THE ROAD AHEAD - LIABILITY DATA REPORTING

Transcription

1 MINIMUM REQUIREMENTS FOR OWN FUNDS AND ELIGIBLE LIABILITIES THE ROAD AHEAD - LIABILITY DATA REPORTING Objective of this document is to provide a comprehensive functional overview of the Liability Data Reporting (LDR) disclosure mandate, under the Bank Recovery & Resolution Directive (BRRD) regulation. This paper also showcases an Integrated Functional Data Model aimed at Compliance WHITE PAPER / JULY 10, 2018

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3 1.0 BACKGROUND Regulations governing banking operations have matured over decades defining a framework around capital adequacy, operational governance and risk mitigation. The 2007 crisis accelerated the evolution of these regulations across geographies, to instill public confidence. New mandate structures and guidelines have been enforced aimed to prevent widespread market panic behavior and its underlying impact. The crisis also saw the governments inject capital, sourced from taxpayer s money, into ailing financial institutions with huge capital erosion due to mark-to-market losses because of taking excessive risks, in a desperate effort to prevent financial catastrophe and uphold market credibility and business bloodline Liquidity. In the run up to the crisis, most banks were actively involved in wanton trading characterized by excessive risk taking. Lehman s leverage increased from 24:1 in 2003 to 31:1 by 2007 at the time of the bank s collapse. This was driven by the firm belief that any unprecedented losses will be picked up by the US government owing to the existence of implicit government guarantees, the oligopolistic nature of these banks and the overarching belief that they were too big to fail. In the wake of the collapse of the financial system in the US and the cascading effect it had worldwide, the G20 heads of state and governments agreed that global reform initiatives were needed to prevent further disruptions. These initiatives were aimed at strengthening resilience of financial institutions and preventing re-occurrence of a systemic crisis. These objectives were addressed by introducing Capital Standards and Buffers, Quantitative Liquidity Guidelines, Non-Risk based Ratios and the like. To avoid using taxpayers money for financial bail-outs, guidelines were sought to ensure possible bank resolutions / insolvency proceedings were feasible and realistic without requiring the government and taxpayers to cover losses, regardless of the size of the institution 2.0 BRRD: RECOVERY AND RESOLUTION DIRECTIVE Due to size, complexity and inter-connectedness of banks it was not possible for banks to undergo normal insolvency proceedings - indirectly forcing governments, and eventually tax-payers to bail them out during The objective of the Bank Recovery & Resolution Directive (BRRD) is to ensure that these liquidation proceedings are realistic and feasible, ensuring business continuity, and limiting government bail-out. The Financial Stability Board (FSB) was mandated to draft an international standard for resolution regimes. The FSB s efforts culminated in publishing the Principles on Loss-Absorbing and Recapitalization Capacity of G-SIBs in Resolution commonly referred to as the Total Loss Absorption Capacity (TLAC) introducing the concept of an additional liability requirement for the largest institutions globally. The key element of this directive is the bail-in tool which aims at making institutions creditors participate in institutional losses thereby reducing the need for a public bailout. In the EU, the basic principles were transposed into European law by way of the Bank Recovery and Resolution Directive which forms the legal basis for bank resolution proceedings. This brings along with it an entirely new regulatory set-up of the Single Resolution Mechanism (SRM) which in-turn establishes the Single Resolution Board (SRB) as the competent authority for Resolutions. The BRRD in an approach like TLAC imposed the Minimum Requirements for Own Funds & Eligible Liability (MREL) which applies to all banking institutions irrespective of size domiciled in the EU region. Though MREL and TLAC appear to be similar they differ significantly in Scope, Minimum Requirements, Definition of Eligible Instruments and Calculation Methods. TLAC and MREL aim to address the same fundamental aspect: increasing the loss absorption capacity amongst financial institutions by means of minimum binding ratios aimed for readiness and bail-in guidelines defining approaches 3 WHITE PAPER / MREL The Road Ahead: Liability Data Reporting

4 for both equity and debt instrument holders based on the liability cascade. As the regulation is subject to overseeing audits by authorized Regulatory Authorities / Central Bank Organizations, data disclosure and reporting guidelines are warranted. The first amongst these the Liability Data Report (LDR) guidelines were published under MREL in 2016 and the technical standards reviewed and updated subsequently. The content below, is written in the in context of MREL, with primary focus on guidelines for Liability Data Reporting. 3.0 LIABILITY DATA REPORTING (LDR) - OVERVIEW LDR reporting consists of 8 schedules of mandated reporting comprising firm-wide aggregated and contract level granular data to ensure requirement fulfilment at both group and individual entity level. There are individual reports as part of the 8 schedules numbering from T00 to T08 subsuming Liability Structure, Capital Funds, Securities, Guarantees, Deposits, Financial Liabilities, Derivatives and Secured Finance. The diagram below gives an overview of the reporting content and key reporting parameters: The frequency is annual in nature and the cut-off date for submission is 30 th of March, each calendar year until A stricter deadline and shorter reporting frequency is expected to be implemented post WHITE PAPER / MREL The Road Ahead: Liability Data Reporting

5 4.0 REPORTING COMPLIANCE: BANK DATA LANDSCAPE Most banks have directly or indirectly adopted a multi-dimensional model for enterprise-wide data management aimed at catering to business critical activities, support functions and complying with regulatory, legal, reporting and disclosure mandates both at entity and enterprise levels. Broadly speaking, the data can be classified as core data capital, customer, product which reside in the golden source of truth databases and other related information such as payments, settlement, reconciliation, regulatory compliance, markets, affirmation services, risk management, collateral, CCP details etc. which reside in business applications / systems. Though banks adopt various approaches to streamline data for LDR Compliance they cannot opt out of the detailed GAP analysis needed to map the reporting attributes to source parameters. The ideal approach would be to map the readily available attributes like BASEL Capital guidelines, COREP, FINREP etc. to LDR reports. Though the above approach would meet the short-term initiative it would make reporting a nightmare in the long run should the consolidation / sub-consolidation parameters depart from prudential standards to meet the needs to business-driven resolution planning. Also owing to the interconnected and reconciling nature of the reports it is imperative for banks to overcome nomenclature, mapping, masking challenges to streamline reconciliation 5.0 KEY CHALLENGES FACING BANKS FOR LDR COMPLIANCE Introduction of Insolvency Parameters & Liability Structure Liabilities - traditionally seen as a balance sheet reporting entity, and hence an aggregation item for reporting purposes will have to be entirely relooked under the MREL guidelines considering the proposed liability cascade. The existing Liability framework will not suffice and banks cannot rely on current reports to fill this gap, but to create a new Metadata driven framework for Liability consolidation. Attributes such as Insolvency Ranking, Contractual 3rd party Governing law, Early Termination Amount, Estimated Close-out Amount etc. need to be understood and underlying calculation/population logic determined. Data: Sourcing, Dependency & Granularity Data overlap across various regulatory regimes are common in today s permeated disclosure landscape. MiFID II, EMIR, CCAR, DFAST, Dodd-Frank, AIFMD etc. would see the sourcing of the same data across multiple applications / business units for compliance reporting. Though an ideal starting point to avoid repetition of work, the efficacy of reusability depends on the scalability of the earlier implemented approaches. A patch-up approach implemented earlier that is non-holistic and lacks scalability will render reusability non-feasible warranting the solution be built from scratch or previous work re-engineered. The above is compounded by the evolutionary nature of reporting parameters under MREL which seems to be getting exhaustive as each year progresses. Amongst the schedule of reports, reporting data is being sought at both Consolidated (Entity) level and Contract (Individual) level with built-in reconciliation parameters identified for data validation purposes. Though the report warrants reconciliation only at these two levels it is imperative for banks to consider reconciliation points based on business hierarchy, accounting structure, group consolidation etc. to ensure accuracy and enable pointed investigations in case of reconciliation failure. 5 WHITE PAPER / MREL The Road Ahead: Liability Data Reporting

6 As indicated in the regulatory guidance a few of the consolidation and sub-consolidation parameters for reporting are based on the prudential standards, i.e. in line with the reporting requirements stemming from the CRR and consistent with the scope of the prudential reporting (i.e. COREP and FINREP). However, the consolidation and sub-consolidation perimeters can depart from the prudential requirements to suit the needs of resolution planning if necessary. In such cases, banks will have to define the scope of consolidation for resolution purposes and identify the same as part of the resolution plan 6.0 HOLISTIC DATA APPROACH As the Financial Services Industry adapts to complex regulatory disclosures it is important they have a good handle on the size, complexity, and changing characteristics of their underlying data. Subsequently, firms must continuously improve their data strategy to meet new reporting, aggregation, and governance requirements. The diagram below is an indicative Data Management strategy which Banks can adopt for Liability Data Reporting Compliance Though modern big data analytic platforms can help integrate and analyze large volumes of data from disparate sources aiding in compliance, it is paramount that FI s adopt a comprehensive Data Management Strategy which includes: Data Integration allows both internal and external information in various systems to be consolidated in one place e.g.: Market & Positions, Exposures, Reference, Retail Business Data Quality entails the establishment and deployment of rules, policies, procedures concerning the acquisition, validation, maintenance and dissemination of data e.g.: CCAR, LCR, BCBS239, LDR Master Data Management collates the enterprise Master information in one single repository. Introducing Data Governance process by way of correcting repetitive failures, introducing workflows, autolearning /self-correcting models to impose validation and verification. Data Warehouse which will serve as a foundation to provide data for compliance and Business Intelligence creates a framework through which the data can be properly used for compliance and reporting purposes. 6 WHITE PAPER / MREL The Road Ahead: Liability Data Reporting

7 7.0 CONCLUSION The Liability Data Reporting presents significant data challenges which will be interconnected to the institutions Resolvability mandate and have an impact on the Business Planning & Steering activities under Resolution Plan submissions. Resolvability & Steering will take different paths; the former driven by Recovery Plans and the latter by Business Indicators and Scenarios. Banks aiming for a strategic, scalable solution will have to adopt a holistic data framework leveraging existing reporting capabilities, and integrating critical data dimensions into Resolvability, Steering & Disclosure mandates. 7 WHITE PAPER / MREL The Road Ahead: Liability Data Reporting

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