The build up

First, there was the FSA 047/048. In late 2009, in a prompt response to the downturn, the FSA introduced a tough new liquidity regime including significantly enhanced liquidity reporting requirements, focused on detailed mismatch ladder analysis, which were to be phased in over a period. During 2010 most banks began submitting, amongst others, the 47 and 48 which cover Daily Flows and Enhanced Mismatch Reporting respectively.

Next came the C66, which had its origins in a 2013 Basel Committee paper: “Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools”. That paper provided detail on certain ‘Additional Liquidity Monitoring Metrics’ including the contractual maturity mismatch. In the European context the EBA’s response resulted in a series of new COREP ALMM returns including, after some delay, the ALMM C66 (Maturity Ladder) which was eventually introduced earlier this year. Bringing in a variety of new requirements, the C66 took liquidity reporting to a new level of complexity.

But now the UK banking market faces up to the prospect of a whole new dimension…

PRA 110

Banks will generally be required to populate and submit the PRA 110 from July 2019, but some firms will be submitting on an interim basis from November this year. Replacing the FSA 047/048 (save during interim reporting), and built upon the C66 but extending it significantly, the PRA 110 takes the levels of granularity and data requirements to yet another level. Indeed there is criticism from some that the UK regulator is trying to ‘gold plate’ standards already agreed at the European level. Some innovations/key features included within the return include the following:

• Includes behavioural & contractual cash flows
• Shows a counter-balancing section with market value of the firms capacity to generate cash through selling securities or using bank facilities, and this includes a line for reporting eligible collateral for that purpose
• More detailed section on contingent flows
• Lots of granularity around levels of stable funding and the quality of assets and collateral
• Details on the implications of derivative positions, including contingent flows in times of market stress
• Includes impact of monetisation actions
• Has LCR weights and blended weights, so can be reconciled back to the LCR
• More frequent reporting

A solution

This level of complexity makes automation of this particular new return look essential and a solution combining liquidity and regulatory reporting increasingly attractive.

At ALMIS® International we have many years experience in supporting clients’ compliance with increasingly complex prudential regulatory reporting requirements. Our futureproof assurance means clients will always enjoy the benefit of autopopulated solutions for their prudential reporting requirements. So as before with the FSA 047/048 and then the C66, we will be delivering an autopopulated solution to the PRA 110. Work is already well underway to provide this solution, initially to those clients who will be submitting from November on the interim basis.

If you would like more information on the ALMIS® Regulatory Reporting software, please contact:

Cameron Stephen
Sales & Marketing
[email protected]
0131 452 8898

Liquidity: the increasing reporting burden
UK banks’ travels on the liquidity reporting journey continue with the imminent official start, after a few false starts, of the maturity ladder Additional Liquidity Monitoring Metric (C66) and the PRA 110 looming over the horizon …..
It was in January 2013 the BCBS issued a paper entitled ‘ Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools‘. That was an early regulatory step on the journey towards today’s C66. It provided some detail on the various Additional Liquidity Monitoring Metrics including the contractual maturity mismatch; and looking back now that initial guidance looks reasonably concise
and manageable. The finalised C66, required monthly or (depending on the relevant bank satisfying certain tests) quarterly from 31 March, is a long way from that original BCBS paper: much more granularity is required. And of course the PRA 110, the introduction of which is now delayed till 1 July 2019, will continue the trend by expanding the data requirements yet again…..

C66: significant in two ways
The C66 is significant in itself as a complex new return. For example some new/key points include the following: –
– unlike the FSA 047/48 the C66 requires the inclusion of contractual interest cash flows
– behavioural cash flows are included (as a Memorandum Item)
– a requirement to calculate the maturity profile of lending which is eligible collateral (in order to include the appropriate amount of collateral in the Counterbalancing Capacity section)

The C66 is also significant as the basic building block on which the proposed PRA 110 is built. That PRA return takes nothing away from the C66 but adds to it. So for example the PRA 110 includes more time periods, more rows (requirements for example for more granularity on retail deposits), some more sections etc.

Webinar feedback
At ALMIS® International we are familiar with this sort of complex and onerous regulation, and are committed to developing and delivering appropriate solutions. One of our current priorities is therefore working with clients to help achieve autopopulation of the C66. Against that backdrop we recently held a webinar in which we discussed how to populate the return, discussed some opinions over interpretation of the relevant standards , and asked if the report will assist firms with their day to day liquidity management. The industry focus on the topic was well illustrated by the very high participation from banks and building societies (140 registered delegates). A poll conducted amongst participants during the webinar revealed that just over 80% of participants felt the C66 maturity ladder is at least to some extent a useful report to help a Bank/Building Society monitor and manage liquidity requirements (23% indicated very useful).

Conclusion
Founder and CEO of ALMIS® International Joe Di Rollo commented: “… the C66 is the most complex liquidity report so far, and the delay on the PRA 110 is helpful. But whilst the data requirements are quite painful our webinar poll tends to confirm the view that if that data is properly interpreted it should help with the practicalities of managing and optimising bank liquidity positions both short and longer term…”
Several other new reporting requirements also now start to apply: many banks are required to report FINREP for the first time, new requirements as regards the reporting of information on sovereign exposures are introduced and the requirements as regards reporting on operational risk are changing. Whatever your organisation’s view of the C66 and the other new returns may be, the journey continues ….

The financial crisis which broke in 2007/08 generated an unprecedented explosion of banking regulation. Some commentators and politicians (esp US) are now arguing its time to deregulate again. Whatever the merits of that debate, there’s little respite yet here in the UK for the banking sector. Amongst other things the flow of new regulatory reporting requirements continues and the volume of data reported increases relentlessly. The typical UK bank today has the following new reporting developments to contend with over the near future:

– Additional Liquidity Monitoring Metrics : the Liquidity Coverage Ratio (LCR) formed a core part of the post crisis regulatory response on liquidity. The ALMMs are a series of regulatory tools introduced in April 2016 and designed to complement the supervision of an institution’s liquidity risk by means of the LCR. Each ALMM takes the form of a detailed return on aspects of the bank’s liquidity position the bank is required to populate with data and submit to the regulator on a periodic basis. One particular return – the maturity ladder – which was originally considered but excluded from banks’ reporting requirements when the ALMMs were introduced is now being introduced in an adjusted form (designed to align with the LCR). Banks will be required to submit this new return (the C66) from March 2018.

– Pillar 2 Liquidity Framework: the prudential banking regulatory framework divides into three Pillars. In the liquidity context the LCR is one of the cornerstone regulatory requirements and currently forms Pillar 1. The Pillar 2 framework is intended to complement the Pillar 1 regime by considering liquidity risks not captured, or not fully captured, under Pillar 1. The UK’s domestic prudential banking regulator the PRA is currently putting the UK Pillar 2 liquidity framework in place, using a series of consultation papers to drive the debate. In the latest, CP 13/17, the PRA has focused on cashflow mismatch risk and proposed it monitors this risk by means of a new reporting requirement- the PRA110. The proposal is that this return will build on the C66, requiring certain additional liquidity data on a daily basis over a 92 day period. The PRA is targeting 1 January 2019 for implementation of this new reporting requirement.

– Capital+ : the PRA is proposing the formal introduction into the regulatory framework of a regulatory return providing forecast capital data, the ‘Capital+’. This return will collect ‘actual data’ ie estimates of capital data for the most recent reference period and also firms’ own forecasts. The data definitions in this return are aligned with various COREP templates eg Own Funds CA1. There are three different versions of this return, PRA 101,102 and 103. A firm will only submit one of these three returns, which one is decided by rules intended to apply some proportionality into the framework. So for example the largest deposit takers would report actual and forecast data on a monthly or quarterly basis using the PRA101, whereas the smallest firms would report forecasts only on an annual basis using the PRA103. This particular requirement started to apply on 1 October this year.

– Forecast Balance Sheet and P&L: the PRA has issued new proposals on reporting forecast balance sheet and P&L. The proposal is to require firms to provide business plan forecasts for their current financial year-end and the following year-end in four new regulatory reports: PRA104 – PRA107. These new reporting requirements apply from 1 January next year, reporting to be on a half yearly basis.

– FINREP: in 2013 the CRDIV EU legislative package introduced a new EU-wide supervisory reporting framework for Financial Reporting (FINREP) and Common Reporting (COREP). All PRA authorised banks and building societies are required to comply with COREP reporting obligations. Many firms have however to date avoided the need to comply with FINREP reporting (which is extensive). From 1 January next year that is about to change:-

• All firms which have not previously been required to complete FINREP reports will now have to report at least a minimum suite of 5 FINREP returns providing data on the firm’s balance sheet, its P&L and Statement of Comprehensive Income. This data will be collected quarterly, at both individual and consolidated group level.
• Some additional FINREP reporting requirements will result from the introduction of IFRS 9 on 1 January next year. These proposals will apply both to firms that apply IFRS generally and also to those which apply IFRS 9 as part of UK GAAP. Depending on the firm’s circumstances a firm in scope will require to submit a further 12 or 6 FINREP returns providing data on credit quality (including arrears and impairments).

Several of these new returns replace old/outgoing returns, so they are not all completely additional. Nevertheless, the pace of change is demanding on reporting firms, autopopulated software solutions look increasingly essential, and of course the cost of compliance continues to rise inexorably. Meanwhile for the beleaguered regulatory reporting officer in that typical UK bank the grind continues…

The financial markets have their fair share of obscure and confusing concepts and jargon. The topic of portfolio macro hedge accounting is a good example. Essentially an accounting technique intended to eliminate volatility in financial statements, it is not an easy topic. But the basics can be illustrated by taking a simple example:

• A bank has advanced a portfolio of fixed rate loans
• A rise in interest rates is a risk to the bank: it will reduce the value of the loans
• The bank protects against this interest rate risk by entering into an interest rate swap(s)
• This swap is a deal the bank enters with a third party to eliminate the interest rate risk
• The bank may or may not adopt the portfolio macro hedge accounting technique
• If it does not its accounts will treat the swap(s) in a manner which results in an accounting gain or loss, despite being an economic hedge
• By adopting the technique the bank mitigates this mismatch between accounting treatment and economic reality in its accounts

Many banks do adopt macro hedge accounting, but applying the current accounting standard (IAS 39) in this area is difficult: many issues are unclear or require interpretation. A 2014 initiative by the IASB to develop a new approach appears to have been quietly shelved. The market is therefore left grappling with the application of IAS 39 . One specific scenario which can arise in practice – the swap(s) in question are cancelled – throws up a variety of considerations. Different methodologies and approaches to this scenario will result in quite different outcomes, some unwelcome: extraordinary adjustments to accounts due to overstatements in previous accounts can even be required. Our ALMIS® Hedge Accounting provides an efficient solution which avoids the pitfalls. For a more detailed article on the swap cancellation scenario click here.