FRSGlobal : Risk Analysis and Regulatory Reporting

Regulators in Switzerland

Switzerland has two regulatory bodies for the financial industry:

• Swiss National Bank (SNB)
• Swiss Financial Market Supervisory Authority (FINMA)

FRSGlobal in Switzerland

In response to the recent global financial crisis, the Swiss National Bank (SNB) implemented measures for the financial sector which helped to stabilise financial markets and reduce systemic risk. In 2008, the authorities strengthened capital requirements for the two largest banks, transferred illiquid assets of one large bank to a “bad bank”, and expanded deposit insurance coverage.

In 2009, the SNB tightened capital requirements for cantonal and regional banks, reduced by about one third the risk of the StabFund, and set new remuneration guidelines for large financial institutions. Moreover, the authorities created a “Too big to Fail” working group that examines ways to address the moral hazard issue, and large contingent liabilities, associated with a financial sector with large institutions.

Finally, guidelines for cooperation on financial stability issues between the SNB and the financial supervisor (FINMA) have been clarified in a revised memorandum of understanding.

As leaders in the field of risk and regulatory solutions FRSGlobal understands your business needs, our heritage in and in-depth knowledge of the financial market enables the development of our solutions to be so flexible that they meets the needs of ALL firms whatever the size or complexity.

FRSGlobal leads the way in risk and regulatory compliance solutions and has many referenceable clients in Switzerland who have taken solutions covering Swiss National Bank Statistics, Basel II equity requirements, large exposure risk and default risk, country risk, interest rate risk and market risk.

Regulatory Environment — Switzerland

The Swiss National Bank (SNB) acts as a major regulator for financial intermediaries in Switzerland. In addition the supervisory authority, Swiss Financial Market Supervisory Authority (FINMA) issues guidelines on financial market regulation and ensures transparency in the regulatory process.

Statutory

Balance sheet reporting
Balance sheet reporting provides information on the financial position of a bank and is required by the SNB on a monthly and quarterly basis. Under this type of reporting all the banks in Switzerland are required to submit the reports on assets and liabilities in Switzerland and in overseas branches as well as all the supplementary information.

Early Information reporting
Comprehensive semi annual or annual supervisory reports on early information such as: AU001-008, and AUH001-AUH002 Early information – entity, and AU101-107, and AUH101-AUH102 Early information - consolidated are part of our solution.

Securities reporting
The banks need to report the security positions and investments to the SNB on a monthly and quarterly basis.

Prudential

Capital adequacy reporting
SNB follows the Basel II reporting standards. Basel II regulatory capital is the minimum capital that an internationally active bank requires to cover credit, market and operational risk based on the recommendations presented in the Basel II Accord, published by the Basel Committee on Banking Supervision. Our solution provides a sophisticated Basel II module with the ability to calculate the capital charge for market and credit risk as specified in Pillar I and Pillar II. It also includes reports on consolidated operational risk, settlement of risk and risk diversification (Large exposure risk).

Liquidity Reporting
Our solution includes currency reports on liquidity, cash liquidity statement (R001) and L102 liquidity statement II (total liquidity).

Statistical

Swiss National Bank reporting
Our integrated module covers statistical data reports on banks and financial markets, balance of payments, international investment position and financial accounts. Included are reports on currency and credit business volume statistics, securities holdings, interest rate risk and risk on interbank failures. Additionally we have reports on interest and commission business (e.g. interest rates for new deals and mortgages) and trading.

Interest rate risk reporting
The banks need to report the interest rate risk exposures on a quarterly basis as well as the supplementary information on interest business, commission business and trading, interest rates for new deals, mortgage interest rates, and interest rate risk in baking books to the SNB.

Currency statistics reporting
The banks which have transactions in foreign currency positions (including options) need to submit a report on all the open positions on a monthly basis and quarterly basis to analyse the liquidity position and the risk which the banks are caring in the business.

What’s coming up: Switzerland

Securities holdings

Financial institutions need to submit a monthly report to the Swiss National Bank (SNB) from December 31, 2011. Institutions need to report holdings of securities in open custody accounts, breakdown by category of securities (including money market paper, medium-term notes, bonds, shares, units in collective investment schemes, structured products and other securities), by origin of issuer (domestic or foreign) and by currency. Banks also need to report breakdown of depositors by economic sectors and to seat or domicile in Switzerland or abroad.

Securities turnover

Financial institutions need to submit a quarterly report to the SNB from December 31, 2011. Institutions need to report:

• Turnover in open custody accounts from purchase and sales transactions
• Outline the account holder on the seat or residence in Switzerland or abroad
• Breakdown of revenues by category of securities (including money market paper, medium term notes, bonds, shares, units in collective investment schemes, structured products and other securities)
• Origin of issuer (domestic or foreign) and by currency.

Solvency risk of counterparties in the interbank sector

All banks or bank groups without branches of foreign banks in Switzerland need to submit reports on risk of counterparties in the interbank sector from June 30, 2011 on quarterly basis. Banks need to submit the following reports:

• Amount due from banks
  • respected group of banks domiciled in Switzerland
  • respected group of banks domiciled abroad
• Amount owed to banks
  • respected group of banks domiciled in Switzerland
  • respected group of banks domiciled abroad

OTC derivatives statistics

All banks in Switzerland need to submit a report on foreign exchange and derivatives transactions according to the provisions of the Bank for International Settlements. Banks also need to submit a report on amount outstanding, turnover on a semi-annual basis from June 30, 2011.

BASEL III

The recent financial crisis brought risk and regulatory issues into sharper focus, highlighting serious loopholes. Regulators around the world are attempting to introduce stringent banking reforms to prevent a reoccurrence.

In a bid to strengthen the regulation, the Basel Committee on Banking Supervision (BCBS) introduced a third Basel Accord – Basel III with new capital adequacy, liquidity and disclosure requirements. Basel III represents a significant tightening of the regulatory rules and will impact almost every business model throughout the financial sector.

The main proposals of Basel III are:

• Raise quality of capital base (2013): Capital structure undergoes significant reform- the constituents of Tier 1 and Tier 2 capital have been redefined to enhance its loss absorbing properties as well as the abolition of Tier 3, the amount of capital that needs to be held has increased and there are notable new deductions from capital
• Liquidity standards (LCR – 2015 and NSFR– 2018) – In addition to the 2008 paper on Principles for Sound Liquidity Risk Management and Supervision, Basel III aims to establish a single global framework to measure and monitor liquidity including the new Liquidity Coverage Ratio (LCR) and Net Stable Funding Ration (NSFR)
• Countercyclical buffers – Conservation buffers are to be held by institutions to protect against future severe shocks. Firms also need to hold a capital buffer to make them more resilient to a possible collapse of the banking sector
• New 3% Leverage ratio (2015) - The new Leverage Ratio is a supplement to risk based capital requirements to achieve a globally comparable measure and safeguard against model risk and measurement error. A 3% ratio was considered during the calibration period.
• Risk coverage – There is a major overhaul for risk coverage in the following areas: capital requirements for trading book and complex securitisation, counterparty credit risk and raised Pillar 2 and 3 standards.

The countdown to compliance has begun as Basel III will be incorporated into national law from January 1, 2013.

Swiss National Bank (SNB) is a member of Bank for International Settlements (BIS) and is completely in favour of implementing Basel III in the country.

With extra capital requirements and further reporting demands amongst other entailments, it is no surprise that Finance, Risk and Treasury departments have started to feel the pressure. Basel III calls for a more holistic approach across global banking industry and means a complete change in risk and regulatory culture but the main question is: when will you be ready?

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.