FRSGlobal : Risk Analysis and Regulatory Reporting

Wolters Kluwer Financial Services | FRSGlobal in the UK

It is now over four years since we started to see the UK financial markets and economy crumble. In 2010 we were told green shoots were appearing, but it seems the snow saw these off as 2011 reported the UK economy hitting rock bottom with over 20% of companies experiencing critical levels of financial distress compared with the same time the year before.

So to 2012, the ongoing euro crisis has been good for the Pound,increasing liquidity, as investors use the UK as a safe haven, but the on-going Euro recession does pose a significant threat to the already weak UK economy.

So, to financial markets and regulation…

What is on the regulatory table for 2012?

Basel III: Basel III, of which COREP & FINREP are a part, has sparked a trend for grabbing headlines with no sign of letting go for 2012.

Solvency II: This directive is based on a similar three pillar structure as Basel III. The project - initiated by the European Commission - aims to enhance a revised set of EU-wide capital requirements and risk management standards. The objective of the new system is to introduce more sophisticated solvency requirements for insurers, to guarantee that they have sufficient capital to withstand adverse events, including natural disasters and offer some protection against systemic economic failures.

Regulatory Environment — United Kingdom

Prudential	Statistical
FSA IRR Reporting	Bank of England Returns
FSA Liquidity Reporting
FSA Retail Mediation Activity
FSA Mortgage Lending and Administration
FSCS Single Customer View

Prudential

The Financial Services Authority (FSA) is a prudential supervisory authority responsible for supervision of financial services in the UK. It asks regulated firms to provide it with a wide and comprehensive range of reports to satisfy its supervisory requirements and statutory objectives.

FSA IRR Reporting
These returns encompass balance sheet and profit and loss statements, overall capital adequacy reporting, credit risk reporting, market risk reporting, large exposures, business forecasting, interest rate sensitivity reporting and others. These reports have a degree of overlap with COREP reporting performed in other European jurisdictions, but are not the same.

FSA Liquidity Reporting
Our solution fully supports the liquidity reporting requirements as required by the FSA including the full suite of required reports. It also integrates these reports with our stress and scenario engine, eliminating conflicts between risk management considerations and reporting to the regulator.

FSA Retail Mediation Activity
Firms engaged in certain retail activities are required to submit reports to the FSA relating to training and competence of staff, product sales and other issues. Our solution supports this reporting requirement and provides an industry leading mechanism for efficient reporting.

FSA Mortgage Lending and Administration
Firms providing mortgage lending are required by the FSA to meet additional reporting requirements. These detail the amount of lending, as well as details concerning volumes of loans and the level of arrears and write-offs. Our solution provides an automated solution that not only meets the regulatory requirements fully, but improves the efficiency of the reporting process.

FSCS Single Customer View
The Financial Services Authority (FSA) has introduced new rules for the Financial Services Compensation Scheme (FSCS) and deposit takers (that is, banks, building societies and credit unions), through Single Customer View (SCV) reporting. These reports include information on customer details, contact details, account information etc. to be submitted electronically.

Statistical

Bank of England Statistical Reporting
Banks in the UK are required to provide statistical reporting to the Bank of England. The information from these reports is used to monitor banking and economic activity, as well as inform other bodies such as the International Monetary Fund and the European Central Bank. Over 30 separate reports are catered for in our solution, covering items such as balance sheet and P&L, reporting to gilt repo activity, country investment analysis and effective interest rate reporting.

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

FRSGlobal provides Asset & Liability Management solutions
tailored to meet the requirements of ALL firms

In light of the recent financial crisis, firms of all shapes and sizes are re-evaluating the way in which they model their ALM risk. 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 have typically developed ALM systems in-house; a luxury few smaller firms can 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.

FRSGlobal has its heritage in and in-depth knowledge of the market. This has 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.

The FRSGlobal 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...

FRSGlobal offers a functionally rich ALM solution that require immediate return on investment by taking a ‘compact’ approach with risk management features that absorb complexity. With the 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 auditability & 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 enables financial institutions of all sizes put in place sound practices and processes to manage their ALM and liquidity risk that are in line with regulatory guidelines.

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 III

Basel III has sparked a trend for grabbing headlines this year, with no sign of letting go for 2012. UK financial institutions have a lot to get ready during the transition period to become fully compliant with the new Basel accord, which includes (but is not limited to):

• Capital definitions to be understood and applied
• Risk coverage and leverage ratios
• Capital buffers to be calculated and held
• Adherence to liquidity standards
• Central counterparty information to be processed
• Transitional arrangements

Fortunately, UK firms have an advantage over their European counterparts when implementing some of the changes, for instance, the new Basel III liquidity standards reflect the existing FSA regime.

The international transitional timeline has little scope for movement. Firms need to recognise that the arrangements for Basel III have to be in place at each milestone, not just the final deadline. Regulators have allowed for observation periods between target points which institutions should use wisely. Companies which use the interludes to their full potential will benefit from a more informed project and team, in addition to avoiding the wrath of the regulator. Wolters Kluwer Financial Services’ FRSGlobal is working closely with regulators and clients to make sure all the objectives are achieved on time and to the standard required in the directive. The implementation period runs from 2011 -2019, which may appear to be a long lead time, but the changes are such that in reality, firms need to focus – those with experience in the regulatory field will remember that Basel II took the best part of a decade from idea to full implementation and in some respects was not as far reaching as the changes under Basel III. Basel III is a game changer for the industry; therefore financial institutions are advised to act now to get the most out of the regime.

To learn more about the separate elements of Basel III please click on the tabs

FRSGlobal – enables Broker-Dealers to improve cash management and boost profits with risk analytics

Broker-dealer firms have to be able to analyse and quantify the impact of market, credit and liquidity risk volatility on their business. A major factor is the impact these risks will have on customer portfolios and consequently the implications for margin calls, collateral and trading activity.

Broker-dealer firms also have to adhere to the FSA requirements regarding liquidity and the firm’s liquidity risk appetite. These requirements include a robust stress testing framework, as well as the ability to produce FSA liquidity submissions on a daily or weekly basis under times of stress. Given the variety of possible behaviours of market participants to be considered, addressing these requirements is not a simple process.

FRSGlobal provides broker-dealer firms with the know-how and software tools required to address these problems.

Download the solution sheet to find out more...

COREP

COREP (common reporting) takes centre stage in 2012 as UK firms work towards being compliant for the 1 January 2013. The key issue for the UK banking sector is that in terms of layout and quantity of data, the items requested by COREP are very different to the existing FSA IRR requirements. The COREP reports typically have 3 to 4 times as many cells to complete, which will require more data at a granular level.

The new COREP reports are required to be submitted to the FSA in XBRL format, which differs to the current XML format. A significant proportion of IRR reports will be kept in place alongside the COREP reporting templates and will still need to be reported using the current XML format.

UK firms will need to create a new set of European reports to run alongside the remaining FSA returns. Firms must ensure that the two streams of reporting match across the varying regimes. The result is an extra strain on resources, both in terms of people to interpret the rules and on systems to support production of the required reports.

Within the UK, the firms who will be the most affected by this change are those that use the IRR reporting mechanism for prudential reporting. This includes banks, investment firms and building societies.

A further extension to the COREP regulation which will cover banks and building societies is FINREP (financial reporting). FINREP is used by the FSA to gather the larger part of periodic financial information and also includes consolidated reporting. For non-consolidated reporting, the balance sheet needs to be reported using the existing IRR reporting mechanism. FINREP reports are to be submitted according to calendar quarter ends. For some whose accounting periods are not aligned with the calendars month this may cause difficulties.

Managing, monitoring and reporting Liquidity Risk - UK

The Financial Services Authority (FSA) was the first regulator to go into print on how it intends to move forward on liquidity risk with the issuance of CP 08/22 "Strengthening liquidity standards" in December 2008. This follows the principles laid out in the June 2008 BIS paper and widens the reporting population for liquidity beyond the traditional banks, to incorporate the likes of investment firms, building societies and UK branches of overseas banks.

In April 2009, the FSA published a second liquidity consultation paper CP 09/13 "Strengthening liquidity standards 2" which focuses on new liquidity reporting requirements, and in June 2009 a third consultation paper CP 09/14 "Strengthening liquidity standards 3" was published detailing transitional provisions, including the proposed timetable for switching from the existing regime to the new requirements.

In October 2009 the FSA published the final version of the new liquidity requirements and implementation timetable in Policy Statement 09/16: Strengthening liquidity standards, including feedback on CP08/22, CP09/13 and CP09/14.

Register here to receive a comprehensive summary of the PS09/16 written by our business expert, Selwyn Blair-Ford.

The FSA has developed a set of proposals that will require liquidity management to be integrated into business planning and management processes. It also requires a comprehensive stress testing strategy, measurement and management against a documented liquidity appetite, a liquidity buffer and a liquidity contingency plan. Overall the amount of resource held against liquidity risk will increase, as will the burden on management.

For some institutions, this will be the first time they have had to address the issues around liquidity, including:

• capturing cashflows
• creating an Individual Liquidity Adequacy Assessment (ILAA) process and the associated Contingency Funding Plan
• developing appropriate stress tests
• daily monitoring and weekly reporting - with only a three-day window between close of business on the Friday and the reporting deadline on the following Monday evening

Read the Comment Pieces:
FSA strengthening liquidity standards transitional measures consultation paper (CP 09/14) » (125.16 kB)

FSA strengthening liquidity standards reporting consultation paper (CP 09/13) » (128.07 kB)

New versions of reporting forms published (February 2009) from the FSA. (79.2 kB)

FSA strengthening liquidity standards consultation paper (CP 08/22) (124.95 kB)

Single Customer View (SCV) - changes to deposit
compensation

In June 2009 the FSA published CP 09/16 – Financial Services Compensation Scheme (FSCS): Verification of the "Single Customer View‟ (SCV) and changes to deposit compensation.

The paper proposed that all licensed deposit takers in the UK are required to participate in the Financial Services Compensation Scheme (FSCS) which, in the event of a bank or firms‟ failure, will protect depositors‟ funds up to the statutory limit, which is £50k or €50k, whichever is the greater.

In order to facilitate prompt and effective payment within seven days of deposit takers default, the FSA is demanding that firms supply an electronic file with a consistent SCV of eligible claimants.

In November 2009 the FSA published PS 09/18 which enshrined these proposals and associated feedback into law.

The FSA‟s SCV requirements will be live from 31 January 2011. However, in advance of this, firms will need to provide implementation reports detailing progress and intentions towards meeting the requirement (July 2010, Jan 2011) and submit a sample file to the FSA for verification.

Register here to receive a comprehensive summary of the PS09/16 written by our business expert, Selwyn Blair-Ford.

Solvency II

Download the Data Sheet which describes the full details of the FRSGlobal Solvency II solution » (362.63 kB)

Solvency II, a fundamental and wide-ranging review of the capital adequacy regime for the European insurance industry, aims to strengthen prudential regulation and improve policyholder protection.

January 1, 2013, is the expected global implementation date when all member states of the European Union (EU) will be obliged to implement Solvency II.

The project initiated by the European Commission as an advancement to Solvency I aims to enhance a revised set of EU-wide capital requirements and risk management standards. The objective of the new system is to introduce more sophisticated solvency requirements for insurers, to guarantee that they have sufficient capital to withstand adverse events, such as floods, storms or big car accidents and offer some protection against systemic economic failures.

Currently, EU solvency requirements cover 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 the demand for a more streamlined approach towards supervision, the Directive would enable insurance groups to be supervised more efficiently, through a College of Supervisors appointed among the supervisory authorities in the home country that would have specific responsibilities to be exercised in close cooperation with the relevant national supervisors.

The group supervisor 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 (Basel II) but adapted for insurance.

The three Pillars of this new regime are structured as below:

Basic Architecture of Solvency II Framework
Pillar I - Quantitative requirements Solvency Capital Requirement (SCR) Minimum Capital Requirement (MCR)	Pillar II - Qualitative requirements Risk Management (ORSA - Own risk and solvency assessment report) Supervisory activities	Pillar III - Supervisory and Disclosure Supervisory reporting Disclosure Transparency

Solvency II and the Lamfalussy process:

The Lamfalussy Process is an approach to the development of financial service industry regulations used by the European Union. Originally developed in March 2001[1], the process is named after the chair of the EU advisory committee that created it, Alexandre Lamfalussy. It is composed of four "levels," each focusing on a specific stage of the legislation.

In January 2011 the Omnibus II directive proposed changes aligning the level 1 text with the Lisbon Treaty and amending the text to reflect the EU’s new supervisory structure:

• Level 1 – The European Commission adopts formal proposal for the directive (regime’s main outline and high level standards) approved by the European Parliament and the European Council.
• Level 2 – Includes introduction of delegated acts developed by the European Commission. The European Commission is advised by the European Insurance and Occupational Pensions Authority, EIOPA (formerly Committee of European Insurance and Occupational Pension Supervision)- representing all insurance supervisors throughout the European Economic Area (EEA).
• Level 3 – The EIOPA adopts guidelines and recommendations, carries out peer review, mediates and settles agreements, takes action in emergency situations, facilitates delegation of tasks and responsibilities, monitors and assesses market developments, undertakes economic analyses and fosters investor protection.
• Level 4 – Enforcement of European Union law (EIOPA and European Commission). The Commission ensures all member states have implemented the legislation correctly.

Maximum harmonisation is assumed with the new Solvency II framework directive. This means European rules will be implemented in all countries of the EEA (i.e. the EU including Iceland, Liechtenstein and Norway). EIOPA has recommended Bermuda, Switzerland and Japan to be the first countries assessed for equivalence with EU insurance regulations under Solvency II. This will facilitate the preservation of a level playing field in Europe, with equal protection of all policyholders within Europe and equivalent jurisdictions.

The challenges and opportunities introduced by the new Solvency II requirements will be more risk-sensitive and more sophisticated than in the past, thus enabling better coverage of the real risks run by any particular insurer.

Insurance companies in Europe have already started their implementation processes and self assessments before the final directive comes into force. Through this exercise and by using the results of QIS 5 companies aim to analyse the factors driving the capital requirements, judge current arrangements and assess Solvency Capital Requirements (SCR).

Moving to the new Solvency II regime is both full of challenges and opportunities as the UK insurance industry is the largest in Europe. Successful implementation of Solvency II in terms of compliance and effective risk management will involve dedicated efforts from different levels of stakeholders such as actuaries, risk and finance professionals.

The EIOPA has also made a proposal to choose XBRL taxonomy, the harmonised Solvency II reporting format to be used for the transmission of the Quantitative Reporting Templates (QRT). In light of media coverage regarding a proposed delay and postponement to January 1, 2014 the UK FSA has clarified their position toward implementation.

The FSA revised its implementation assumptions as follows:

• January 1, 2013: Responsibilities of supervisors and the EIOPA would become effective.
• January 1, 2014: Solvency II requirements applicable to firms

The FSA has requested firms to continue their preparations, making assumptions of an implementation date of January 1, 2013.

The FSA is assessing the impact of the draft proposals and will provide further clarification when a greater degree of certainty is observed. Currently firms are going through the internal model approval process as part of the preapplication process.

In a recent announcement the FSA has also extended the dealine of the preapplication process:

• Internal model approval – Date extended till June 2013
• Standard model – Application process to be started from January 1, 2013

Our Solvency reporting solution is equipped with actual report formats that meet the data and compliance requirements of the EIOPA and the European Commission.