# IFD Articles 36-40 SREP, Pillar 2R & Pillar 2G Add-Ons

> Navigate EU IFD Articles 36-40 SREP audits under EBA/GL/2022/02 and RTS 2023/1651: binding Pillar 2R add-ons, Pillar 2G buffers, and Art. 39 powers.

Canonical: https://eurofirmledger.com/bulletins/ifd-article-36-40-srep-pillar-2r-own-funds-add-ons-eba-guidelines
Last updated: 2026-11-14T19:49:03.229Z

**Publication:** Euro Firm Ledger
**Category:** EU Ifr Ifd Class2 Kfactor Prudential
**Published:** 2026-11-14T03:45:25.915Z
**Author:** Lukas Lindqvist, CEFA (Certified European Financial Analyst (EFFAS/CEFA, Frankfurt & Zurich))
**Reviewer:** Not recorded

## Answer-first summary

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.

## Key takeaways

- Joint EBA-ESMA Guidelines (EBA/GL/2022/02) integrate MiFID II conduct-of-business deficiencies directly into prudential SREP scores (1 to 4) and binding Pillar 2R capital add-ons.
- Under RTS (EU) 2023/1651, binding Pillar 2R equals the larger excess over Pillar 1 D of either NCA-verified orderly wind-down capital or total ongoing risk-by-risk harms plus governance surcharges.
- Total SREP Capital Requirement (TSCR = D + P2R) is legally binding every day, backed by at least 56% CET1 and 75% Tier 1 (75% CET1 where AT1 = 0).
- IFD Article 39(2) empowers NCAs to freeze dividends, slash variable bonus pools, restrict high-risk products, and mandate daily liquidity reporting alongside P2R surcharges.

## Related financial entities

- **Cyprus Investment Services and Activities Law (CySEC)** (CYSEC-CIF) — license: Statutory framework administered by CySEC transposing MiFID II, governing the authorization and operational requirements of Cypriot Investment Firms.
- **European Securities and Markets Authority (ESMA)** (ESMA) — license: Independent European Union authority contributing to safeguarding the stability of the EU financial system by enhancing investor protection and promoting stable markets.
- **German Investment Institutions Act (WpIG / BaFin)** (BAFIN-WPIG) — license: Specialized German regulatory statute transposing the EU Investment Firms Directive (IFD), administered by BaFin and the Deutsche Bundesbank.

## Analysis

Submitting an annual [IFD Article 24 ICARA](/bulletins/ifd-article-24-icara-internal-capital-wind-down-stress-testing) 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](/competent-authorities/bafin) (§§ 44–45 WpIG), [ACPR](/competent-authorities/autorit-de-contr-le-prudentiel-et-de-r-solution-france-166), [CySEC](/competent-authorities/cysec), and [CSSF](/competent-authorities/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](/bulletins/eu-ifr-ifd-class-1-2-3-prudential-capital-k-factor-guide-2026) and the [IFR/IFD prudential hub](/topics/eu-ifr-ifd-class2-kfactor-prudential), 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](/passports/european-securities-and-markets-authority) 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](/topics/bafin-wplg-amf-consob-cnmv-supervision), or unsustainable CPA affiliate burn;
2. **Internal Governance & Risk Controls**: Four-eyes independence, board risk appetite, compliance staffing at firms like [CAPEX.com](/firms/capex) or [1Market](/firms/1markets), 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](/bulletins/ifr-article-43-liquid-assets-requirement-one-third-for-haircuts).

![Supervisory Review and Evaluation Process (SREP) workflow under IFD Articles 36-41 and RTS 2023/1651 stacking P2R and P2G over Pillar 1](/api/figure?type=flow&title=IFD%20Articles%2036%E2%80%9341%20SREP%20Capital%20%26%20Liquidity%20Stacking&subtitle=How%20NCA%20examiners%20convert%20SREP%20Scores%20%281-4%29%20into%20binding%20P2R%20and%20stressed%20P2G%20buffers&steps=1.%20Four-Module%20Scoring%3A%3ABusiness%20model%2C%20governance%2C%20capital%20%26%20liquidity%20%281%20to%204%29%7C2.%20RTS%202023%2F1651%20P2R%3A%3AAdd%20binding%20own%20funds%20for%20un-covered%20harms%20%26%20wind-down%20gaps%7C3.%20Art.%2041%20Pillar%202G%3A%3AAdd%20CET1%20stress-test%20buffer%20above%20Total%20SREP%20Capital%20Req%7C4.%20Art.%2039%20Sanctions%3A%3ARestrict%20dividends%2C%20variable%20bonuses%2C%20or%20high-risk%20products&metrics=P2R%20CET1%20FLOOR%3A%3A%3E%3D%2056.0%25%20P2R%3A%3AIFD%20Art.%2040%283%29%20%2875%25%20Tier%201%29%7CP2G%20INSTRUMENT%3A%3A75%25%E2%80%93100%25%20CET1%3A%3AIFD%20Art.%2041%20stress%20buffer%7CMEASUREMENT%20RTS%3A%3AEU%202023%2F1651%3A%3ABinding%20EU%20P2R%20math%20rulebook%7CDIVIDEND%20FREEZE%3A%3AIFD%20Art.%2039%282%29%3A%3ATriggered%20immediately%20on%20P2R%20breach)

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

| Regulatory Layer | Statutory Basis | Legal Consequence of Breach | Required 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](/bulletins/ifr-article-9-own-funds-composition-56pct-cet1-at1-tier2-ratios)) |
| **Pillar 2 Requirement (P2R)** | IFD Art. 40 + RTS (EU) 2023/1651 | **Legally 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 IF | Combined Pillar 1 + Pillar 2R minimum stack |
| **Pillar 2 Guidance (P2G)** | IFD Art. 41 | Non-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](/competent-authorities/bafin) or [CySEC](/competent-authorities/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
Total_SREP_Capital_Requirement_And_Guidance:
 TSCR_EUR = D_Pillar1 + P2R_Art40
 TSCR_Ratio_Pct = (TSCR_EUR / D_Pillar1) * 100%

 P2R_Art40 = max(
 max(0, NCA_Verified_WindDown_Capital - D_Pillar1),
 max(0, KFR_Plus_Uncovered_Harms_And_Governance_AddOn - D_Pillar1)
 )

 Overall_Capital_Target_With_P2G = TSCR_EUR + max(0, Peak_3Yr_Adverse_Stress_CET1_Depletion - 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)](/api/figure?type=bars&title=Worked%20SREP%20Decision%20Letter%20Capital%20Waterfall&subtitle=Stacking%20RTS%202023%2F1651%20P2R%20%28%2B33.3%25%29%20and%20Art.%2041%20P2G%20%28%2B18.8%25%29%20atop%20EUR%202.40M%20Pillar%201&steps=Pillar%201%20Floor%20%28D%29%3A%3AEUR%202.40M%20%28100.0%25%20COREP%20IF%2001%20baseline%29%7CBinding%20P2R%20%28Art.%2040%29%3A%3A%2BEUR%20800k%20-%3E%20EUR%203.20M%20TSCR%20%28133.33%25%20of%20D%29%7CP2G%20Buffer%20%28Art.%2041%29%3A%3A%2BEUR%20450k%20-%3E%20EUR%203.65M%20Total%20Target%20%28152.08%25%29%7CManagement%20Headroom%3A%3AInternal%20Yellow%20EWI%20set%20above%20165%25%20of%20D&metrics=BINDING%20TSCR%20RATIO%3A%3A133.33%25%20of%20D%3A%3ABreach%20triggers%20Art.%2039%20bans%7CTOTAL%20P2G%20TARGET%3A%3A152.08%25%20of%20D%3A%3AAbsorbs%203-yr%20adverse%20shock%7CLIQUIDITY%20ADD-ON%3A%3AIFD%20Art.%2042%3A%3AParallel%20SREP%20HQLA%20surcharge%7CSREP%20CYCLE%3A%3A1%20to%203%20Years%3A%3AProportional%20to%20firm%20risk%20tier)

## 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](/bulletins/ifd-article-30-32-remuneration-variable-pay-deferral-mrt-rules) (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.


## Source URLs

- https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32019L2034
- https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32023R1651
- https://www.eba.europa.eu/regulation-and-policy/supervisory-review-and-evaluation-srep-and-pillar-2/guidelines-common-procedures-and-methodologies-supervisory-review-and-evaluation-process-srep-investment-firms

## Citation

- APA: Lukas Lindqvist, CEFA. (2026). 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
- Canonical article: [IFD Articles 36–40 SREP & Pillar 2R Add-Ons: EBA/ESMA Joint Guidelines Explained](https://eurofirmledger.com/bulletins/ifd-article-36-40-srep-pillar-2r-own-funds-add-ons-eba-guidelines)
- Site research index: [Euro Firm Ledger](https://eurofirmledger.com/llms-full.txt)