Regulatory update: PRA and European liquidity regime

Regulatory update: PRA and European liquidity regime Lombard Risk Enabling regulatory compliance

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/events/ past-events Flavour of last year s programme 16 th December 12 th November Where are we now with the implementation of Basel III in USA Reducing cost of regulatory compliance for wealth management 5 th November New capital reporting for prop trading firms 9 th October Liquidity framework requirement (LIQREP) 2014 25 th June Central Bank Ireland regulatory reporting 14 th May Latest remittance dates after COREP delay 7th May CRD IV and CRR 3 rd April Electronic collateral messaging 1 st October Asia Pacific regulatory change: Singapore 2 nd April XBRL regulatory submission for CRD IV in time for COREP 4 th September EBA Financial Reporting (FINREP) 28 th August Asset Encumbrance 1 st August FCA consumer credit regime 1 st August FCA mortgage market review 31 st July PRA foreign branches supervision approach 26 th March EBA Financial Reporting (FINREP) 5 th March So you thought it was all over? 4 th March The regulatory tsunami 13 th February Disputes and portfolio management 11 th February So you thought it was all over? 22 nd July EBA reporting What s on the horizon? 10 th December A summary of 2013 and what 2014 has in store Lombard Risk - Managing collateralised trading Enabling regulatory compliance Register for these events to receive presentation material

/events 1 st quarter s programme: Stream January 13th January 22 nd Summary of 2014 and overview of 2015 regulatory landscapes Meeting the logistical challenges and addressing the requirements of the Senior Managers and Certification regimes Regulatory update Compliance stream Today PRA and European liquidity regime Regulatory update February and March SM and C regimes, and regulatory attestations European regime and supervisory disclosure US implementation of liquidity reporting Liquidity framework: supervisory disclosure SM and C regimes, and thematic reviews (risk buckets) Single supervisory mechanism and the ECB Compliance stream Regulatory update Regulatory update Compliance stream Compliance stream

Webinar agenda < 60 min Welcome and introduction Rebecca Bond Group Marketing Director Presentation James Phillips Global Director Regulatory Strategy Real-time polling questions Questions & Answers Online questionnaire upon exit Lombard Risk - Enabling regulatory compliance

Ticker: LRM A leading player in global risk management and compliance solutions Founded in 1989 Trusted providers for 25 years 270 strong in 10 office locations Global presence 300+ banks, hedge funds, commodity trading and fund management clients in 25 countries Solutions for global financial services institutions No.1 provider of regulatory compliance solutions in both the United Kingdom and United States - with global coverage A market leader in collateral management, clearing and optimisation solutions Expertise in OTC derivatives reform: Dodd-Frank Act Title VII and global equivalents EMIR

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Speaker: James Phillips Global Director Regulatory Strategy James Phillips has responsibility for Lombard Risk s regulatory solution strategy. He is an industry expert on regulatory issues monitoring them on a global, regional and country/regulator basis through frequent interaction with regulatory groups and financial institutions. As a result he fully understands financial services institutions operational procedures relating to internal and external monitoring and reporting demands. Email: James.Phillips@lombardrisk.com / REGinfo@lombardrisk.com Lombard Risk - Enabling regulatory compliance

Agenda Where have we arrived? Legislative development, focus on Europe LCR a specific look What, when, who, why etc (and not to forget NSFR.) AMM a specific look Also what when who why etc Intraday What this means and certain recommendations Liquidity disclosure Where this is and where it is going UK regime Doubled up for a while Action Sleeves to be rolled up somewhat. Lombard Risk - Enabling regulatory compliance

Liquidity where have we arrived? Lombard Risk - Enabling regulatory compliance

Basel II a reminder Any mention of liquidity?

Basel II there where some costs Bailing out the UK banks cost 5,500 per family

Liquidity where are we (but why?!) A long journey: Basel I: end 1992, G10 inspired, (to mitigate credit risk disasters..) Over 100 countries Focus on credit risk and risk-weighting of assets Basel II: 2006 (eventually, and as further modified) Make capital allocation more risk sensitive Enhance disclosure requirements (for market participants) Quantify credit & market risk; introduce Operational risk; quantified by formal techniques Attempted alignment of economic and regulatory capital to reduce regulatory arbitrage. Basel III: January 2013 (liquidity, leverage) More and higher quality capital Revised definition of Tier 1 capital Increased amount of CET1 as minimum regulatory capital Establishes Capital Conservation buffer Establishes a countercyclical capital buffer Empowers leverage ratio Introduces liquidity risk requirements, short and long term Internationally start date (2013), but patchy

H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Basel III liquidity framework milestones 16/12/2010: BCBS 188 International framework for Liquidity risk measurement 25/09/2008: BCBS 144 Principles for sound Liquidity Risk Management 11/04/2013: BCBS 248 Intraday liquidity 07/01/2013: BCBS 238: LCR and liquidity risk monitoring tools April 2014: BCBS 284 Q&A about LCR 12/01/2014: BCBS 272 LCR disclosure 31/10/2014: BCBS295 NSFR Q3 2015: Final NSFR disclosure requirements 1/1/2015: International LCR implementation date 2008 2009 2010 2011 2012 2013 2014 2015 2016 17/06/2008: BCBS 138 Principles for sound Liquidity Risk Management (Consultation) 09/12/2014: BCBS 302 NSFR disclosure ( Consultation)

H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 EU & UK: liquidity framework milestones EU Beyond 2015: Intraday; NSFR; Liquidity disclosure; Liquidity for investment firms 25/07/2014: Final draft ITS on AMM 20/12/2013: EBA report on definition of HQLA 10/10/2014: EU Commission Adopt Delegated act on LCR 16/12/2014: EBA consults the LCR reporting templates 1/07/2015: EBA AMM first reporting 1/10/2015:EU LCR comes into force EU LCR 60 31/12/2015: Earliest LCR reporting (New templates for banks) 20/07/2011: EC proposed to develop CRD IV legislations; 27/06/2013: CRR is published in EU O.J 31/04/2014: EBA first LC reporting reference date 17/01/2015: LCR Delegate Act is published in O.J From 2011 to June 2013: Lots of consultations, draft ITS 2008 2009 2010 2011 2012 2013 2014 2015 2016 UK beyond 2015: FSA liquidity returns; Liquidity for foreign branches; 01/06/2010: UK BIPRU12 liquidity reporting FSA047-FSA055 28/11/2014: PRA CP27/14 CRD IV Liquidity 01/07/2015: PRA intraday liquidity reporting Q2 2015 PRA new liquidity regime policy statement 01/04/2016: Non-EU foreign banks submit LCR template and contractual maturity ladder return 01/04/2016 Abandon FSA051, 053 01/10/2015 Abandon FSA050,052,054 From 1/10/2015: PRA new liquidity regime; PRA LCR 80%

Polling question #1 Polling question # 1 5% 52% 43% Our business model, what businesses we are in etc Our day to day lives... in keeping reporting operationalised Both of above

Basel III liquidity framework milestones Authority When Paper Name Key points The link Related information BCBS 25 September 2008 BCBS 144: Principles for Sound Liquidity Risk Management and Supervision Sound Principles Liquidity Risk Management BCBS 16 December 2010 BCBS 188: Basel III: International framework for liquidity risk measurement, standards and monitoring Liquidity Risk Centre Stage liquidity risk measurement BCBS 7 January 2013 BCBS 238: Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools Focus on LCR Revised version of BCBS 188; The EU AMM BCBS 11 April 2013 BCBS 248: Monitoring tools for intraday liquidity management intraday liquidity Intraday

Basel III liquidity framework milestones Authority When Paper Name Key points The link Related information BCBS 12 January 2014 BCBS 272: Liquidity coverage ratio disclosure standards LCR common disclosure template Revised at March 2014 BCBS April 2014 BCBS 284: Frequently Asked Questions on Basel III's January 2013 Liquidity Coverage Ratio Q&A about LCR BCBS 31 October 2014 BCBS 295: Basel III: the net stable funding ratio The NSFR standard and timeline for its implementation BCBS 09 December 2014 BCBS 302: Net Stable Funding Ratio disclosure standards - consultative document NSFR common disclosure template

EU Liquidity framework (LCR) milestones Authority When Paper Name Key points The link Related information EBA 20 July 2011 Commission adopted a legislative package to strengthen the regulation of the banking sector. Original proposal on contexts of CRD IV based on Basel III agreement include liquidity framework Based on BCBS 238 EBA 20 December 2013 Report on definition of HQLA Define the extremely HQLA and HQLA and on operational requirements for liquid assets; For the purpose of LCR delegated act October 2014 EU Official Journal 27 June 2013 Regulation (EU) 575/2013 of the European Parliament and the Council of 26 June 2013 (CRR) Part SIX of CRR is about Liquidity framework; CRR 460 empowered European Commission to adopt a delegated act October 2014 LCR delegate Act Article 416 defines liquidity Coverage (LC) European Commission 10 October 2014 Draft Delegated act on the liquidity coverage ratio LCR becomes Pillar 1 requirement from 1 October 2015 New LCR reporting templates

EU Liquidity framework (LCR) milestones Authority When Paper Name Key points The link Related information EBA EU Official Journal 16 December 2014 17 January 2015 L11/1: EBA/CP/2014/45: Draft ITS on supervisory reporting with regard to the LCR following the EC s Delegated Act specifying the LCR Delegated act on the liquidity coverage ratio Re-write the LCR reporting templates for credit institutions The first reference date is end of December 2015 or six months from the adoption of the updated ITS Come into force at 1 October 2015 EC LCR Delegated Act PRA consults the UK new liquidity regime 1 October 2015 onward EU Official Journal Mid 2015 Commission Implementation LCR comes into force at Regulation(EU) No /... December 2015 or later Amending ITS with regard to supervisory reporting of institutions according to Regulation (EU) No 575/2013 of the European Parliament and of the Council TBC The LCR Delegated Act

EU Liquidity framework (AMM) milestones Authority When Paper Name Key points The link Related information EBA 25 July 2014 EBA/ITS/2013/11/rev1 EBA FINAL draft implementing technical standards on additional liquidity monitoring metrics under Article 415(3)(b) of Regulation (EU) No 575/2013 Final draft on AMM reporting requirements EBA Q1 2015 The DPM model v2.4 For XBRL transmission for AMM Based on BCBS 238 TBC May release in a draft final format EBA TBC Intraday liquidity TBC TBC No EU level requirement EU Official Journal TBC Commission Implementation TBC TBC MAY follow the same pattern Regulation(EU) No /... as CRR in O.J, immediate effect Regard to AMM

UK Liquidity framework milestones Authority When Paper Name Key points The link Related information PRA 28 November 2014 PRA CP27/14 CRD IV: Liquidity PRA new approach to regulating liquidity from 1 October 2015 EU LCR Delegated Act PRA Q2 2015 PRA Liquidity supervisory approach final rules 80% LCR from 1 October 2015 Amended FSA047-055 TBC EU LCR Delegated Act PRA 12 December 2014 Announcement of reporting intraday liquidity Firms start reporting information on their intraday liquidity positions from 1 July 2015 to collect data BCBS 248

Hong Kong Liquidity framework milestones Authority When Paper Name Key points The link Related information HKMA 26 January 2011 Implementation of Basel III in Announced that HKMA Hong Kong would implement Basel III framework include liquidity requirement BCBS papers HKMA 20 January 2012 Consultation Paper: Implementation of Basel III Liquidity Standards in Hong Kong (L1) Two-tier liquidity requirement framework BCBS 188 HKMA 18 June 2012 Consultation Paper: Implementation of Basel III Liquidity Standards in Hong Kong (L2) Two-tier liquidity requirement framework BCBS 188 HKMA 12 July 2013 Consultation Paper: Implementation of Basel III Liquidity Standards in Hong Kong (L3) Update HK LCR proposal based on BCBS 238 Two-tier liquidity requirement framework BCBS 238

Hong Kong Liquidity framework milestones Authority When Paper Name Key points The link Related information HKMA 30 April 2014 Consultation on Returns for Reporting of Liquidity Maintenance Ratio and Liquidity Monitoring Tools Template of LMR (K1 return) Template of monitoring tool (KM return) BCBS 238 HKMA 15 September 2014 Consultation on Reporting return of Liquidity Coverage Ratio Template of LCR (K1 return) BCBS 238 HKMA 20 October 2014 Banking (Liquidity) Rules Final HK liquidity rules from 1/1/2015 BCBS 238 HKMA 24 December 2014 Final reporting Return of Liquidity Position in HK Final K1 returns (LCR and LMR) BCBS 238

Singapore Liquidity framework milestones Authority When Paper Name Key points The link Related information MAS 16 August 2013 P010-2013 : Consultation Paper on Local Implementation of Basel III Liquidity Rules Liquidity Coverage Ratio Two-tier liquidity requirement framework BCBS 238 MAS 25 June 2014 P008 2014:Consultation Paper on the Proposed Framework for Systemically Important Banks in Singapore Reporting returns for LCR and MLA BCBS 238 MAS 03 December 2014 MAS Notice 649: MINIMUM LIQUID ASSETS ( MLA ) AND LIQUIDITY COVERAGE RATIO ( LCR ) The final liquidity framework in Singapore

Free Take-Away Just a dozen pages a quick summary of all this. Lombard Risk - Enabling regulatory compliance

Liquidity Coverage Ratio (LCR) Implementation 01 January 2014 2015 2016 2017 2018 2019 Basel LCR NA 60% 70% 80% 90% 100% Australia: NA 100% 100% 100% 100% 100% Canada LCR NA 100% 100% 100% 100% 100% China LCR** 60% 70% 80% 90% 100% 100% EU LCR NA 60%* 70% 80% 100% 100% HK LCR NA LCR: 60% LMR: 25% Singapore LCR*** LCR: 70% LMR: 25% LCR: 80% LMR: 25% LCR: 90% LMR: 25% LCR: 100% LMR: 25% India NA 60% 70% 80% 90% 100% NA LCR:60% LCR:70/50% LCR:80/50% LCR:90/50% SGD: 100% SGD: 100% SGD: 100% SGD: 100% LCR:100/50% SGD: 100% UK LCR NA 80%* 80% 90% 100% 100% US LCR NA 80% 90% 100% 100% 100% *In EU, LCR comes into force at 1/10/2015 ** In China, banks need to achieve the minimum requirement ratio by end of each year *** A bank incorporated and headquartered in Singapore shall comply Basel LCR for all currency while maintain SDG LCR 100% from 1/1/2015; other LCR firms need to maintain SDG LCR 100% and all currency LCR 50% from 1/1/2016

LCR a specific look Lombard Risk - Enabling regulatory compliance

LCR a specific look So: 5 Do s and Don ts 1) As per the grey box above! 2) Meet (transition) Liquidity Coverage Requirement 3) During times of stress, can use liquid assets to cover net liquidity outflows 4) CRR limits liquidity inflows to 75% of liquidity outflows you can t rely only on expected inflows to meet outflows 5) Instead: minimum liquid assets equal to 25% outflows. Lombard Risk - Enabling regulatory compliance

LCR a specific look What has to be reported? Note these changes are extensive: 2014 LC templates } New LCR templates Code Name No. of Cells Code Name No. of Cells C 51.00 LIQUID ASSETS 261 C 72.00 LIQUID ASSETS 105 C 52.00 OUTFLOWS 950 C 73.00 OUTFLOWS 404 C 53.00 INFLOWS 512 C 74.00 INFLOWS 464 C 54.00 COLLATERAL SWAPS 24 C 75.00 COLLATERAL SWAPS 829 C 76.00 CALCULATIONS 38 Total 1747 Total 1840 This will be XBRL Scope of amendments credit institutions only Current LC continues for firms not affected Lombard Risk - Enabling regulatory compliance

and NSFR 31 st Oct 2014 BCBS295 contains final NSFR standards Changes from Jan 14 consultation re stable funding from: Short-term exposures to banks and other financial institutions Derivatives exposures Assets posted as initial margin for derivative contracts Note that NSFR is not dormant till 1 st January 2018 By 31 st December 2016 EC will commence legislation CRR requires from 1 st Jan 2016 shall ensure that long-term obligations are adequately met with a diversity of stable funding requirements under both normal and stressed conditions http://europa.eu/rapid/press-release_memo-13-690_en.htm Lombard Risk - Enabling regulatory compliance

AMM a specific look NSFR LCR AMM Lombard Risk - Enabling regulatory compliance

AMM a specific look So: The Metrics 1) Contractual Flows 2) Concentration of counterbalancing capacity by issuer/counterparty 3) Concentration of funding by counterparty 4) Concentration of funding by product type 5) Prices for various lengths of funding 6) Roll-over of funding Lombard Risk - Enabling regulatory compliance

AMM in a bit more detail Scope of application All (consolidated and individual) where CRR Article 415 applies i.e. all firms that are currently in scope for LC reporting follows from the application of AMM on the same scope and level of application of the CRR and of COREP in particular: on consolidated basis to EU parent credit institutions and investment firms and to credit institutions and investment firms controlled by EU parent financial holding company or by EU parent mixed financial holding company on individual basis to all credit institutions and investment firms that are authorised to provide the investment services listed in points 3 and 6 of section A of Annex I to Directive No 2004/39/EC with waiver options on the same basis as the LC Lombard Risk - Enabling regulatory compliance

AMM in a bit more detail Frequency is threshold based (but nothing else is) All due either monthly or quarterly According to the firms nature/scale/complexity etc: So only if all three here are met, quarterly: 1. Not part of group with subsidiaries or parents under a different competent authority (i.e. can only report quarterly if a clearly solo-jurisdiction) 2. Ratio of individual balance sheet total of institution to the sum of all such totals for member state is below 1% for two years running (based on year-end audited figures) [So, monthly to start, then?] 3. Less than 30bn Euro total assets (at either consolidated or individual level, as applicable) Otherwise monthly!.from 1 st July 2015 Lombard Risk - Enabling regulatory compliance

Intraday liquidity management http://www.bis.org/publ/bcbs248.pdf http://www.bankofengla nd.co.uk/pra/pages/crdiv /updates.aspx Lombard Risk - Enabling regulatory compliance

Intraday liquidity requirements 12 th December 2014, UK PRA stated: Plans to start systematically collecting intraday liquidity data.to inform intraday liquidity risk in normal and stressed conditions Firms measure, monitor and actively manage intraday liquidity risk under BIPRU 12.3.17R and BIPRU 12.5.26 Data collection to build on this; enable supervisors to monitor ability to timely meet payment and settlement obligations (PRA CP27/14 CRD IV: Liquidity re moving rules to new PRA Rulebook) PRA ask UK banks, building societies and designated investment firms to start reporting intraday liquidity positions from 1 st July 2015 PRA may not collect where priorities/firm s risk profile do not justify Lombard Risk - Enabling regulatory compliance

Intraday liquidity requirements 12 th December 2014, UK PRA stated:.will discuss proposed data collection exercise, including form, frequency and content through regular PRA supervisory engagement..will stop collecting if/when intraday liquidity reporting is fully harmonised in EU PRA s intraday liquidity template closely aligned with April 2013 BCBS Monitoring Tools for Intraday Liquidity Management. Lombard Risk - Enabling regulatory compliance

3 Categories Intraday liquidity management Setting out 7 monitoring tools They are: Tools applicable to all reporting banks A (i) Daily maximum intraday liquidity usage A (ii) Available intraday liquidity at the start of the business day A (iii) Total payments A (iv) Time-specific obligations Tools applicable to banks that provide correspondent banking services B (i) Value of payments made on behalf of correspondent banking customers B (ii) Intraday credit lines extended to customers Tool applicable to reporting banks which are direct participants C (i) Intraday throughput Lombard Risk - Enabling regulatory compliance

Intraday liquidity management Table A Direct Participants Lombard Risk - Enabling regulatory compliance

Intraday liquidity management Table B Banks that use correspondent banks Lombard Risk - Enabling regulatory compliance

Intraday liquidity management Table C Banks that provide correspondent banking services Lombard Risk - Enabling regulatory compliance

Disclosure Lombard Risk - Enabling regulatory compliance

Disclosure LCR disclosure January 2014 BCBS272 final LCR disclosure requirements Common templates must be used to report their LCR results and select details of the LCR components Applied to all internationally active banks Consolidated basis From 1 st January 2015 Lombard Risk - Enabling regulatory compliance

UK Regime Lombard Risk - Enabling regulatory compliance

Impact of LCR: New UK liquidity regime http://www.bankofengland.co.uk/pra/documents/publicati ons/cp/2014/cp2714.pdf Lombard Risk - Enabling regulatory compliance

New UK liquidity regime PRA Consultation Paper CP27/2014 (28 th Nov 2014) Closes 27 th February 2015 Arises as PRA (as other NCAs) have to align with EU: EC Delegated Act re LCR (the LCR Delegated Act) Enters force 31/12/14, directly applicable 1/10/15 PRA has to revoke various rules and restate approach 4 Sections: 1. How PRA will transition to new liquidity regime, taking into account Delegated Act applying from 1 st October 2015 2. Explains PRA requirements proposed beyond LCR 3. Details not covered by EU legislation 4. Cost/Benefit Lombard Risk - Enabling regulatory compliance http://www.bankofengland.co.uk/pra/pages/publications/cp/2014/cp2714.aspx

New UK liquidity regime Impact: Revoke BIPRU 12 including simplified ILAS regime and requirement on firms to undertake standardised stress testing PRA to carry forward broad principles established in BIPRU 12.. Higher minimum LCR requirements in UK till LCR is fully introduced Carry forward existing add-ons not covered in the LCR as the new Pillar 2 add-ons, until each firm s next liquidity review Establish new rule that firms ensure their systems and processes enable them to report all LCR returns daily.. Amend existing liquidity reporting requirements FSA048-FSA055 That UK-designated investment firms be subject to the same liquidity regime as the credit institutions That third country firms to report LCR returns on a whole-firm basis Lombard Risk - Enabling regulatory compliance

New UK liquidity regime Impact: 1 Although reporting NSF templates is not mentioned on the main text of CP27/14, the draft rulebook states that foreign branches need to comply with Title II and Title III of Part 6 CRR Lombard Risk - Enabling regulatory compliance

Polling question #1 2 reckon that is an interesting idea we ll look at that! 27% Have actively decided to leave all these jobs in their silos 18% Have actively considered seeing if there is some strategic answer to all these (in terms of producing reporting) 55% 0% 10% 20% 30% 40% 50% 60% Lombard Risk - Managing collateralised trading Enabling regulatory compliance

Action Lombard Risk - Enabling regulatory compliance

Implementation Business issues: Glide path to new ratios and adjustment to business models Adjusting quality of and quantity capital Adjusting quality and quantity of high quality liquid assets Changing business operating model: more, and more frequent reporting Serious liquidity supervisory reporting Operational issues: Many data challenges New data types Existing data but at deeper granularity No current reporting project time to develop expected results Deeper reconciliation with management information Reporting peaks exacerbated with more reports due at the same time Additional people and equipment resources Lombard Risk - Enabling regulatory compliance

Lombard Risk solution Lombard Risk - Managing collateralised trading Enabling regulatory compliance

Lombard Risk REPORTER Fully scalable, consolidated regulatory solution Lombard Risk REPORTER for regulatory compliance

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