UK banking prudential regulatory reporting: the relentless grind…

The financial crisis which broke in 2007/08 generated an unprecedented explosion of banking regulation. Some commentators and politicians (esp US) are now arguing its time to deregulate again. Whatever the merits of that debate, there’s little respite yet here in the UK for the banking sector. Amongst other things the flow of new regulatory reporting requirements continues and the volume of data reported increases relentlessly. The typical UK bank today has the following new reporting developments to contend with over the near future:

Additional Liquidity Monitoring Metrics : the Liquidity Coverage Ratio (LCR) formed a core part of the post crisis regulatory response on liquidity. The ALMMs are a series of regulatory tools introduced in April 2016 and designed to complement the supervision of an institution’s liquidity risk by means of the LCR. Each ALMM takes the form of a detailed return on aspects of the bank’s liquidity position the bank is required to populate with data and submit to the regulator on a periodic basis. One particular return – the maturity ladder – which was originally considered but excluded from banks’ reporting requirements when the ALMMs were introduced is now being introduced in an adjusted form (designed to align with the LCR). Banks will be required to submit this new return (the C66) from March 2018.

Pillar 2 Liquidity Framework: the prudential banking regulatory framework divides into three Pillars. In the liquidity context the LCR is one of the cornerstone regulatory requirements and currently forms Pillar 1. The Pillar 2 framework is intended to complement the Pillar 1 regime by considering liquidity risks not captured, or not fully captured, under Pillar 1. The UK’s domestic prudential banking regulator the PRA is currently putting the UK Pillar 2 liquidity framework in place, using a series of consultation papers to drive the debate. In the latest, CP 13/17, the PRA has focused on cashflow mismatch risk and proposed it monitors this risk by means of a new reporting requirement- the PRA110. The proposal is that this return will build on the C66, requiring certain additional liquidity data on a daily basis over a 92 day period. The PRA is targeting 1 January 2019 for implementation of this new reporting requirement.

Capital+ : the PRA is proposing the formal introduction into the regulatory framework of a regulatory return providing forecast capital data, the ‘Capital+’. This return will collect ‘actual data’ ie estimates of capital data for the most recent reference period and also firms’ own forecasts. The data definitions in this return are aligned with various COREP templates eg Own Funds CA1. There are three different versions of this return, PRA 101,102 and 103. A firm will only submit one of these three returns, which one is decided by rules intended to apply some proportionality into the framework. So for example the largest deposit takers would report actual and forecast data on a monthly or quarterly basis using the PRA101, whereas the smallest firms would report forecasts only on an annual basis using the PRA103. This particular requirement started to apply on 1 October this year.

Forecast Balance Sheet and P&L: the PRA has issued new proposals on reporting forecast balance sheet and P&L. The proposal is to require firms to provide business plan forecasts for their current financial year-end and the following year-end in four new regulatory reports: PRA104 – PRA107. These new reporting requirements apply from 1 January next year, reporting to be on a half yearly basis.

FINREP: in 2013 the CRDIV EU legislative package introduced a new EU-wide supervisory reporting framework for Financial Reporting (FINREP) and Common Reporting (COREP). All PRA authorised banks and building societies are required to comply with COREP reporting obligations. Many firms have however to date avoided the need to comply with FINREP reporting (which is extensive). From 1 January next year that is about to change:-

  • All firms which have not previously been required to complete FINREP reports will now have to report at least a minimum suite of 5 FINREP returns providing data on the firm’s balance sheet, its P&L and Statement of Comprehensive Income. This data will be collected quarterly, at both individual and consolidated group level.
  • Some additional FINREP reporting requirements will result from the introduction of IFRS 9 on 1 January next year. These proposals will apply both to firms that apply IFRS generally and also to those which apply IFRS 9 as part of UK GAAP. Depending on the firm’s circumstances a firm in scope will require to submit a further 12 or 6 FINREP returns providing data on credit quality (including arrears and impairments).

Several of these new returns replace old/outgoing returns, so they are not all completely additional. Nevertheless, the pace of change is demanding on reporting firms, autopopulated software solutions look increasingly essential, and of course the cost of compliance continues to rise inexorably. Meanwhile for the beleaguered regulatory reporting officer in that typical UK bank the grind continues…

Portfolio Hedge Accounting: continuing to grapple with IAS 39

The financial markets have their fair share of obscure and confusing concepts and jargon. The topic of portfolio macro hedge accounting is a good example. Essentially an accounting technique intended to eliminate volatility in financial statements, it is not an easy topic. But the basics can be illustrated by taking a simple example:

  • A bank has advanced a portfolio of fixed rate loans
  • A rise in interest rates is a risk to the bank: it will reduce the value of the loans
  • The bank protects against this interest rate risk by entering into an interest rate swap(s)
  • This swap is a deal the bank enters with a third party to eliminate the interest rate risk
  • The bank may or may not adopt the portfolio macro hedge accounting technique
  • If it does not its accounts will treat the swap(s) in a manner which results in an accounting gain or loss, despite being an economic hedge
  • By adopting the technique the bank mitigates this mismatch between accounting treatment and economic reality in its accounts

Many banks do adopt macro hedge accounting, but applying the current accounting standard (IAS 39) in this area is difficult: many issues are unclear or require interpretation. A 2014 initiative by the IASB to develop a new approach appears to have been quietly shelved. The market is therefore left grappling with the application of IAS 39 . One specific scenario which can arise in practice – the swap(s) in question are cancelled – throws up a variety of considerations. Different methodologies and approaches to this scenario will result in quite different outcomes, some unwelcome: extraordinary adjustments to accounts due to overstatements in previous accounts can even be required. Our ALMIS Hedge Accounting provides an efficient solution which avoids the pitfalls. For a more detailed article on the swap cancellation scenario click here.

NSFR – A reality check

Introduction

The Basel Committee indicated several years ago that it wants the NSFR to become “a minimum standard by 1 January 2018 ”. With that apparent deadline looming, now seems a good time to assess where matters stand on this key post crisis reform to the banking sector.

The story so far

At the international level it was in 2010 The Basel Committee published its Consultative Document on the NSFR, describing it as “one of the….Committee’s key reforms to promote a more resilient banking sector”. The Document explained the underlying objective: to reduce funding risk over a longer time horizon (contrast LCR) by requiring banks to fund their activities with sufficiently stable sources of funding in order to mitigate the risk of future funding stress. The NSFR would limit overreliance on short-term wholesale funding, encourage better assessment of funding risk across the balance sheet, and promote funding stability. Designed as complementary to the LCR, the NSFR was described by the Committee as a “significant component of the Basel III reforms”. The January 2018 timetable was set…

At the European level regulatory work on the NSFR progressed alongside the Committee’s consultation process. The CRR, introduced in 2013 as part of CRDIV, did several things: it imposed the NSFR COREP reporting obligation; imposed a very general requirement that long-term assets have to be adequately met with a diversity of stable funding instruments; set a timetable for the introduction of a legislative proposal on a European NSFR; and it recognised that domestic regulators could apply interim stable funding requirements in the meantime.
The story continued when the European Commission issued a draft Regulation in Nov 2016 . Amongst other things that draft Regulation introduces detailed rules on a binding harmonised EU NSFR; but envisages the ratio applying from two years after the Regulation itself comes into force (whenever that will be).

Meanwhile at the domestic UK level the PRA has not to date published anything specific on the NSFR, with more of a current focus on PILLAR 2.

An immediate observation: timing

Relevant institutions continue to submit COREP NSFR returns, and remain subject to the general CRR stable funding requirement.  But what’s the significance of the Basel Committee’s Jan ’18 timetable ? Whatever the Committee envisaged happening at that time it is looking increasingly unlikely UK institutions will become subject to any binding new NSFR. At the European level the draft Regulation issued last November in its current form clearly works to a much more extended timetable. So in the absence of some immediate burst of European or domestic regulatory activity nothing much in this space will change on 1 January 2018…

Getting more granular…

But there is also a very much more real world dimension: the COREP template returns do not contain any statement of the reporting institution’s ratio, and careful review reveals those templates are insufficiently granular to enable an accurate calculation of the ratio per the standard’s rules. For example:

  • the standard applies various specific rules in relation to the treatment of encumbered assets; the COREP templates however are insufficiently granular to show the data required to apply these rules – for example, the proportion of 35% RWA which are encumbered.
  • initial margin in relation to a derivative transaction receives a certain treatment under the ratio calculation however the COREP template does not accommodate any data specifically on initial margin, so again does not permit accurate calculation of this component within the ratio.

So until the reporting requirements are amended the regulator is receiving neither a statement of the submitting institution’s ratio nor the data required to calculate it in accordance with the standard. (The Commission has stated the EBA will develop draft implementing standards “to harmonise NSFR reporting requirements”.)

An ALMIS solution

Having considered these deficiencies in the COREP templates we have devised a solution within the ALMIS system to assist clients. We have enhanced the ALMIS NSFR Report to permit the inclusion of the more granular data required to calculate the ratio correctly; and that greater granularity introduced into the ALMIS NSFR Report permits the user also, using a new template tool in our Report Writer, to calculate the ratio accurately in accordance with the standard. This tool is wholly configurable by the client, allowing for example the selection of chosen RSF and ASF factors in relation to asset or liability categories. Where a client is already fully utilising the ALMIS Capital Adequacy, Liquidity and Regulatory Reporting functionality, no additional data will be required. It is intended that this new template, underpinned by the same single source of data used across the ALMIS system, will become a robust and practical MI tool to support decisions by ALCOs until the regulatory regime eventually settles reporting procedures which demonstrate compliance with the applicable ratio. (The ALMIS functionality will of course continue also to autopopulate the existing COREP NSFR template; and will be developed in line with the new template when it is finally published.)

Conclusions

The NSFR is an important part of banking reform following the banking crisis. It favours stable retail and wholesale funding over short term wholesale. The key principles have been established and a deadline has been set. However the reporting detail and EU regulation has not yet been finalised and therefore it looks almost certain the 1 January 2018 deadline will be missed. Firms can however still calculate and therefore monitor and prepare for the introduction of the NSFR as a minimum standard sometime after 1 January 2018.

Supervising building societies’ treasury and lending activities

Joe Di Rollo reviews practical aspects of product pricing & FTP at BSA Seminar with PRA speakers helping building societies understand key changes in SS 20 / 15.

ALMIS International’s founder & CEO, Joe Di Rollo, will be sharing the platform with the PRA’s Head of Building Societies at the BSA’s half day seminar on 21 February 2017 in London. Designed to provide building society executives an opportunity to understand the impact of the PRA’s revised Supervisory Statement SS 20/15 (formerly known as the Specialist Sourcebook for Building Societies) from experts.

The seminar will include a presentation on the topic of product pricing, which has been given much greater prominence in the revised SS. To finish off there will be an open session for questions to the speakers and discussion from the floor.

To find out more and to book your place click here.

IRRBB to remain PILLAR 2

Basel Committee on Banking Supervision have published its latest paper on Interest Rate Risk (IRRBB). This paper details Interest Rate Risk principals updated since the consultation paper was published last year. The Committee has concluded that the heterogeneous nature of IRRBB would be more appropriately captured in Pillar 2.

Nevertheless IRRBB is set to become an increasing priority for regulators and risk managers as the Committee is recommending an enhanced Pillar 2 approach.

Banks are expected to implement the standard by 2018.

https://www.bis.org/bcbs/publ/d368.pdf

ALMM Update

The PRA has finalised the date of changes to liquidity reporting rules. On 22 April 2016, FSA 050-053 will be switched off and the EU requirements to report additional liquidity monitoring metrics introduced. Firms will not be required to report both sets of returns simultaneously. Note the first reporting date for returns C67.00, C68.00, C69.00, C70.00 and C71.00 will be 30 April for monthly reporters, and 30 June for quarterly reporters.

C66.00 (Maturity analysis) has been dropped

For the months from April 2016 to October 2016 only, the reporting remittance date for monthly reporters is the 30th calendar day after the reporting reference date. Afterwards it reverts to 15 calendar days. Quarterly reporters have 30 calendar days to remit returns.

Reporting remains monthly – but quarterly for institutions that are not part of a group with subsidiaries or parent institutions located outside the UK and the “balance sheet total of the institution represents only a small proportion of the sum of individual balance sheet totals of all institutions in the respective Member State and the institution has total assets which are not significant”. This means almost all UK banks and building societies are quarterly.

http://www.bankofengland.co.uk/pra/Pages/publications/ps/2016/ps1516.aspx

Navigating COREP Taxonomy Changes

The much-anticipated update to the current (version 2.3.1) taxonomy (the set of definitions published by the EBA which precisely interpret the meaning/value of numerical data entered into COREP and FINREP returns) has been published. This new version (2.4.1) currently does not have an implementation date but has already superseded version 2.4 which was never implemented.

The EBA has also issued a version 2.5 which will supersede all previous versions to become the definitive taxonomy from December 31st 2016. Amongst others, one of the first reports affected will be the monthly LCR for period ending Dec 2016.

To complicate the situation even further, the recent European LCR Delegated Act, implemented by the UK regulatory authorities, requires dual reporting of the monthly COREP LCR. As version 2.3.1 does not cover the Delegated Act’s requirements, in practical terms this will mean firms using both the existing COREP taxonomy version 2.3.1 and a manual Excel spreadsheet work around until such time as version 2.4.1 (or version 2.5) is implemented.

This complicated and uncertain environment is a challenge for both financial firms, many of whom are still finding their way through the rigours of COREP and FINREP, and for service providers like ALMIS International who must ensure their software is always compliant, regardless of the frequency and uncertainty of regulatory directives from the EBA.

ALMIS International will continue to develop its Regulatory Reporting module to comply with the now published ‘gold standard’ of version 2.5. However, we will continue to work closely with the EBA and the PRA at UK national level so that if version 2.4.1 is implemented between now and December 31st, our software, training and support will ensure your returns remain compliant and help you navigate a smooth course.

For more information contact Jenna Haston j.haston@almis.co.uk or call +44 131 452 8898

Colin McKay joins as Chief Operating Officer

November 1st 2015, ALMIS International announces the key appointment of Colin McKay as Chief Operating Officer (COO). This key appointment signals an exciting new phase in the expansion of the company, established in 1992, which has seen significant growth over the past two years. ALMIS International now supports over 50 clients with the development of a comprehensive Asset Liability Management (ALM) and Regulatory Reporting solution for small and mid-size banking firms.

Joe Di Rollo, founder of ALMIS International, will transition from his current roles of Managing Director and Head of Operations, to that of Chief Executive Officer (CEO), with an intention to concentrate on product development, customer relations and regulatory developments.

Already a Non-Executive Director of ALMIS International for some time, Colin now assumes his new executive role after 25 years as a finance lawyer advising banks in domestic and international markets. During spells in London, Tokyo and Edinburgh Colin has worked in several firms including Freshfields, Eversheds and most recently Shepherd and Wedderburn. Along the way he has led service delivery teams, held various management positions and run several key financial institution accounts.

Colin said, “Joe has developed a world-class solution which the banking market needs now more than ever. With the support of a loyal and expanding client base, the prospects for growth of the business are exciting”.

In welcoming Colin to the team Joe comments,” I believe Colin has the ideal combination of banking expertise, management best practice and customer relations experience to take us forward to the next stage of growth and consolidation.”

ALMIS International hosts its annual user group meeting later this month at which clients will have the opportunity to meet Colin and hear of his initial plans.

For more information, contact Jenna Haston by email or call on 0131 452 8898.

LCR under the new Delegated Act 58 Banks and Building Societies attend ALMIS webinar

From 1st October all UK Banks and Building Societies are required to produce the LCR under the new delegated act. To help bring clarity to the new delegated act and address the key points which affect small banks and building societies ALMIS International, already experts in delivering an automated solution, hosted a highly informative and interactive webinar on Tuesday 29th September, attended by 58 delegates.

The webinar was led by Joe Di Rollo (Managing Director) of ALMIS International and covered the main points for completing and calculating the new LCR.

This webinar was very relevant to understanding and navigating the issues posed by the new CRD IV liquidity regime which came into force on 1st October. There is definitely an appetite for greater understanding of the new regime and discussion of the more complex and ambiguous issues, as evidenced by the high turnout from both banks and building societies. Everyone agreed on the need for clarity in order to achieve effective compliance and best practice.

The webinar focused on the main points for completing and calculating the LCR and highlighted some key issues.

Key Issues

There is now increased choice for investing in HQLA’s (High Quality Liquid Assets). Delegates were asked which instruments they are considering. The results are captured in the graph below:

lcr-webinar-graph

Outflows are the most complex part of the return with some interesting differences in interpretation. One example of different opinions in interpretation discussed at the webinar is detailed below:

If a customer has a balance greater than the FSGS limit (shortly to be £75,000) should the entire balance be treated as a higher risk outflow of 10% or only the portion of the balance above the insured amount?

The EBA FINAL draft implementing technical standards states:

1.1.1.2 Deposits subject to higher outflows

“Credit institutions shall report here the full balance of the deposits subject to higher outflow rates in accordance with paragraph 2 and 3 of Article 25 of Commission delegated regulation (EU) 2015/61. Those retail deposits where the assessment under paragraph 2 of Article 25 for their categorization has not been carried out or is not completed shall also be reported here”.

This wording suggests that the intent is for the entire balance to be considered non-stable.

On the other hand…

Article 25 para 1 – Credit institutions shall multiply by 10% other retail deposits, including that part of retail deposits not covered by Article 24.

Firms are interpreting this to mean that only the excess over the guarantee is subject to the higher outflow.
ALMIS software is designed to handle both interpretations.

In summary, ALMIS is already a fully automated solution which produces the LCR from core data. This same core data is used for liquidity adequacy and analysis, providing a reliable, automated system to help ensure efficient compliance with the new regulations, regardless of interpretation.

For the presentation slides, please contact Jenna Haston by email on j.haston@almis.co.uk or call on 0131 452 8898.

Liquidity under CRD IV and ALMM – Additional Liquidity Monitoring Metrics – Is there a positive aspect?

The imminent introduction of the new LCR and ALMM will indeed increase the volume and even frequency of reporting for many Building Societies but, after closer inspection, is it all bad news or can firms use this data to their competitive advantage?

Volume of Reporting

The amount of regulation reporting for liquidity from each individual firm is now twice the volume that the entire UK Building Society sector was producing prior to 2008. The six new ALMM reports alone contain over 15,000 data points. The new ALMM reports can be considered work in progress as the EBA gain approval from the European Commission and they add technical definitions and validations. For a temporary period, firms are reporting three different cuts of liquidity data as regulations move towards new standards.

Proportionality

There are, however, positive aspects to the new regime announced recently by the PRA.

  • Daily reporting will not be a requirement for firms with >£5bn assets.
  • The new LCR (liquidity under CRD IV) replaces the BIPRU 12 type A/B approach, is more rules based than principles driven and for many produces a lower minimum.
  • The minimum liquidity target is therefore considered easier for most building societies.
  • There is now a wider range of instruments to invest liquid assets.

Turning Compliance to Competitive Advantage

The volume and ‘work in progress’ nature reporting demand that all firms implement smart, automated and flexible systems. The up side though of getting this right will enable firms to better analyse and manage liquidity to their advantage – providing more accurate visibility over a Funds Transfer Pricing allowing understanding of the true cost of liquidity and how to best manage this.

To assist with this, we are developing auto population for four of the main reports and this auto population will be available from beginning of September 2015. We have also prepared a document that explains the reports and a more detailed ALMIS specification.

For further information or to request an ‘ALMIS Guide to understanding ALMM’, please contact j.haston@almis.co.uk