revenue from investment services.

Three features make this a live assessment rather than a one-time determination:

• It is conjunctive. Failing a single condition removes the classification, whatever the others show.
• Several conditions are measured over a rolling window rather than at a point, so a firm can cross while its current-month figures look unchanged.
• Some conditions are assessed on a combined basis for firms in a group, so a firm can lose the classification through activity that is not its own.

What the classification changes

What the ICARA process is

The ICARA is a process, not a document, though it produces one. Its purpose is to establish that the firm can operate viably, and can wind down in an orderly way, without causing significant harm to clients or markets. It runs continuously and is reviewed at least annually, and the governing body owns it.

Four components carry the substance: identification of the harms the firm could cause or suffer, assessment of the financial resources needed to address them, wind-down planning, and the monitoring and escalation that keeps the assessment live between reviews.

Harm identification

Harm is assessed along the same three directions the capital regime uses, which is what makes the two connect.

• Harm to clients — from failures in the services the firm provides, loss or misuse of client assets and money, unsuitable advice or poor execution.
• Harm to markets — from the firm’s trading activity, its role in market infrastructure, or the disorderly exit of a participant.
• Harm to the firm — operational, credit, concentration and liquidity events that threaten its own viability and therefore its ability to wind down in an orderly way.

The discipline that makes this defensible is quantification. A harm identified but not sized cannot be tested against resources, and a supervisor reading the assessment will look for the link between the scenario, the loss it produces and the resources held against it.

The two threshold requirements

The assessment produces two numbers. The own funds threshold requirement is the amount of own funds the firm concludes it needs, taking the regulatory own funds requirement as a floor and adding for harms not adequately captured by it, plus the cost of an orderly wind-down. The liquid assets threshold requirement does the same for liquidity, covering ongoing needs under stress and the liquidity the wind-down itself consumes.

Wind-down planning

Wind-down planning is the part firms most often underestimate, because it drives both threshold requirements. It needs a credible trigger framework, a sequence of steps with the time each takes, and a costing of the period between the decision to wind down and the point at which client obligations are discharged. Fixed costs continue through that period, client assets must be returned or transferred, and revenue typically stops well before the costs do.

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