FRSGlobal : Risk Analysis and Regulatory Reporting

Regulators in the UAE

The supervisory and regulatory framework in the United Arab Emirates consists of two main bodies :

• Central Bank of the United Arab Emirates (CBUAE)
• Dubai Financial Services Authority (DFSA)

FRSGlobal in United Arab Emirates (UAE)

The United Arab Emirates (UAE) is a federation that consists of seven emirates. Each Emirate has a separate ruling family and separate budgets, however, security, immigration and foreign policies are common. The seven Emirates are Abu Dhabi (the capital), Dubai, Sharjah, Ajman, Umm Al Quwain, Ras Al Khaima and Al Fujairah.

Like the rest of the world the UAE economy has suffered from the downturn triggered by the global ‘credit crunch’. Its previous stability originated from oil exports and Dubai’s free trade zone, which helped the commercial real estate boom. The federation’s status as a financial services hub also contributed heavily to the UAE becoming one of the fastest growing economies prior to the crisis.

In 2009, this period of growth came to an abrupt end with the collapse of the Dubai real estate market, which had an impact on the wider financial market, spurring on tighter regulations with the likelihood of more stringent changes ahead.

The main challenge being faced in the UAE is associated with the need to rebuild (external) investor confidence in the economy and market forces. To some extent this focuses attention on the need to introduce better and more transparent governance and translates also into the increased amount of risk management being required by the regulators, as evidenced by the liquidity regime. The emphasis is now on implementing an integrated approach to risk management as opposed to pose to the silo‘d approach which perhaps too often has not put with liquidity risk to at the fore.

Regulatory Environment — Dubai

Statutory

Suspicious Transaction reporting
These reports are considered a measure to combat terrorist financing or money laundering through interbank transactions. In case any suspicious transactions are observed, banks are obliged to report to the Dubai Financial Services Authority (DFSA).

Financial position reporting
Banks need to report total assets, liabilities, equity positions and company holdings to the DFSA on monthly and quarterly basis.

Prudential

Prudential returns reporting
Prudential returns reporting includes reports with detailed information related to the statement of financial position, income statement, provisions for impairments, credit activity, brokerage activity, wealth management activity and other various breakdowns which are required to be submitted to the DFSA on an annual or quarterly basis. In addition, it includes a report on related party transactions disclosing all the transactions with related parties to safeguard against a conflict of interest.

Capital adequacy reporting
Capital adequacy is centred around risk reporting and is based on the Basel II framework. These reports are generally concerned with information on credit risk, market risk and operational risk in addition to group solvency risk and liquidity risk for risk management purposes.

Group solvency reporting
Financial group solvency report is required by the DFSA in order to calculate financial group capital requirements and financial group capital resources.

Liquidity reporting
The DFSA requires liquidity position reports covering the information on financial inflows and outflows as a measure to calculate liquidity requirements, manage liquidity risk, and control the liquidity crisis.

Large Exposure reporting
These reports cover detailed information on large exposures faced by financial intermediaries due to concentration risk.

Regulatory Environment — UAE

Statutory

Financial reporting
These reports are considered a measure to combat terrorist financing or money laundering through interbank transactions. In case any suspicious transactions are observed, banks are obliged to report to the Dubai Financial Services Authority (DFSA).

Prudential

Capital adequacy reporting (Basel II returns)
Capital adequacy norms in the UAE are based on the Basel II framework and are generally centred around risk reporting. The Basel II returns are concerned with calculation of capital adequacy and capital base requirements and the UAE follows a standardised approach on credit risk, and banks can select any approaches for Market Risk and Operational Risk, with the advanced options requiring explicit approval by the CBUAE. According to a recent announcement from the Central Bank of UAE; banks in the country are expected to assess their Internal Capital Adequacy Assessment Process (ICAAP) and detailed risk profile and submit these reports to the Central Bank (UAE). Prudential Return Templates included in Appendix 7 are required to be submitted on a quarterly basis.

Statistical

Credit statistics reporting
The Central bank sets rules for the compilation of returns on credit statistics on periodical basis. All the commercial banks have to submit the above to bank based on the instructions laid down by the Central bank.

Transactional

Suspicious Transactions reporting
Recognizing the threat posed by Money Laundering and Terrorist Financing to countries in the Middle East and North Africa Region ("MENA Region”), the Central Bank UAE in association with Middle East and North Africa Financial Action Task Force (MENAFATF) have set up a committee called Anti-Money Laundering and Suspicious Cases Unit ( AMLSCU). Therefore all the authorized institutions in case of any suspicious transactions observed, are required to submit the data on all their remittances through Suspicious Transactions Reports (STRs) along with report on cash deposits greater than 40 thousand United Arab Emirates Dirham (AED) or equivalent foreign currency.

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

Dubai Financial Services Authority (DFSA)

The Dubai Financial Services Authority (DFSA) is the sole independent regulator of all financial and ancillary services conducted through the Dubai International Financial Centre (DIFC), a purpose-built free zone in Dubai. The DFSA’s regulatory mandate covers asset management, banking and credit services, securities, collective investment funds, custody and trust services, commodities futures trading, Islamic finance, insurance, an international equities exchange and an international commodities derivatives exchange. Each regulated institution is required to produce reports in specific formats on a regular basis depending on the category of the bank and its operations. (category one-four).

FRSGlobal - world leader in automated regulatory reporting & risk solutions provides a full solution to international banks operating in Dubai under the DFSA in order to comply with current and future requirements.

The FRSGlobal solution automates regulatory reporting for the DFSA to improve the efficiency of production and on-going compliance with the regulator’s requirements for specified reports. In addition to the simplicity of production which releases valuable staff time, the well proven features of the FRSGlobal solution enables senior managers and executives to quickly analyse report data and identify meaningful trends, exceptions or variance (between reports and periods for example), and to further drill down (or up) into the information for prompt resolution or for further action to be taken.

All regulated and authorised institutions are required to report according to four different categories of bank operation. Reports may include information on CAD, liquidity and Basel standards compliance, for example.

The FRSGlobal solution covers all current required reports outlined by the DFSA on 31 July 2010 for Category one banks. Additionally, FRSGlobal provides a unique level of confidence and security to executives and compliance officers to ensure that all changes to existing reports are incorporated automatically through subscription to the Regulatory Update Services (RUS) - available to clients for all supported countries and jurisdictions.

New reports will be added as released and maintained under the terms of the FRSGlobal Regulatory Update Services (RUS).

The solution offers the following;

• Automation of the above reports for submission via the Electronic Prudential Reporting System (EPRS)
• Improved accuracy of reporting and inter/intra report consolidation
• Integration of data from back office systems/Excel etc.
• Capability of analysis for improved business decisions

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.