FusionBanking Loan IQ Regulatory Update: EIR, IFRS 9, FATCA and more

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2 Misys Topic of the Month FusionBanking Loan IQ Regulatory Update: EIR, IFRS 9, FATCA and more Misys Connect Strategic advantage Michel DORVAL Product Management Strategy Regulation Lorenzo CERUTTI Systems Advisory Group Christine SCAFFIDI Product Management Lending

3 Agenda Regulatory update for Lending - Overview FusionRisk for Loan IQ EIR and IFRS 9 Other Regulatory requirements BCBS 239, Anacredit, FATCA/CRS Regulatory Working Group Question and Answers 3

4 A cross-functional approach to position Misys on regulatory topics Monitor and understand new regulations Synthesis and prioritisation of top regulations Thought leadership & positioning Product roadmap & development External Collateral, GTM planning Capture new and changed regulations as they are proposed Identify high-level impact through discussions with PMs Identify and prioritise regulatory trends Drill down on most important regulations and agree strategic positioning Define Misys position Deliver internal training Engage with Partners Launch external positioning campaign Define and deliver required functionality Follow standard ARR and PLM process including GTM checklist / enablement Build demos Develop collateral Plan campaigns / launches as required

5 Prioritization of top regulations indicating impact on lending business Full Name Compliance Date Region/ country Business Impact on customers IFRS Global Accounting AnaCredit 2018 Europe Lending More alignment with risk management (hedge accounting and expected loss impairment model) Potential changes to fair value versus amortised cost calculation Integration of the AnaCredit data requirements Expansion of the reporting content and more frequent interval of reporting FATCA 2015 Global (linked to US) Financial Crime Capture of Customer and counterparty (individuals and legal entities) classification and identification of US accounts CRS (or GATCA) 2018 Global Financial Crime Capture of the customer information Due diligence and identification Documentation and reporting BCBS Global Group level High level principles concerning banks IT and infrastructure capabilities, upstream and risk systems, risk data and reporting. MIFID II/Dodd Frank 2017 Europe Market Structure Major extensions to pre and post trade transparency and transaction reporting Moves trading of standardised derivatives on to exchanges or other organised trading venues EMIR/Dodd Frank 2017 Europe and US OTC derivatives Open items that needs to be covered from EMIR/Dodd Frank like Connectivity to CCP or Clearing 5

6 IFRS 9 Key requirements Classification and Measurement of Financial Assets and Liabilities Includes Expected Losses Replaces IAS 39 Effective 1st Jan 2018, as per IFRS Foundation decision But national endorsement required. The US will not adopt IFRS 9 as such, but US GAAP tend to converge with IFRS New Misys architecture allows a fair level of localisation 6

7 IFRS 9 Key requirements Classification Measurement Impairment Hedging Consistency Asset chars Business model Determines measurement type Amortised Cost (EIR) Fair Value (NPV) Expected Loss Forward looking Optional (IAS 39 rules can continue to be applied). Rules being still finalised 7

8 IFRS 9 Misys Strategy Yesterday Today Equation IAS 39 LoanIQ IAS 39 Essence IAS 39 Midas IAS 39 Non-Misys Banking system FusionRisk IAS 39 FusionBanking Equation FusionBanking Lending FusionBanking Essence FusionBanking Midas Non-Misys Banking system FusionRisk IAS39 / IFRS 9 Risk Management Limits Balance Sheet Mgmt Other Regulations Misys November,

9 Misys FusionRisk A pro-active risk management platform 24 November,

10 Misys FusionRisk: (some) References out of 330+ Customers Misys February,

11 Why replace the EIR module of Loan IQ? IFRS 9 requires convergence and consistency across various requirements, including EIR Centralised development across Misys products Critical to Misys > guaranteed commitment Access to all other FusionRisk features, also beyond Regulatory space FusionRisk is a modern, specialised platform Easy to integrate: FusionFabric Connect - Middleware FusionRisk Insight Ultra-fast data aggregation and business intelligence dashboard using in-memory database 11

12 Roadmap for Loan IQ Loan IQ Version EIR via FusionRisk Loan IQ Version Retrofit of FR integration Support of existing Loan IQ EIR module will continue FusionRisk IFRS 9 Impairment added to FusionRisk 12

13 IFRS 9 Classification FusionRisk classifies assets bases on standard attributes: Business Model SPPI Condition Held for Trading Etc... The rules to assign those attributes can be setup: Inside FusionRisk, based on contract characteristics Outside FusionRisk, importing the attributes as part of the contract details Misys February,

14 IFRS 9 Classification - Example of data that could be sent from CME Pre-defined covenants available in list. Selected covenants are added to the deal Standard covenant wording is populated and access controlled 14

15 EIR with FusionRisk From Loan IQ v7.3.1.x LoanIQ FusionFabric Connect 6 FusionRisk Accounting computations are returned to LoanIQ 4 Accounting Computations (EIR ), event management Loan / Facility Export 1 2 Mapping to CDM CDM Common Data Model 3 Data upload in FusionRisk Accounting Module Cashflow Engine 5 Display detailed Results FusionRisk Insight Dashboard 15

16 IFRS 9 IFRS 9 Impairment The requirement From Incurred Loss Approach to Expected Loss Approach Base is the same (EAD x PD x LGD) - but: Provisions must be made: - at contract initiation (12 months expected losses) - at end of financial year (12 months expected losses) - upon significant credit deterioration (lifetime expected losses) EAD must be consistent with Asset measurement (AC, FV) PD and LGD to be determined with custom rules taking into account future contractual cashflows and bank expectations over customer and market evolution: term structures for PD and LGD, transition matrix, sensitivity to macro-economic factors, etc... 16

17 IFRS 9 Impairment FusionRisk process Credit Risk Framework Expected Loss Engine Output FusionRisk module but could use external application instead Assign the bucket according to customisable rules Assign the appropriate PD/LGD/EAD inputs according to customisable rules Define the scenarios Market/macroeconomic data PD/LGD/transition matrix Retrieve the credit risk inputs Bucket PD/LGD/EAD parameters Compute Expected Losses 12 months Lifetime Dashboard (FusionRisk Insight) On-demand for pre-deal origination Pre-defined regulatory reports Extraction sent to the Loan IQ sub ledger - or other GL system Misys February,

18 IFRS 9 Impairment Leveraging the existing EIR solution Scenarios Cashflows engine Amortised Cost Expected Loss Economic o Rate curves o Market and macroeconomic indices Behavioral o Prepayment o Future drawdowns Imported Computed o Based on financial characteritics o Based on models EIR computation 12M EL Lifetime EL Credit risk o PD/LGD o Transition matrix New Development

19 Expected Loss Engine Credit Risk Scenario Multi-scenarios Expected Loss computation (e.g.: Base, Downturn, etc.) Credit Risk Scenario «Base» Segment «Retail» Segment «Corporate» Segment «SME» PD LGD Surface Index Surface Index PD LGD Surface Index Surface Index PD LGD Surface Index Surface Index Transition matrix Transition matrix Transition matrix Misys February,

20 Expected Loss Engine Credit Risk Scenario PD and LGD can be defined as curve or index The curve defines a term structure % RatingA RatingA % % % Rating A % % % % % % % % % % % % % % % % % % % % % % % % % % 0d 0.000% 365d 730d 1095d 1460d 1825d % 0d 365d 730d 1095d 1460d 1825d 2190d % 0d 365d 730d 1095d 1460d 1825d 2190d The index associates a value to a date. The value can be imported or defined by a function. 5.00% 4.00% 3.00% 2.00% 1.00% The user can define any macro-economic factors in the economic scenario. GrowthRate 8.00% 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% Inflation rate 0.00% Misys February, % -2.00% 20

21 Expected Loss Engine Credit Risk Scenario The transition matrix is applied to the curve/index defined for the PD Segment «Retail» Conditions can be defined to link the TM to indexes defined in the economic scenario IF GDPGrowth(t) < 0 THEN TransitionMatrix = Downturn Matrix ELSE TransitionMatrix = Base Matrix «Base Matrix» 31/07/2015 Time horizon 12 months RatingA RatingB RatingC RatingD Default «Downturn Matrix» 31/07/2015 Time horizon 12 months RatingA RatingB RatingC RatingD Default RatingA 90% 8% 1% 0.30% 0.70% RatingB 1% 91% 7.5% 0.15% 0.35% RatingC 0.10% 2.90% 91% 5.50% 0.50% RatingD 0.02% 0.53% 7.45% 85% 7% Default 0% 0% 0% 0% 100% RatingA 80% 12% 5% 1% 2% RatingB 0.5% 80% 13.5% 3% 3% RatingC 0% 1% 82% 10% 7% RatingD 0% 0% 3% 82% 15% Default 0% 0% 0% 0% 100% Misys February,

22 Output - Accounting Impairment Stage 1: Initial recognition, and at each balance sheet date Expected losses over the next 12 months Impairment Stage 2: Upon credit deterioration Expected losses over the transaction lifetime Impairment Stage 3: Charge Off Misys February,

23 Output FusionRisk Insight Dashboard No SQL Storage Fast in-memory aggegation Customisable and interdependent widgets Will be used to drill down on FusionRisk results e.g. Amortised Cost, Cashflows, etc. Misys February,

24 Output Pre-defined regulatory reports Load the Excel template in FusionRisk Run the computations and export the Excel file 24

25 Output On-demand calculation e.g. for Pricing Contract characteristics Lending system (CME, Loan IQ, Other) API FusionRisk Loss Allowance, FTP, RWA, 25

26 BCBS 239: Misys response versus data management, processes, risk measures, reporting and governance Data architecture & IT infrastructure respecting BCBS239 principles Bi-directional end to end process from sources to recipient Generate in automated way and timely manner accurate information to support decision making process (on-demand) Capture and aggregate retail, lending, trading data in common place allowing identification of all type of exposures by business line, region, product type and other grouping Facilitate supervisory review by delivery documented workflow

27 AnaCredit: the BCE requires a new dataset with detailed information on individual bank loans. It will be applied in phases. Level 1 Level 2 Level 3 Introduction date End of 2017 Middle of 2019 Reportable institutions Reporting treshold Banks (domestic) Non performing exposure: independent of the amount Performing exposure: from 50 K EUR Other finance companies Foreign branches Non performing exposure: independent of the amount Performing exposure: < 25 K EUR Borrowers Non-finance companies Public sector All legal entities Housing loans Individual entrepreneurs Other loans for private households Granularity Borrower by borrower/loan by loan Loan by loan Loans Loans Debt instruments without ISIN code Off-balance sheet receivables Derivatives Reporting frequency Quarterly Quarterly (prudential data)/ Monthly (non prudential data) Submission deadline 30 working days ITS deadlines 30 working days ITS deadlines for model-based data, non-eu branches 27

28 FATCA: Phase 1 in Loan IQ Loan IQ has been enhanced (ENH 3606, v ) to assist clients in meeting the regulatory requirements of the United States IRS Foreign Account Tax Compliance Act. The first phase of FATCA development includes functionality to 1. Identify the FATCA Classification of entities (including lenders, borrowers, agent banks) 2. Indicate whether entities are required to perform FATCA withholding. 3. Determine whether a deal or facility falls under FATCA withholding due to grandfathering status 4. Determine whether select payments fall under FATCA withholding 5. Withhold for FATCA where applicable 28

29 CRS: The incremental impact in case of full FATCA implementation Topic New customer on-boarding Broad area of impact Capture of customer information Due diligence and identification Impact business processes Impact on IT systems Key considerations Low Medium Medium Medium Increase in data (additional data like country of residence or place of birth) to be captured Increase in volume of accounts to be reviewed and documents to be verified Documentation Medium Low Pre-existing customers Due diligence and identification High Medium Compliance with new set of rules to handle multiple jurisdictions Increase in volume of accounts to be reviewed and documents to be verified Documentation High Low Change in circumstances Review of customer information Due diligence and documentation Medium Low Medium Compliance with new set of rules and events to handle multiple jurisdictions Increase in volume of accounts to be reviewed and documents to be verified Medium Reporting Reporting Medium Medium Increase in number of fields to indicate jurisdiction, other data 29

30 Regulatory & Tax Working Group Mission To provide a forum for clients to discuss Regulations as they impact the business lines run on FusionBanking Loan IQ and gain consensus on any new requirements. Primary focus has been on FATCA. Structure Meets monthly or more frequently as needed Led by Amanda Kwok, Misys Senior BA, amanda.kwok@misys.com and Christine Scaffidi, christine.scaffidi@misys.com Achievements Published FusionBanking Loan IQ FATCA Position Paper Collaborated on FATCA Phase I enhancement, delivered in v in April 2014 Future focus Current discussion focuses on implementing Ph. 1 and interim workarounds Future discussions to encompass additional FATCA and tax withholding requirements Additional topics: VAT, IFRS9 and the U.S. Service Members Civil Relief Act 30

31 Next steps In one minute Questions and Answers Today Presentation PDF Link to Webex recording Survey State bank s interest in various features Rate this session Suggest topics for future session Anytime lorenzo.cerutti@misys.com 31

32 In one minute > Questions and Answers In one hour > Survey Anytime: just me 32

33 Lorenzo Cerutti / Michel Dorval / Christine Scaffidi Lorenzo.Cerutti@misys.com Michel.Dorval@misys.com Christine Scaffidi@misys.com misys.com Please consider the environment before printing this LinkedIn MisysVideoChannel