CySEC Circular C526 – Common weaknesses identified during the review of the Recovery Plans (Form 20-01) submitted by CIFs which qualify for the simplified Recovery Plan

MNK Risk Consulting > Regulatory Developments > CySEC Circular C526 – Common weaknesses identified during the review of the Recovery Plans (Form 20-01) submitted by CIFs which qualify for the simplified Recovery Plan

Circular C526 (“the Circular”) dated 10/08/2022 introduces the Common weaknesses identified during the review of the Recovery Plans (Form 20-01) submitted by CIFs which qualify for the simplified Recovery Plans.

The Cyprus Securities and Exchange Commission (the ‘CySEC’) wishes to inform the Cyprus Investment Firms[1] (the ‘CIFs’) which fulfil the criteria of par. 4 of the Directive DI20-01 on the establishment of simplified obligations as to the content and details of their Recovery Plans (qualifying CIFs) that a CIF’s Recovery Plan should be in place to enable it to deal with for periods of financial distress, recover from financial losses and improve its financial position.

The Form 20-01 is due to be submitted to CySEC, via the TRS system, by 30/09/2022, taking into consideration all the below points while preparing the next recovery plan.

The key takeaways along with the main weaknesses identified during CySEC’s review of the Recovery Plans submitted in 2020, can be found below:

  1. Governance arrangements
  • Recovery plan must include a clear assignment of roles and accountability for each procedure within the recovery, together with the escalation process assigned.
  • Qualifying CIF should 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.
  • The Recovery Plan should include a detailed description on how the recovery plan fits within the overall risk management framework of the qualifying CIF.
  • Strategic Analysis
  • Qualifying CIFs should consider the criteria relation to the determination of critical functions as stated in Article 6 of the Commission Delegated Regulation (EU) 2016/778. For example, some CIFs identified their compliance function as a critical function, which is not.
  • Stress Scenarios
  • Identify at least two scenarios that will be severe enough to bring the CIF close to default.
  • 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. They 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 take into consideration the EBA “Guidelines on the range of scenarios to be used in recovery plans” when designing their scenarios.
  • Recovery Options
  • The recovery options presented should be feasible and have an actual impact within the right timeframe.
  • Recovery options like the financial support of the shareholder should be reconsidered as the crisis in the Ukraine has showed that some shareholders may not be in a position to provide immediate financial support if needed.
  • CySEC expects that the Qualifying CIFs will present the indicators that derived from the application of the recovery options, in order to indicate their impact on the recovery indicators.
  • Qualifying CIFs should identify a broad range of recovery options available to them towards having more alternatives available to implement in different situations.
  • Qualifying CIFs should also consider all operational and legal impediments before considering specific recovery option. There should be a realistic timeframe for management action to deliver the expected outcome.
  • Good Practices
  1. Planning: Identifying the core business lines together with the risk indicators is the first step before designing the Stress Tests Scenarios.
  2. Feasible Stress Test Scenarios: Sufficiently severe scenarios should be designed, relevant to the Qualifying CIF’s business model to test their readiness in periods of financial stress.
  3. Clear assignment and accountability: A clear assignment of the roles for each task is needed so that everyone in the Qualifying CIF understands what should be done within the timeline set.
  4. Communication with the CySEC: Good communication with CySEC is important during periods of financial stress in order to ensure that all the necessary measures are taken.

Please note 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.

Should you need more information or assistance you can email us at or call us at 25-508201.

[1]With Initial capital requirement of €750.000 per section 9(1) of Law 165(I)/2021 regarding the prudential

supervision of Investment Firms