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.

Treasury Management integrated with ALMIS

In 2017 we will be introducing our Treasury Management System, currently being developed in collaboration with clients, to ensure we are offering as comprehensive a solution as possible working off a single source of data. Our current core offering spanning Regulatory Reporting, ALM and Hedge Accounting is already unique in the UK.

Clients benefit from key advantages of our single platform including:

  • Reduced cost and resource requirements.
  • Consistency across all outputs with one dataset driving all ALM, Regulatory Reporting and other needs.
  • Synergy of a holistic view, with the regulatory matrix integral to ALM & business planning.

Fair value accounting: an open and shut case

For the first time this year many financial institutions will have included derivatives at their fair value on balance sheets and, in many cases, this will have been a major headache.

Although fair value accounting became mandatory for larger banks and building societies in 2005, it has only become a requirement for smaller firms recently and must now be evident in their accounts. There is also a lot of evidence that all ‘big 4’ accounting firms are tightening up their procedure for auditing hedge accounting for both new FRS 102 transition clients and established IFRS clients.

Fluctuation in interest rates from one period to another causes the fair value of interest rate swaps to change materially and, as a result, there is potential for large volatility in reported earnings and profits. The numbers are often material and so the accounting is very important.

The accounting standard IAS 39 was amended back in March 2004 to specifically allow a portfolio approach to hedge account for a fair value portfolio of derivatives used to hedge interest rate risk. This was particularly helpful to banks who hedge interest rate risk in the banking book (IRRBB) on a portfolio basis. IFRS 9 (IAS 39 replacement) has not yet replaced portfolio or macro hedge accounting and so currently the only way to account for a portfolio of derivatives rather than individually is to adopt IAS 39.

However, in order to follow the relevant guidelines (AG114 – AG132) many banks have adopted this portfolio hedge accounting approach where constant, eg monthly, amortisation adjustments for de and re designation are required.

The complex guidance requires that the hedge item amount is fully tracked between the prospective and retrospective stage, the only way to keep track is to amortise off all the hedge adjustments and amortise on all the hedge adjustments every month, and that way you know you have it right.

If your portfolio has 60 time periods, this means 60 new adjustments every month, leading to many thousands after a few years. These adjustments are often made on large spreadsheets, introducing the risk of human error. Importantly the adjustments can cause the value on the balance sheet to become distorted from the true economic fair value and the accounts can also distort what is actually happening between the hedge and the hedged item.

The example below shows the treatment for a simple theoretically perfectly hedged bullet loan with no expected pre-payments. The example shows how the carrying amount is amortised out each period and we can compares this to its true economic value. In this simple example, the balance sheet value and the true economic value are materially different, and even a theoretically perfectly hedged scenario shows material P/L volatility. Surely this is not the best way to perform hedge accounting.

Fair Value Accounting Figure

It is however difficult but perfectly feasible to adopt open portfolio hedge accounting, allowing a firm to take an open portfolio of interest rate swaps and apply the concept of dynamic hedging without the need for constant adjustments.

With this in mind, the ideal software will properly calculate the value of the designated hedged item while following the very specific rules laid out in AG126 and AG 127.  It will include the individual loans and have the ability to calculate their fair value based on expected cash flows and can track actual pre-pre-payments between the prospective and retrospective stages.  If it can’t then we go back to the headache of de designating every month and amortising the fair value out.

Surely adopting a cleaner approach to hedge accounting, that doesn’t require all of these adjustments, is essential, where the hedged item amount reported always reflects the economic value of that hedged item without any distortion?

For more information on ALMIS International and our solution go to Hedge Accounting or contact us T: +44 131 452 8898

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

FTP – Exploring a ‘Best Practice’ Approach

Funds Transfer Pricing used in banks and building societies has evolved significantly since the banking crisis and particularly with the introduction of the strengthening liquidity standard and new CRD IV & BASEL III standards

Our FTP White Paper is now in its second publication and is aimed to help our clients implement their own individual approach to Funds Transfer Pricing (“FTP”).

This paper is based on the views and experiences of both our own expert consultants and also from detailed consultation with our bank and building society clients who use our ALMIS software and also industry experts.

Our aim is to provide some guidance as to the structure and what needs to be considered when client Firms are developing their FTP policies, methodologies and models. It is particularly aimed at the needs small and medium sized institutions that do not access the international capital markets for their funding.

In this paper, we give some background, explain the definition and objectives of FTP and then provide a technical road map for calculating pricing, taking account of the main components as identified. It will be particularly of relevance to banking institutions that are predominantly funded from retail / SME sources.

Request FTP White Paper - 2016 Update

The following links give valuable insight on this evolving subject – published by global, European, US and UK regulatory bodies.

The Bank for International Settlements published a paper written by Australian regulator Joel Grant.  This paper was a reaction to the lack of liquidity pricing post-crash and looks at liquidity pricing in some detail.

http://www.bis.org/fsi/fsipapers10.pdf

The EBA published a very high level paper on guidance over liquidity pricing in October 2010

https://www.eba.europa.eu/documents/10180/16094/cebs18_Guidelines.pdf

The FSA send a dear treasurer letter to all banks following a thematic review of 10 UK banks and highlighting general weaknesses in FTP

http://www.fsa.gov.uk/pubs/international/ftp_treasurer_letter.pdf

Following the thematic review the Bank of England publish a very informative paper on approaches and techniques for FTP on banks written by Fabrizio Cadamagnani of the Banking and Insurance Analysis Division, Rashmi Harimohan of the Bank’s Monetary Assessment and Strategy Division and Kumar Tangri of the Risk Infrastructure, Liquidity and Capital Division.

http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2015/q204.pdf

In March 2016 the Federal Reserve System published Interagency Guidance on Funds Transfer Pricing Related to Funding and Contingent Liquidity Risks.

https://www.federalreserve.gov/bankinfore.g./srletters/sr1603.htm

As part of Building Society regulation, the Bank of England include for the first time FTP in the building society source book and specific guidance included in consultation paper CP1216.

http://www.bankofengland.co.uk/pra/Documents/publications/cp/2016/cp1216.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

COREP Taxonomy Updates

There have been some recent press releases issued by the EBA regarding updates to the Data Point Model and the XBRL Taxonomies according to the Implementing Technical Standards (ITS) on Supervisory Reporting.

The first of these is a corrective update, taxonomy 2.4.1, which is to be used in place of the previously published taxonomy 2.4. This taxonomy will apply for submissions with reference dates 6 months from the point of their publication in the Official Journal- provided that this is prior to December 2016. At the time of writing, there has been no publication relating to taxonomy 2.4 or 2.4.1 in the Official Journal.

The second press release is related to the publication of taxonomy 2.5. It is explicitly stated that this will be used for reference dates from 31 December 2016 onwards.

In the interim, the active taxonomy continues to be 2.3.1.

We will continue looking out for further news on the situation, and liaise with contacts in the industry in order to keep our clients updated with the most recent regulatory developments.

Almis Strengthen Core Team

Almis International have continued their growth strategy with two senior appointments.

Simon Garrett joins as Head of Implementation, having previously worked in a similar role with Oracle.  He  will manage software implementation using the respected ‘ALMIS Implementation Methodology’ (AIM), delivering projects on time and within budget.   He brings 20 years experience in the financial services industry as both a customer and software vendor and is already adding value to the team.

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.