FRSGlobal : Risk Analysis and Regulatory Reporting

FRSGlobal in Malaysia

Malaysia, a middle-income country, has transformed itself since the 1970s from a producer of raw materials into an emerging multi-sector economy. After coming to office in 2003, former Prime Minister ABDULLAH tried to move the economy further up the value-added production chain by attracting investments in high technology industries, medical technology, and pharmaceuticals, an effort that continues under current Prime Minister NAJIB.

As an oil and gas exporter, Malaysia has profited from higher world energy prices, although the rising cost of domestic gasoline and diesel fuel, combined with strained government finances, has forced Kuala Lumpur to reduce government subsidies.

The central bank maintains healthy foreign exchange reserves and its well-developed regulatory regime limited Malaysia's exposure to riskier financial instruments and the global financial crisis.

Nevertheless, decreasing worldwide demand for consumer goods damaged Malaysia's exports and economic growth in 2009, although both began showing signs of recovery later in the year.

In June 2010 NAJIB introduced the Tenth Malaysian Plan, outlining new reforms. The key areas include:

• Charting development for a high income nation
• 6% growth target
• Per capita income to increase to RM38,845 by 2015
• Creating private sector-led economy
• Supporting innovation-led growth
• Full employment
• Restructuring of subsidies

Regulatory Environment — Malaysia

Financial	Prudential	Operational (Transactional)
Balance sheet reporting	Capital adequacy reporting	Credit transactions reporting
Income statement	Liquidity reporting	Foreign exchange transactions reporting
Statement of changes in equity
Cash flow statement

Financial

Balance sheet reporting

Balance sheet reporting provides information on financial statement positions and is required by Bank Negara Malaysia (BNM) on a semi annual and annual basis. Under this type of reporting all the banks in Malaysia are required to submit the reports on position of assets and liabilities in Malaysia, shareholders equity, commitments and contingencies.

Income statement
Banks are required to submit a report to BNM on an annual basis stating the different sources through which the income is earned by the bank.

Statement of changes in equity
The different transactions performed in the equity market by the bank and the profits gained or losses barred need to be reported to BNM on an annual basis.

Cash flow statement
The operating activities, increase or decrease in operating assets and liabilities, cash flow from investing activities and financing activities need to be reported by the banks on a semi annual and annual basis to BNM.

Prudential

Capital adequacy reporting
This type of reporting is mainly concerned with risk incurred by banks and is centred around risk reporting. BNM uses the Basel II framework to calculate the capital adequacy requirements. Capital adequacy reporting collects the information on market risk exposures as well as the existing credit risk and the operating risk.

Liquidity reporting
The liquidity position of the bank, maturity profile and selected data for stress testing is needed for reporting to BNM on a monthly basis in order to analyse the positions of the banks in the country.

Operational (Transactional)

Credit transaction reporting
Banks need to submit a report to BNM on a quarterly basis specifying any significant non-compliance with policies and procedures in line as well as any credit transactions with connected parties not complying with the limits specified by BNM.

Foreign exchange transaction reporting
Banks in Malaysia need to submit a report on the settlements between residents and non residents affected through the banking system under IT IS (International Transactions Information System). Banks need to submit foreign exchange administration compliance reports including credit facilities, survey on external assets and liabilities of resident companies in Malaysia, survey on external debt of resident companies in Malaysia, overseas bank account statement and inter-company account statement to BNM.

So how can we help you? FRSGlobal provides regulatory reporting solutions throughout the world for banks, insurance companies, and other financial institutions. By leveraging a global data model (DataFoundation), a standardised integral development environment, fully integrated calculation capabilities and a global runtime engine for reporting, FRSGlobal can provide local reporting efficiently consistently for any jurisdiction. The main benefits of the FRSGlobal regulatory reporting solution include: Regulatory Update Service (RUS): FRSGlobal is actively monitoring regulatory changes and provides updates within the product subscription Full audit trail and drilldown to underlying data, variance analysis, etc as part of the runtime engine Fully integrated solution for risk management & regulatory reporting, as the regulatory framework is converging all over the globe on these topics. This means: Single source of data and data management to ensure consistency Any risk calculation results relevant for regulatory reporting are automatically taken into account into the reporting Regulatory reporting includes report level validation rules and electronic delivery where applicable Local domain expertise while at the same time global consistency

What’s coming up: Malaysia

New Statistical Submission System (NSRS)

The new statistical submission system with a standardised reporting framework and infrastructure named, New Statistical Reporting System (NSRS) is developed based on the International Financial Reporting Standards (IFRS) 2008, the BASEL Accord and other reporting standards as announced by Bank Negara Malaysia (BNM) in August last year. The BNM is leveraging the eXtensible Business Reporting Language (XBRL) taxonomy for financial statements and compliance reporting. This would minimize the differences between the Financial Reporting Standard (FRS) and the International Financial Reporting Standard (IFRS).

Basel II

The Bank Negara Malaysia (BNM) formulated the capital adequacy framework as per the Islamic Financial Services Board (IFSB) and the Risk Weighted Capital Adequacy Framework (Basel II – Risk Weighted Assets Computation).

The framework specifies the minimum capital requirements to be held by Islamic banks against credit risk, market risk and operational risk as follows:

Risk Type	Available Approaches
Credit Risk	Standardised Approach Internal Ratings Based (IRB) Approach *
Market Risk	Standardised Approach Internal Models Approach (IMA)*
Operational Risk	Basic Indicator Approach (BIA)h Standardised Approach(TSA)* Alternative Standardised Approach (ASA)*

*Subject to explicit approval by Bank Negara Malaysia (BNM). For IRB approach applicable from 1 January 2010.

The IRB approach has to be implemented by 31 December 2015 and banks are expected to conduct a full assessment of the implementation of IRB.

Islamic Banks adopting the IRB approach will be eligible for a transition period before 31 December 2015 from the date of implementation as follows:

Implementation Date	Available Transition Period
Between 1 January 2010 to 31 December 2012	3 years
Between 1 January 2013 to 31 December 2015	Less than 3 years commencing from the date of implementation until 31 December 2015
After 31 December 2015	Final implementation and no transition period

Basel III

The Basel III reforms aim to improve the banking sector’s ability to absorb financial and economic shocks to reduce the risk on real economy.

Banks in Malaysia will be in a position to implement Basel III due the initiatives taken by the banks and the industry during the Asian financial crises.

The major elements of the Basel III capital framework which includes the internal ratings based approach and the Pillar 2 and 3 components will be implemented.

The implementation of Basel III in Malaysia will help in reducing pro-cyclicality and contagion within the financial system. The BNM started consultation regarding the implementation in 2011 to meet the Basel Committee on Banking Supervision (BCBS) requirements by 2018.

Asset & Liability Management (ALM)

ALM is being embraced as more than just a tool to monitor and manage interest rate risk in banking books. It is a process for managing balance sheets against other risks that affect earnings and portfolio valuations of banks, shifts in customer behaviour, future balance sheet growth and impact of business strategies (pricing, hedging, growth and planning).

In light of the recent financial crisis, firms of all shapes and sizes are re-evaluating their ALM model. In order to earn an adequate return, the need to assess and mitigate the adverse value and income impact of changes in the market has become even more vital.

So how do different types of financial institutions manage their ALM requirements today?

Large, tier 1 firms typically develop their ALM systems in-house; a luxury few smaller firms can’t afford. These systems typically include sophisticated and finely tuned functionality for Value exposure, Value at risk, Dynamic simulation, Earnings at risk and Treasury view.

In the past, smaller firms have found solutions for meeting ALM requirements to be over-complicated, difficult to integrate with incumbent systems, resource-dependent and cost-prohibitive. For these reasons they have resorted to using alternative methods such as spreadsheets or independent consultants, neither of which is ideal.

Until now the sheer cost of developing and supporting an in-house ALM system has been prohibitive to smaller firms but the need to have accurate visibility into the future position of the firm is critical.

Our heritage and in-depth knowledge of market have enabled the configuration of our solution to be so flexible that it meets the needs of ALL firms; from those with highly complex derivatives to those with a vanilla approach.

Our ALM solution provides a comprehensive range of capabilities that cover the following areas:

• Value exposure / market risk (static)
  For a consistent and comprehensive assessment of the adverse value impact of changes in market risk factors based on common pricing models using gap analysis and analytical/numerical stress testing analysis
• Value at risk / market risk (static)
  To calculate the loss potential of a specific portfolio or the total balance sheet over a given time horizon and confidence level
• Dynamic simulation (“what if” NII analysis)
  To assess and manage income, using a dynamically modelled balance sheet and market environment
• Earnings at risk (interest rate models)
  To calculate the potential to lose income, and to value it in a dynamically modelled balance sheet and market environment
• Treasury view
  To assess the exposure and risk position of Treasury, using the risk management techniques applied by the firm

And for the smaller firm

Our rich ALM solution offers a functionally that require immediate return on investment by taking a ‘compact’ approach with risk management features that absorb complexity. Along with evaluating a mismatch between assets and liabilities, our ALM solution also manages risks arising due to liquidity and interest rate in banking books.

With our ALM solution firms can:

• Quantify the value impact of interest rate changes over the total balance sheet based on regulatory requirements
• Conduct stress testing / value impact of any risk factor change over the total balance sheet
• Benefit from robust processes with audit ability and traceability, reverse processing from results to initial input using modelling (strategies & scenarios)
• Meet processing times / frequency of analysis and reduce manual work
• View Balance Sheet value impacts from interest rate moves in terms of sensitivity, liquidity and margin
• Utilise a simple financial analysis framework
• Make use of a flexible reporting tool and standard export to standard formats (Excel, PDF, HTML, XML)

FRSGlobal 6-step process for ALM

So how can we help you? The ALM process does not have to be difficult. FRSGlobal operates a simple 6-step process to achieve effective ALM. The in-built functionality is the power of the system that delivers the benefits to the firm. The six steps are: Configure (the system – a one off) Input data (connect to source systems) Model (risk management) Set up calculations (input variables) Run calculations (press the button) View results (see the results) The ‘compact’ approach provides easy interfacing of input data to reduce the amount of effort required for step 2 and preconfigured model libraries to ease steps 1,3,4,5 & 6 For further information about our complete or compact ALM solution please contact us.

Basel II

Embracing advanced Basel II approaches and capital management practices

While some countries in Asia-Pacific and Japan were initially content with implementing basic and standardised approaches to Basel II, the trend towards more complex approaches to credit risk and market risk management have evolved as the Basel Committee on Banking Supervision has continued to enhance its guidance for more sophisticated approaches to managing market, credit, and operational risk.

The FRSGlobal solution provides a sophisticated Basel II module with the ability to calculate the capital charge for market and credit risk as required under Pillar 1. For Pillar 2, interest rate risk in the banking book, liquidity risk and concentration risk are covered. DataFoundation enables the reporting requirements set out in Pillar 3. The Basel II compliance can be used as an independent stand alone solution or in combination with all the other FRSGlobal RiskPro and RegPro modules.

Capital Adequacy Reporting Videos

A series of videos explaining various aspects of Capital Adequacy Reporting.

• What is Capital Adequacy Reporting?



• What is the purpose of Basel?



• RiskPro or RegPro?



• What does the FRSGlobal solution cover?



• What are the analysis methods?

Adoption of the IFRS7 and IAS 32, 39

Employ dynamic ALM for better balance sheet management

Several Asian Countries: Malaysia, Indonesia, Thailand and South Korea have introduced adoption plans for member banks to comply with international accounting treatments (or slight variations of them). The standards include information on how to value, categorise and account for financial instruments. In addition, the standard gives details of the accounting treatment for positions that qualify for hedge accounting. As these standards continue to evolve, it is incumbent that banks have a process in place to keep up with the latest developments.

The FRSGlobal IFRS solution is made up of both RiskPro and RegPro elements. FRSGlobal RiskPro enables the classification of financial instruments and the calculation of the valuation using either fair value or amortised cost as appropriate. RiskPro also supports several methods for testing and estimating impairment as required by IAS 39.

FRSGlobal RegPro uses ReportGenerator to produce standard IFRS report definitions with country adaptations as well as ReportBuilder to build additional standardised reports.

Read more about the FRSGlobal IFRS solution here.

Liquidity Risk Management

Banks are interested in going beyond simple static financial ratios and gap reports as the measures of their liquidity risk. Since the Basel Committee on Banking Supervision issued its final paper on ‘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 sheet. By modelling their liquidity contingency plans against such scenarios, a measure of the bank’s cash-flow survival horizon can be derived, giving a statement of the effectiveness of the bank’s plan against such crisis.