Art. 37 sets the limits with regard to concentration risk and exposure value excess. In particular, Art 37 (1) states that “An investment firm’s limit with regard to the concentration risk of an exposure value with regard to an individual client or group of connected clients shall be 25 % of its own funds” whereas Art. 37 (2) indicates that “Where the limits referred to in paragraph 1 are exceeded, an investment firm shall (…) meet an own funds requirement on the exposure value excess in accordance with Article 39. Art. 37 (3) establish the limit of the exposure value with regard to an individual client or group of connected clients (500%/600%). 

Art. 38 (2) establishes that competent authorities may grant the investment firm a limited period to comply with the limit referred to in Art. 37 which arises the issue of which limit is it referring to. In our view, there are two possible interpretations to approach this issue:

(Option A) Art. 38 (2) only refers to the limit set in Art 37 (1) and therefore 25%/100% is a hard limit. Thus, competent authorities may only grant a limited period to the investment firm to comply with the 25%/100% limit. During that period, the IF has to calculate K-CON.

(Option B) Art. 38 (2) refers to the different limits set in Art. 37 and therefore 25%/100% is a soft limit. Thus, as the Art. 37 mentions a few other limits, competent authorities can impose the investment a limited period to comply with the 25%/100% limit, but not necessarily. Therefore, the investments firms can have a concentration risk over 25%/100% and calculate K-CON as long as they meet the 500%/600% limit set in the Art. 37 (2).