Skip to content
INSTITUTIONAL RESEARCH DESK
Euro Firm Ledger
Directory

EU Ifr Ifd Class2 Kfactor Prudential

IFD Articles 36–40 SREP & Pillar 2R Add-Ons: EBA/ESMA Joint Guidelines Explained

IFD Articles 36-40 and Commission Delegated Regulation (EU) 2023/1651 empower EEA supervisors to impose binding Pillar 2 Requirement (P2R) own-funds add-ons and Pillar 2 Guidance (P2G) buffers.

By Lukas Lindqvist, CEFAReview not recorded
IFD Articles 36–40 SREP & Pillar 2R Add-Ons: EBA/ESMA Joint Guidelines Explained — Euro Firm Ledger 2026 quantitative & supervisory data card
Euro Firm Ledger (EU IFR/IFD Class 1/2/3 Prudential Tiers, Initial Capital & K-Factor Formulas): Joint EBA-ESMA SREP scoring, RTS 2023/1651 P2R math, P2G stress buffers, and Art. 39 remedies.Source: Euro Firm Ledger Institutional Research DeskLicense: CC-BY-4.0

Submitting an annual IFD Article 24 ICARA report is only the firm-side half of Pillar 2: Articles 36 through 41 of Directive (EU) 2019/2034 (IFD), operationalized by Joint EBA-ESMA Guidelines (EBA/GL/2022/02) and Commission Delegated Regulation (EU) 2023/1651 (the Pillar 2R Measurement RTS), govern the regulator-side Supervisory Review and Evaluation Process (SREP). Following SREP desk and on-site reviews, national competent authorities—such as BaFin (§§ 44–45 WpIG), ACPR, CySEC, and CSSF—score the firm 1 to 4 across four SREP modules and issue legally binding Pillar 2 Requirements (P2R) alongside forward-looking Pillar 2 Guidance (P2G).

Within our EU IFR/IFD prudential capital guide and the IFR/IFD prudential hub, understanding how RTS (EU) 2023/1651 computes "indicative benchmarks" prevents unpleasant capital shocks when examiners challenge weak governance or aggressive B-book risk models.

Four SREP Scoring Modules Under Joint EBA/ESMA Guidelines (EBA/GL/2022/02)#

Jointly drafted by EBA and ESMA so conduct breaches feed directly into prudential capital scores, SREP grades every Class 2 firm from Score 1 (Low Risk) to Score 4 (High Risk / Failing or Likely to Fail) across four pillars:

  1. Business Model Viability & Sustainability: Revenue concentration in volatile CFD promotions, over-reliance on single host passports facing CNMV/CONSOB marketing bans, or unsustainable CPA affiliate burn;
  2. Internal Governance & Risk Controls: Four-eyes independence, board risk appetite, compliance staffing at firms like CAPEX.com or 1Market, and outsourcing oversight;
  3. Assessment of Risks to Capital (RtC, RtM, RtF): Adequacy of K-factors vs real tail exposures; and
  4. Assessment of Risks to Liquidity & Funding: Intraday margin stress and unencumbered IFR Article 43 HQLA.
Supervisory Review and Evaluation Process (SREP) workflow under IFD Articles 36-41 and RTS 2023/1651 stacking P2R and P2G over Pillar 1
Supervisory Review and Evaluation Process (SREP) workflow under IFD Articles 36-41 and RTS 2023/1651 stacking P2R and P2G over Pillar 1Verified Exhibit

Statutory Distinction: Binding Pillar 2R (Art. 40) vs Pillar 2G (Art. 41)#

Quantitative Distribution · Statutory Basis
Statutory BasisLegal Consequence of Breach
01Pillar 1 Requirement (D)IFR Art. 11 (ma…02Pillar 2 Requirement (P2R)IFD Art. 40 + R…03Total SREP Capital Requirem…D + P2R (expres…04Pillar 2 Guidance (P2G)IFD Art. 41
Regulatory LayerStatutory BasisLegal Consequence of BreachRequired Capital Tier Quality
Pillar 1 Requirement (D)IFR Art. 11 (max(PMR, FOR, KFR))Immediate regulatory breach; public Pillar 3 disclosure; license risk>= 56% CET1, >= 75% Tier 1, <= 25% T2 (IFR Art. 9)
Pillar 2 Requirement (P2R)IFD Art. 40 + RTS (EU) 2023/1651Legally binding at all times; triggers Art. 39 dividend/bonus bans & administrative fines>= 56% CET1 and >= 75% Tier 1 (or higher CET1 if NCA orders under Art. 40(3))
Total SREP Capital Requirement (TSCR)D + P2R (expressed as % of D, e.g., 135%)Hard regulatory solvency floor monitored every quarter in COREP IFCombined Pillar 1 + Pillar 2R minimum stack
Pillar 2 Guidance (P2G)IFD Art. 41Non-public supervisory expectation; repeated breach converts P2G into binding P2R!At least 75% Tier 1 (56%+ CET1) to absorb 3-year adverse macro stress

How RTS (EU) 2023/1651 Computes Binding Pillar 2R Add-Ons#

Under Commission Delegated Regulation (EU) 2023/1651 Articles 1–4, an NCA cannot invent an arbitrary P2R surcharge; examiners calculate P2R systematically as the maximum gap between Pillar 1 (D) and either:

  • Orderly Wind-Down Capital Shortfall (RTS Art. 2): Where realistic wind-down costs verified by the NCA exceed FOR (and exceed D); OR
  • Un-covered / Under-captured Material Risks (RTS Art. 3): Aggregated risk-by-risk capital for non-trading FX/credit, model deficiencies in K-NPR/K-CMG, DORA ICT cyber risk, and governance/control surcharges where SREP Governance scores 3 or 4!

Worked SREP Decision Letter & Total Capital Ratio Target#

Suppose BaFin or CySEC conducts a SREP review on a Class 2 broker (D = EUR 2,400,000) and scores Internal Governance at 3 due to weak tied-agent monitoring and under-budgeted wind-down severance:

Formula or model from the articleNot independently verified
Total_SREP_Capital_Requirement_And_Guidance:
  • TSCREUR = DPillar1 + P2R_Art40
  • TSCRRatioPct = (TSCREUR / DPillar1) * 100%
  • P2R_Art40 = max(
  • max(0, NCAVerifiedWindDownCapital - DPillar1),
  • max(0, KFRPlusUncoveredHarmsAndGovernanceAddOn - D_Pillar1)
  • )
  • OverallCapitalTargetWithP2G = TSCREUR + max(0, Peak3YrAdverseStressCET1Depletion - Offset_Allowance)
  • Worked SREP Determination Letter:
  • Pillar 1 Requirement (D) = EUR 2,400,000 (KFR binding over EUR 1.40M FOR)
  • NCA Restated 12-Month Wind-Down Capital = EUR 2,950,000 (Gap vs D = EUR 550,000)
  • NCA Risk-by-Risk Assessment: KFR (EUR 2.40M) + Conduct/Tied-Agent Harm (EUR 480k) + Governance Score-3 Add-On (EUR 320k)
  • = EUR 3,200,000 (Gap vs D = EUR 800,000)
  • Binding P2R_Art40 = max(550,000, 800,000) = EUR 800,000 (+33.33% of D)
  • TSCR_EUR = 2,400,000 + 800,000 = EUR 3,200,000 (Binding SREP Ratio = 133.33% of D!)
  • Pillar 2G (3-Year Stress Depletion Buffer) = EUR 450,000 -> Total Supervisory Capital Target = EUR 3,650,000 (152.08% of D)
SREP capital stack showing EUR 2.40M Pillar 1 D, EUR 800k binding Pillar 2R (133.3% TSCR), and EUR 450k Pillar 2G (152.1% total target)
SREP capital stack showing EUR 2.40M Pillar 1 D, EUR 800k binding Pillar 2R (133.3% TSCR), and EUR 450k Pillar 2G (152.1% total target)Verified Exhibit

Non-Capital Supervisory Measures Under IFD Article 39(2) & Article 42#

Beyond own-funds surcharges, IFD Article 39(2) arms supervisors with sweeping operational remedies: prohibiting shareholder dividend distributions or AT1 coupons (Art. 39(2)(i)), capping variable staff bonus pools (Art. 39(2)(g)), forcing divestment of high-risk cross-border product lines (Art. 39(2)(e)), and imposing binding specific liquidity requirements above 1/3 FOR under IFD Article 42.

Frequently asked questions

Must a Class 2 investment firm disclose its binding SREP Pillar 2R ratio publicly in its Pillar 3 report?

Under IFR Article 50(c), Class 2 firms must publicly disclose any additional own-funds requirement based on the supervisory review process referred to in IFD Article 39(2)(a) and its CET1/Tier 1 composition—whereas non-binding Pillar 2 Guidance (P2G, Art. 41) is NOT publicly disclosed unless triggered under MAR.

How often do BaFin, ACPR, and CySEC conduct full SREP assessments on Class 2 and Class 3 firms?

Under EBA/GL/2022/02 proportionality categories, high-impact Category 1/2 investment firms undergo full SREP cycles every 1 to 2 years, medium-impact firms every 2 to 3 years, and low-risk Class 3 SNI firms at least every 3 years alongside annual automated COREP risk-indicator screening.

What happens if an investment firm dips into its Pillar 2 Guidance (P2G) buffer during a market downturn?

Dipping below P2G does not trigger automatic IFD Article 39 dividend freezes or license revocation; instead, under IFD Article 41(2), the firm must immediately notify its NCA and submit a revised capital plan restoring P2G over an agreed timeframe—though repeated failure converts P2G into binding P2R.

Can an NCA impose a binding SREP surcharge on liquid assets under IFD Article 42?

Yes. Where SREP reveals intraday clearing-margin vulnerability, concentrated prime-broker funding, or negative-balance gap risk exceeding 1/3 FOR, IFD Article 42 authorizes specific quantitative HQLA add-ons that become just as binding as IFR Article 43.

Publication record

Published
14 November 2026
Updated
14 November 2026
Author
Lukas Lindqvist, CEFA
Review
Review not recorded
Automated fact check
Passed in the stored pipeline record
Source URLs
3 recorded

AI assistance recorded: anthropic/claude-opus-4.6. This field does not establish human review or source verification.

Academic & Institutional Attribution

Cite This Research & Embed Live Data Card

Open Attribution License (CC BY 4.0)

Standard academic & institutional research paper citation format.

Lukas Lindqvist, CEFA. (2026, November 14). IFD Articles 36–40 SREP & Pillar 2R Add-Ons: EBA/ESMA Joint Guidelines Explained. Euro Firm Ledger. https://eurofirmledger.com/bulletins/ifd-article-36-40-srep-pillar-2r-own-funds-add-ons-eba-guidelines

Further Institutional Analysis & Briefings

Euro Firm Ledger Data, Benchmarks & Contributor Records

CC BY 4.0 Open Data

Open Institutional Datasets (CSV / JSON) →

Download desk-compiled quantitative series & schemas.

2026 Reference Matrix

2026 Institutional Benchmarks & Thresholds →

Statutory capital, clearing, margin & rate conventions.

Editorial Records

Authors & Review Records →

View named contributors where those records are available.

Complete Index

Master Research & Dossier Archive →

Browse all published briefings by topic pillar & date.

IFD Articles 36-40 SREP, Pillar 2R & Pillar 2G Add-Ons | Euro Firm Ledger