FRSGlobal : Risk Analysis and Regulatory Reporting

Regulators in Singapore

The Monetary Authority of Singapore (MAS) is not only the country’s central bank, but also the government’s main financial supervision arm.

FRSGlobal in Singapore

Singapore has a highly developed and successful free-market economy and has been the centre for trade and financial services for the Asian region for over 40 years. It enjoys stable prices, and a per capita GDP higher than that of most developed countries. The economy depends heavily on exports, including; consumer electronics, information technology products, pharmaceuticals, and on a growing financial services sector.

Real GDP growth averaged 6.8% between 2004 and 2008, but contracted 2.1% in 2009 as a result of the global financial crisis. The economy has clearly regained its momentum and in 2010 Singapore’s GDP grew 19.3% year-on-year in the second period, accelerating from the first quarter’s 16.9% and beating the Dow Jones survey’s forecast of a 16.5% rise.

The city-state’s growth is leading Asia’s strong recovery, which is helping to pull the rest of the world out of the economic crisis.

Despite this strong recovery and the fact that the Singapore regulatory environments are the most mature and stable in their regions, banks still have a number of onerous regulatory reporting requirements to meet. Four of the most complex reports are as follows:

• MAS639 - Sets out the limits on a bank’s exposure to a single counterparty group
• Top 100 – This report is required to assess large credit exposure and asset quality
• MAS613 – A set of liquidity reports
• MAS758 - prescribes a bank’s minimum cash balance requirement

All of the above reports apply to commercial banks and can typically add up to 80-100 pages of MAS reporting on a daily/weekly/monthly/quarterly basis (excluding Top 100).

Regulatory Environment — Singapore

Financial

Financial reporting concerns balance sheet information as well as profit and loss.

Balance sheet reporting
This type of reporting covers monthly reports on balance sheet information such as assets, liabilities, contingents and off balance sheet position in accordance to MAS (Monetary Authority of Singapore) requirements.

Profit and Loss reporting
Profit and Loss reporting includes returns on selected income and expenditure items to be submitted on quarterly basis.

Prudential

Capital Adequacy Reporting
The Monetary Authority of Singapore follows the Basel II framework for calculating capital charge and requirements. Capital adequacy reporting is generally centred around risk reporting, mainly credit risk, operational risk and market risk and includes quarterly reports on assessments of capital adequacy requirements and reserves calculation to be reported on solo or consolidated basis. Also included are reports on approved assets and capital funds for bank incorporated outside Singapore, equity exposures, securitization exposures, off balance sheet exposures etc.

Liquidity reporting
MAS has imposed various liquidity limits on banks to ensure that they maintain sufficient liquid positions as part of sound liquidity risk management and to protect non-bank depositors. Liquidity reporting includes returns on minimum liquid assets, fortnightly returns on qualifying liabilities and Minimum Cash Balance (MCB) requirements, quarterly and fortnightly returns on Assets Maintenance Requirements (AMR), etc.

Credit exposures reporting
This type of reporting is used to address a bank’s credit exposures that are substantial, unsecured, classified and related concerns. Included in this category are biannual reports of top 100 borrowers with details on outstanding balances, shareholders, facility size etc. In addition it also covers quarterly reports on exposures to single counterparty group, secured and unsecured credit facilities and quarterly returns on classified exposures classified by country, industry and provisions.

Other exposures
Other exposures include returns on specific areas of exposures such as SGD credit facilities to non-resident financial institutions, limit on equity investment, immovable property limit, property related assets and contingent liabilities, etc

Operational (Transactional)

Operational reporting covers the MAS requirements on reporting at transactional level as well as breakdown reports that focus on specific items from balance sheets to income statements.

Foreign exchange reporting
Foreign exchange reporting covers the volume of foreign exchange transactions. All banks are required to submit a monthly return on total foreign exchange turnover and other derivatives transactions to the MAS. It also includes weekly reports on SGD transactions.

Other Operational and Transactional reporting
Included under this category are those reports submitted along with core balance sheet information as annexures. They are breakdown reports which focus on specific items from the balance sheet such as deposits of non bank customer, underwriting activities, interbank bank investments and indebtedness, loans and advances, assets and liabilities by maturities etc. Other reports include monthly reports on Singapore Government Securities (SGS) held by a reporting institution that is acting as custodian.

What’s Coming Up : Singapore

Basel II

Financial institutions are subject to a capital adequacy requirement issued by the Monetary Authority of Singapore (MAS) under MAS Notice 637 "Notice on Risk Based Capital Adequacy Requirements for Banks Incorporated in Singapore”, where banks must satisfy risk-based capital requirements that involve mark-to-market practices.

The reports required under this Notice aim to meet the objective of the Basel II framework to enhance the soundness and stability of the banking system by aligning the minimum regulatory capital requirements more closely to the risks that banks face, and encouraging improvements in a bank’s risk management. This Notice specifically aims to meet the three Pillars specified in Basel II by providing the following guidelines:

• The minimum capital adequacy ratios for a bank incorporated in Singapore and the methodology to be used for calculating these ratios (Pillar 1).
• Expectations with respect to the internal capital adequacy assessment process of a Reporting Bank under the supervisory review process (Pillar 2).
• Minimum disclosure requirements for a Reporting Bank in relation to its capital adequacy, with a view to enhancing market discipline (Pillar 3).

The latest set of amendments issued on 5 July 2011 to the MAS Notice 637 in relation to capital requirements and disclosures for market risk and securitizations are to be implemented on 31 December 2011. The revisions to MAS Notice 637 also incorporate the adjustments to the Basel II market risk framework issued by the Basel Committee on Banking Supervision (BCBS) on 18 June 2010 and 11 February 2011.

Basel III

The Monetary Authority of Singapore (MAS) announced its support to Basel III, the new global regulations announced by the Group of Governors and Heads of Supervision (GHOS), the oversight body of the Basel Committee on Banking Supervision (BCBS). The MAS will strengthen the resilience of individual banks during periods of stress, and in doing so, contribute to banking sector stability by implementing the following changes:

1. Common Equity Tier 1 (“CET1”) capital adequacy ratio (“CAR”) of 6.5% by 2015, to be phased in as follows: 4.5% in 2013, 5.5% in 2014 and 6.5% in 2015.
2. Tier 1 CAR will be increased from 6% to 8% (7% in 2014 and 8% in 2015).
3. Total capital adequacy requirement will remain unchanged at 10%.
4. In addition to these minimum requirements, there will be a capital conservation buffer, set at 2.5%, to be met with Common Equity Tier 1, phased in between 1 January 2016 and 1 January 2019 in equal increments.
5. The new eligibility criteria for regulatory capital will also be phased in between 1 Jan 2014 and 1 Jan 2018.

Basel III is a major step forward in several areas:

• It strengthens capital requirements for trading activities, off-balance sheet vehicles, securitization, and counterparty credit derivatives.
• • It improves the quality of capital, with a greater focus on common equity to absorb losses.
• It raises the level of capital that banks will have to hold to absorb losses in both going-concern and unwinding scenarios.
• It introduces international liquidity standards for the first time, to make banks more resilient to short-term funding disruptions and longer-term liquidity mismatches.

Singapore also plans to make its banks compliant with the Basel rules ahead of the official timetable, with banks having to meet the Basel minimum capital requirements by January 1, 2013, two years ahead of the Basel Committee's 2015 timeline.

Moving towards a more robust OTC derivatives and repo market in the post-crisis period

In the OTC derivatives market, the lack of risk controls and transparency have led policymakers to commit to implementing a series of regulatory reforms by 2012. There are four key pillars identified under the reforms. These include pushing for standardization of OTC derivative contracts, mandating the trading of OTC derivative contracts on exchanges or organized trading venue, imposing central clearing requirements and introducing trade reporting requirements for these instruments.

Development in General insurance on the Supervisory front

For insurance, the International Association of Insurance Supervisors’ (IAIS) Insurance Core Principles (ICPs) are being reviewed and are currently undergoing public consultation. These will be finalized and adopted by insurance regulators globally by October 2011. Some areas where GIA members will be actively engaged are as follows:

Group Supervision

Regulators around the world agree that it is important to have a holistic view of the activities and risk of entities within the group. MAS is therefore reviewing its regulatory framework to ensure that, where MAS is the home supervisor of an insurance group, we will have the required legal authority and supervisory powers to conduct consolidated group supervision, and impose group capital and solvency requirements.

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

Basel II

Embracing advanced Basel II approaches and capital management practices

The Monetary Authority of Singapore (MAS) supports the broad objectives of Basel II and believes that it will incentivise improvements in risk management, as well as complement the supervisory objectives of MAS. The MAS implemented the Basel II framework for all Singapore incorporated banks on 1 January 2008.

The MAS recently issued a revised Notice 637, on risk based capital adequacy requirements for banks incorporated in Singapore. This notice includes amendments arising from the MAS policy review and the BCBS proposals published on “Enhancements to Basel II framework”. It also incorporates the adjustments to Basel II market risk framework published by the BCBS.

The revised prudential regulation includes amendments to capital requirements, disclosure for market risk and securitizations scheduled to be implemented on 31 December 2011.

These changes aim to enhance the Basel II Framework by ensuring that risks inherent in portfolios of banks relating to trading activities, securitizations and exposures to off-balance sheet vehicles are better reflected in minimum capital requirements and risk management practices.

Our solution provides a sophisticated Basel II module with the ability to calculate the capital charge for credit risk, market risk and operational risk. It can be used as an independent stand alone solution or in combination with our other reporting and risk management solutions assisting banks to meet regulatory requirements and improve their performance over risk.

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?

IFRS

Harmonisation of global accounting standards

Besides Europe and the US, Asia is also a key player in global International Financial reporting standard (IFRS) convergence movement. In Singapore, the Accounting Standard Council (ASC) is responsible for setting the accounting standards under law. Singapore's Financial Reporting Standard (FRS) is in line with the IFRS to ensure that the accounting standards prescribed are of consistent high quality.

As a key step forward in its strategic directions the Singapore ASC has decided to work towards full convergence of the Singapore FRS with the IFRS as the global accounting standard by 2012.

Key challenges ahead to implement IFRS are:

• The increasing interest in integrated reporting, the growing importance of electronic reporting and the extended use of XBRL
• Many major new or revised standards will come into effect in 2013 or later

For instance, to improve the reporting requirements for financial instruments the IASB introduced IFRS 9- Financial instruments which eventually will supersede IAS 39 (from which the Singapore Financial Reporting Standard 39 has been adapted). It covers the classification and measurement of financial assets along with a methodology for impairment and hedge accounting.

The objective of IFRS 9 is to establish principles for reporting of financial assets that will present relevant and useful information to users of financial statements for their assessment of the amounts, timing and uncertainty of the entity’s future cash flows.

Recently the IASB issued an exposure draft suggesting the mandatory effective date of IFRS 9 to be changed to annual periods beginning on or after 1 January 2015 (currently 1 January 2013). The comment period of the exposure draft will close on 21 October 2011.The draft also suggests that the proposed deferral would only change the date when IFRS 9 would be mandatory and entities could still elect to use IFRS 9 before 2015. The ASC has requested the comments to be submitted on or before 26 August 2011.

IFRS 9 equivalent Singapore accounting standard will be applicable for annual reporting periods based on final decisions by the IASB but is available for early adoption from the date of issue.

Our IFRS solution enables classification of financial instruments and calculation of valuations using appropriate fair values or amortised costs. It also supports several methods for testing and estimating impairment as required by IAS 39.

Read more about the FRSGlobal IFRS solution here.

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 Basel Committee on Banking Supervision issued its 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 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.

Our liquidity reporting solution supports the reporting requirement of the Monetary Authority of Singapore (MAS).

Credit institutions in Singapore are required to submit reports as set out in Appendix 6 of the MAS notice no. 613. These reports based on the cash flow based approach include information on calculation of minimum liquidity assets, top 20 depositors and interbank lenders, cash flow analysis, top and interbank lenders, and maturity analysis of cash flow.