FRSGlobal : Risk Analysis and Regulatory Reporting

Regulators in Luxembourg

Luxembourg has two regulatory bodies for the financial industry:

• Commission de Surveillance du Secteur Financier (CSSF)
• Banque Central du Luxembourg (BCL)

FRSGlobal in Luxembourg

Luxembourg, like all EU members, suffered from the global economic crisis that began in late 2008. The crisis had a significant impact on the effectiveness and stability of the Luxembourg financial sector. Employment in the banking sector decreased by more than 3%.

It also demonstrated flaws within financial institutions, and limitations to the current prudential framework; showing the necessity to compliment the micro-prudential supervision approach with a macro-prudential approach which takes into account systemic risk.

Regulatory Environment — Luxembourg

Statutory

FINREP
FINREP is used for the largest part of the periodic financial information the (CCSF)Commission de Surveillance du Secteur Financier gathers for its supervision. FINREP includes both consolidated and non-consolidated reporting. For non-consolidated reporting, the balance sheet needs to be reported monthly, and the income statement quarterly. Consolidated reports are reported quarterly. The FRSGlobal FINREP application is integrated into the appropriate country solutions - finely tuned to meet the local discretions.

AGDL (Association pour la Garantie des Dépôts)
Statistics on guaranteed deposits and instruments (AGDL) is a reporting required by the CSSF. It is an annual report with the total amount of the guaranteed deposit, total amount of the guaranteed instruments and the percentage of these amounts.

Regulatory Fund Reporting
Undertaking collectives investment companies have to report financial information to the CSSF on an annual or monthly basis.

Prudential

COREP
The CSSF uses COREP for collecting periodic solvency-related information as part of its prudential supervision. This reporting is split in two parts, both of which are supported by FRSGlobal: non-consolidated, based on reports B 1.4 (required quarterly); and consolidated, based on reports B 6.4.

Large Exposures Reporting
CSSF uses Large Exposure Reporting for collecting information about large exposures of the institutions. This reporting is split into five parts in the consolidated report (B6.3) as well as in the non consolidated (B2.3).

Liquidity Reporting
Banks are required to submit monthly returns on liquidity ratios as outlined by the CCSF. These reports provide information on the liquidity position of banks under stress.

Statistical

Statistical Reporting - Banks
The Central Bank of Luxembourg, through related circulars recently introduced regulatory changes in line with the ECB regulation (EC) No 2008/32, 2009/7. The introduction of new templates and formats including updates to existing reports, signifying major changes have been incorporated by FRSGlobal.

Statistical Reporting - Funds
The Central Bank of Luxembourg, through related circulars introduced regulatory changes in line with the ECB regulation (EC) No 958/2007. FRSGlobal has a fund reporting module that includes the new Banque Centrale du Luxembourg (BCL) fund reports.

Securitisation Vehicles
Our Securitisation Vehicles reporting module that includes the BCL securitisation vehicles reports concerning the balance sheet of securitisation vehicles and transactions made by securitisation vehicles.

Transactional

MIFID
MIFID relates to the delivery of information concerning details of trading to regulatory authorities, to help them fight financial crime including market abuse. For all non-ISIN futures and options, our solution supports the use of aII these alternative instrument identifier codes in MiFID reporting since September 2008.

BOP (Balance of Payments)
The Central Bank of Luxembourg obtains information about balance of payments through BOP reporting. Our reporting module includes BOP reporting that is required to be reported on a daily basis to the BCL.

What’s Coming Up — Luxembourg

Balance of Payments reporting

The Banque centrale du Luxembourg (BCL) has introduced new BOP reporting.

BOP 1.1 - Breakdown of selected items from a Credit institution’s profit and loss account is mandatory 1 October 2011 onward and has to be submitted on monthly basis. The reporting agent can also provide this information on a daily basis.

BOP 1.2 - Cross-border payments executed for the account of resident counterparts is mandatory from 1 January 2012 onward and has to be submitted on monthly basis. The reporting agent can also provide this information on a daily basis.

Security By Security reporting (SBS)

It is expected that the BCL will amend instructions related to Security by Security reporting of credit institutions and ask financial institutions to deliver the portfolio type of the securities in the report SBS. The BCL will identify the portfolio type according to loans and receivables, financial assets held for trading etc. The date when this reporting will come into effect has not yet been specified.

Virements (reports V)

Credit institutions will be required to submit new reports related to virements (reports V). The probable implementation timeline for this new reporting requirement is beginning of 2012 wherein credit institutions will be required to submit their January 2012 data on 1 February 2012. The reporting frequency is expected to be monthly.

COREP (B 1.4 and B 6.4)

The Commission de Surveillance du Secteur Financier (CSSF) recently published a Circular CSSF 11/513 on 6 June 2011 concerning changes in capital adequacy reporting applicable from 31 December 2011. The instructions suggest changes in the tables B 1.4 and B 1.6 (CA-SRO and MKR IM) in line with amendments published by the European Banking Authority (EBA) taking into account the changes arising from Directive 2009/111/EC (the "CRD II") and Directive 2010/76/CE (the "CRD III").

Table B 1.4 and B 1.6 CA-SRO: The changes in capital requirements due to hybrid instruments, re-securitisations in these tables reflect the new provisions set out in section 1.1.4 of CSSF Circular 10/475 as well as sections 7, 8 and 9 of CSSF Circular 10/496.

B 1.4 and B 1.6 MKR IM: These changes in capital requirements for market risks calculated using internal models are consequent amendments specified in section 10 of circular CSSF 10/496.

In the circular 11/513, the CSSF also announced reports B1.4 and B6.4 - credit risk will be modified in line with the European directive (CRD IV). The changes will be implemented from December 31, 2012.

The CSSF recently published circular 06/273 modified according to instructions laid down in circular 11/513.

Basel III

On 24 May 2011, the ABBL organized a conference on the new Basel III liquidity rules. In this conference, the Luxembourg Central Bank (BCL) and the financial supervisory authority CSSF presented their joint impact assessment of the new liquidity rules on banks in Luxembourg. The BCL and the CSSF also expressed their inclination toward Basel III on LCR and NSFR until the CRD 4 guidelines are published by EU authorities.

CEBS change over to EBA

The European Banking Authority (EBA) came into effect from 1 January 2011 and took over the responsibilities of Committee of European Banking Supervisors (CEBS). EBA is responsible for safeguarding public values such as stability of the financial system, transparency of markets and financial products, protection of depositors and investors wealth.

Financial Reporting (FINREP)

The aim of FINREP has always been to harmonise the financial reporting within the member states to improve comparability. However after implementation it has become apparent that the large number of national discretions has prevented to reach this goal. With the announced adjusted guidelines, the member states are obliged to apply at least the balance sheet and P&L statement and can choose out of 23 additional templates to apply. However CEBS insists that on all templates that the national regulator adopts, no changes should be made to its meaning or appearance.

Further it asks the member states for a firm commitment that the FINREP reporting will be the only consolidated financial reporting that an individual banking group has to provide to the regulator. Also the scope of consolidation will need to be aligned with the CRD.

Common Reporting (COREP)

In general the adoption of the COREP templates has been more straightforward between the member states than FINREP. However there have been still numerous differences. Here CEBS intends to align this further medium term with clearer definitions and tuning of the COREP templates.

Large Exposures is included in the COREP framework with the revised guidelines. It will be applicable as of 1st of January 2011, but only move into a binding core reporting framework as of 31st December 2012.

Read our data sheet for more information on the Large Exposure Reporting requirements

Concentration risk

Draft guidelines have been published on a revision of the concentration risk reporting. The most notable change is that reporting on concentration risk within an individual risk type (intra-risk) is considered to be insufficient. It pleas for reporting based on risk interaction (inter-risk) and would be related to credit, market, operational and liquidity risks.

Read the comment piece “CEBS pushes forward with reporting harmonisation agenda” for more information on the new requirements and their impact on financial institutions »

CEBS stress testing

Read the comment piece "CEBS stress testing" which looks at the results of the CEBS EU-wide stress testing exercise of July 2010, compares them with the previous US and UK FSA stress testing results, and looks at what the market can glean from them »

Fund Reporting

The FRSGlobal Fund Reporting solution will enable financial institutions to comply with both current and future fund reporting requirements. The regulations for fund reporting are new and evolving and FRSGlobal will provide clients with the knowledge that the reports will be maintained in line with the regulators requirements.

Populating these reports calls for a diverse range of information from many systems, including back office, trading, reference, accounting and risk systems. FRSGlobal solutions allows for such information to be collated, calculated, validated and stored in a single repository (FRSGlobal DataFoundation) to create a 'clean' source of information, suitable for both regulatory and management information style reporting.

The Fund Reporting solution currently provides all the report templates for both BCL and CSSF fund reporting in Luxembourg and coverage is being extended to Ireland, Switzerland, Belgium, Germany and Italy.

Download Fund Reporting Data Sheet » (102.7 kB)

Liquidity Risk Management

With lessons learnt from the recent liquidity crunch, banks are going beyond simple static financial ratios and gap reports as measures of liquidity risk management.

Recent efforts by the European Banking Authority – EBA (formerly Committee of European Banking Supervisors- CEBS), the Basel Committee on Banking Supervision (BCBS) and the UK FSA, in terms of principles and recommendations have set greater emphasis on liquidity risk management.

Since the BCBS issued its final paper, ‘Principles for Sound Liquidity Risk Management and Supervision’, banks have been adopting liquidity stress testing scenarios to simulate bank-specific and system risks to their balance sheets.

By modelling their liquidity contingency plans against such scenarios, the measure of a bank’s cash-flow survival horizon can be derived, giving a statement of the effectiveness of its plan against such crisis.

The BCBS in its recommendation outlined a new prudential supervisory framework for liquidity with the introduction of two regulatory ratios - Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR). LCR aims at strengthening a bank’s short-term liquidity profile by identifying the level of liquidity buffer to be held to cover short-term funding gaps under severe liquidity stress, and under a time horizon of 30 days. NSFR defines the minimum acceptable amount of stable funding in an extended firm-specific stress scenario over a time horizon of 1 year, with the objective to strengthen a bank’s medium- to long-term liquidity profile.

To assess the impact of the implementation of these new liquidity ratios, the Banque Centrale du Luxembourg (BCL) and the CSSF conducted a joint quantitative impact study as a proactive measure.

The Basel III liquidity rules will be implemented in Luxembourg by means of amendments to the Capital Requirements Directive (CRD IV).

The observation period of regular reporting of these new ratios to the supervisory authorities will start from January 1, 2012. This however does not mean that banks will have to be fully compliant with the new standards as of this date. A transition period is foreseen and full compliance is expected from 2015 for LCR and 2018 for NSFR.

With our solution and experts keeping eye on global regulatory change, banks need not worry about the changes in reporting requirements.

Solvency II

Solvency II is a fundamental and wide-ranging review of the capital adequacy regime for the European insurance industry. It represents both a challenge and an opportunity for European insurers. Globally it is scheduled to come into effect by 31 Dec 2012..

The project initiated by European Commission as an advancement to Solvency I is expected to enhance a revised set of EU-wide capital requirements and risk management standards..

The objective of new system is to introduce more sophisticated solvency requirements for insurers, in order to guarantee that they have sufficient capital to withstand adverse events, such as floods, storms or big car accidents..

Currently, EU solvency requirements covers insurance risks, whereas in future insurers would be required to hold capital also against market risk (e.g. a fall in the value of an insurer's investments), credit risk (e.g. when debt obligations are not met) and operational risk (e.g. malpractice or system failure). This will help to increase their financial soundness with implementation of sound economic risk management practices in insurance industry.

With a demand of more streamlined approach towards supervision, the new system would enable insurance groups to be supervised more efficiently, through a 'group supervisor' in the home country that would have specific responsibilities to be exercised in close cooperation with the relevant national supervisors.

The introduction of group supervisors would ensure that group-wide risks are not overlooked and would enable groups to operate more efficiently, while providing policyholders with a high level of protection. Groups that are sufficiently diversified may also be allowed to lower their capital requirements under certain conditions.

The Directive often referred as Basel II for insurers is based on a three pillar approach which is similar to the banking sector (Basle II) but adapted for insurance.

The new provisions of Solvency II will be adopted under the Lamfalussy process:

Level 1 – Solvency II directive includes overall framework principles developed by European Commission approved by European Parliament and European Council.

Level 2 –Includes introduction to implementation measures developed by European Commission and approved by European Insurance and Occupational Pensions Committee (EIOPC)

Level 3 –Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) will guide European Commission to enhance supervisory standards.

Level 4 –European Commission will finally monitor, Compile and enforce the regulation regime.

Maximum harmonization is assumed with the new Solvency II framework Directive. This means the European rules will be implemented all countries of the European Economic Area (i.e. the EU plus Iceland, Liechtenstein and Norway). The European Union’s Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) has recommended to the European Commission that Bermuda, Switzerland and Japan will be the first countries assessed for equivalence with EU insurance regulations under Solvency II.

Thus the new solvency II requirements with challenges and opportunities ahead will be more risk-sensitive and more sophisticated than in the past, thus enabling a better coverage of the real risks run by any particular insurer.