Bank regulatory reporting update. Imminent technical challenges. Ask Synergy Software Systems about the proven BRSAnalytics Regulatory Reporting Solution

May 9th, 2014 by Stephen Jones Leave a reply »

Stringent data reporting and risk management requirements will compel banks to significantly overhaul their IT infrastructure to not only comply with sweeping regulatory change but also to power new operational efficiencies and create market differentiation.
Basel III is much wider and deeper than its predecessors.

The new micro- and macro-prudential norms, the global regulatory mandate (which rolls out this year through 2018) requires banks to increase their quality of capital by focusing on liquidity and common equity; improve supervision of firm-wide risk management; and to provide detailed reporting on regulatory capital and the calculation of capital ratios. It mandates adherence to those ratios which are aimed at strengthening banks’ short such as :liquidity coverage and net stable funding, and long-term liquidity.

Almost all the regulations under Basel III have a direct or indirect technology implication for banks . This will require to aggregating, standardizing and analyzing data to derive high-quality insights for internal and regulatory consumption. Regulatory data reporting is ever more stringent, and additional ad hoc or supplementary reports are often required to respond to random checks by regulators. The quality of the underlying data, is highly important from the bank, regulator and market perspectives. Inconsistencies in data and reporting will attract further regulatory scrutiny and affect a bank’s credibility.

The pressure on margins, we believe require that banks go beyond the standard applications of the new technologies.
By building strong capabilities in the areas that are the focus of these regulations, While compliance remains the top priority, banks need to enhance efficiencies in their day-to-day operations to prepare for a prolonged period of tight margins and high costs and to differentiate themselves from their competitors. Banks that have invested heavily in creating IT infrastructure to support processes such as counterparty risk management internally could even provide these platforms as a service to other players in the industry.

Basel III will create technological challenges. the proposed rules require banks to report their liquidity metrics on a daily basis. Banks will need to collect data points, which could run into several thousands, across the organization. The mandated enhancements to banks’ risk management infrastructures will also pressure their technology infrastructure.

Basel III also includes a credit value adjustment (CVA) charge that must be calculated over and above the default counterparty risk charge that was proposed in Basel II. 3 needs to be carried out on a real-time basis to analyze various trades and to determine those counterparty likely to default

Improved reporting infrastructures and analytics are essential to strong financial management. CFOs can support profitability through data-oriented investment decisions. Powerful analytics will assure risk management, especially with regard to interest rate exposure. As regulatory pressure flows down from the largest institutions, smaller banks must consider additional investments in compliance infrastructure, and the integration of risk management into their board governance. While addressing cyber threats will be an ongoing concern in 2014, banks that pay greater attention to risk governance and communicate effectively with regulators will be in a
more favorable position to drive business growth.

Some key considerations:
Undertake a fundamental analysis of individual businesses to identify growth drivers.
• Strengthen data management practices to create a single source of truth for all functions.
• Embed key functions such as liquidity and risk management into related processes across the organization.
• Invest in technologies to free up resources to focus on core activities.
• Improve project management capabilities to realize greater benefits from IT investments.

Basel III liquidity coverage ratio:

The Basel III capital requirements cover three areas:
the liquidity coverage ratio (LCR)-the quality and value of assets available to cover net cash outflows
net stable funding requirements;
the leverage ratio.

The LCR requires the calculation of a firm’s 30-day average net cash outflow, with many considerations for what is included or exclud­ed. It also requires the calculation of the value of high quality liquid assets (HQLA) that are available to cover the cash outflow. HQLAs must:
meet level one and level two definitions,
be unencumbered,
be controlled by a formal liquidity management function.

Meanwhile implementing the Markets in Financial Instruments Directive (MiFID) II also going to be a challenge for both bank ls and regulators due to increasing politicisation of MiFID II and its combined with its vast scope. MiFID II is a revision of the Markets in Financial Instruments Directive, which came into force in 2007. Its primary goals are to increase transparency and fair competition in capital markets, and to bring other non-equity asset classes such as FX and fixed income under the scope of the single European rulebook.

National politicians are protective against any perceived threat to their domestic industries. A lot of banks may not fully realise just how much MIFID II is will impact on trade reporting.

The upcoming European Parliamentary elections could also have an impact on the outcome of the regulation. There are anti-bank politicians lobbying and that makes for poor regulation.

There are fundamental challenges to draft the legislation. The text for example states that all derivatives that are deemed to be ‘sufficiently liquid’ should be cleared through an approved exchange. However, there is no definition of the phrase ‘sufficiently liquid.’ Confusion over definitions caused a great deal of commotion in the weeks leading up to the introduction of the European Market Infrastructure Regulation (EMIR) trade reporting mandate, and regulators need to resolve this issue to avoid a repeat with MiFID II.

European authorities can expect to meet a great deal of resistance from firms and governments in the run up to MiFID II implementation. Trade reporting under Dodd-Frank in the US and EMIR in Europe was tough enough. MiFID II introduces even more stringent rules around trade reporting . Banks were relieved that the 12th February trade reporting deadline under EMIR has passed, but they MiFID II is coming with new trade reporting rules that will have a huge investment impact. In EMIR you trade report on a T+1 basis. MiFID II will tighten that up to near real time, and it will specify what fields you have to use in reporting. That’s an extra layer of technology cost for banks to think about

Banks also need to move swiftly to address mandated changes to reporting formats .

Regulatory reporting is a rapidly moving one way street to become digital. Governments are imposing ever more strict financial reporting regimes to prevent any future liquidity crises
Policy makers also have to cope with the glut of reporting. To become more efficient they are standardising the way they want banks to present information – XBRL, feXtensible Business Reporting Language is or soon will be the de facto standard..

This will be more efficient and more transparent. This global data standard for exchanging business information will bring speed, consistency and accuracy to the reporting process.

Financial services organisations must be able produce, standard reports on a regular basis, for regulators . Provision of reports in the new standard demanded, in this XBRL format, became mandatory from January this year (2014) in many markets

It will also be necessary to report on the much larger regulations around FINREP (Financial Reporting) and COREP (Common Reporting) – with each report filed in the correct, designated XBRL format in the . specific taxonomy (structure) defined by the relevant regulator.

June 2014 marks the start of Liquidity reporting in XBRL, closely followed by the first COREP and FINREP reports. The first mandated full Solvency II reports in XBRL are expected to be submitted in early 2016,

January introduced an interim reporting period, during which National Competent Authorities (NCAs) must either comply with the regulation or give reasons why they cannot, .

Financial organisations in Euriope must get each of the specific report structures from the European Banking Authority (EBA) to the local regulatory organisations to meet one centralised taxonomy, and a common set of rules that govern how the data in the report should be presented..

The Capital Requirements Directive (CRD)[1] IV requires a great deal of information has to be captured and properly taxonimised, and in a relatively short period of time. Many banks will struggle to provide the required information form numeiriosu in hosue of different in-house systems for core banking to Excel.

There is no standard easy or risk-free way to get the data in XBRL report format directly out of each system.
To manually extract data into a spreadsheet, add manually entered information to ‘enhance’ the aggregate, export the data as CSV: will still won’t give you XBRL production and validation. without extra work and manipulation.

What depth of competence , and what manul effort is needed to populate how many financial reporting templates in compliance with the required taxonomies?

Do banks really want to develop and t0 maintain this expertise in house ?

• the correct developer and skills in-house
• sufficient technology and regulatory reporting compliance officer knowledge to interpret the rules and data and
to map these to our business systems and compliance needs
• an XBRL conversion utility or reporting tool
a proven way to handle error exceptions and XBRL error returns
• the confidence all the data got entered into the right templates, with validations
• appropriate security rights
• ability to do ad hoc analysis
• audit trails
• ability to inquire on legacy data and reports
• ease of modification and upgrade

An integrated business process, for CRD IV, COREP (Common Reporting), LC (liquid coverage), FINREP (Financial Reporting) and Large Exposures and Stable Funding Ratio is now a fundamental reuirement.

CRD IV automation:
If you don’t have all this in place and are facing imminent deadline then available technology can help you address these issues .

• Look for underlying system components from standard industry providers of databases and technology from mainstream vendors e.g Microsoft SQL and Analysis Services. That way you can be assured of upgrades, of ease of integration to standard tools, and a ready supplied of available trained technical staff in the market.
• Applications are most likely to have been proven in Europe where regulatory compliance has the longest track record. All markets are broadly complying with internationals standards and report formats are regularly updated so a proven framework and process it aro more important than current localisation.

Scalability and comprehensiveness matter. The system must manages CRD IV and other formats like COREP, LC, FINREP, Large Exposures and Stable Funding Ratio etc. – and not just in terms of the right structure (taxonomy) but also the right content (rules) and format (XBRL)D
• Regulations are both vague and changing . So find partner supplier partner whose system can cter for such changes
• A streamlined review and approval process to move information between different people and collate/verify data, is essential in or hoe will you meet deadlines month in and month out?

BRSAnalytics will produce, transport and validate your reporting data into XBRL using the configured regulation taxonomy. Automating this complexity will avoid a lot of manual work and the significant risks of heavy fines for missing deadlines and associated reputational damage.

if you need a proven CRD IV solution in good time to meet this challenging regulatory change adequately, then talk to us now to ensure your Bank efficiently meets meet all future compliance requirements on time, every time.

Hasan: 009714 3365589


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