Best Practices for Liquidity Regulatory Reporting According to FSA PS09/16 Moody's Analytics Liquidity Risk and FSA Reporting Webinar Series

Best Practices for Liquidity Regulatory Reporting According to FSA PS09/16 Moody's Analytics Liquidity Risk and FSA Reporting Webinar Series XAVIER PERNOT, ANTOINE SPINELLI January, 19th 2010

Agenda 1. New liquidity regulatory reporting requirements from FSA 2. Issues that need to be addressed in the process of generating the reports 3. Practical implementation of Regulatory Reporting 2

New requirements Issues to be addressed Towards New Liquidity Regime Discussion paper issued by FSA in December 2007» Review of the liquidity requirements for banks and building societies» CP08/22: Strengthening liquidity standards in December 2008» CP09/13, CP09/14, CP09/16 Policy Statement 09/16 issued in October 2009 Committee of European Banking Supervisors» Technical Advice to the European Commission on Liquidity Risk Management (1 st part : Aug 2007, 2 nd part: Sept 2008) Large banks to build their proper liquidity risk management model to be approved by supervisor» March 2009 : Interim Report on Liquidity Buffers & Survival Periods Basel Committee on Banking Supervision» Principles for Sound Liquidity Risk Management and Supervision (June 2008) Turner Review (March 2009)» It is essential now to restore liquidity regulation and supervision to a position of central importance. Lord Turner, Chairman, Financial Services Authority, Turner Review 3

New requirements: building blocks Issues to be addressed» Adequate liquidity and self-sufficiency (BIPRU 12.1 and 12.2) UK banks are expected to be able to stand alone and should monitor and manage their own liquidity separately from the liquidity of other institutions in the group» Branches will have to hold local operational liquidity reserves FSA may agree to modifications of this self-sufficiency requirement for overseas branches if it can agree cross-border supervision arrangements» Enhanced systems and control requirements (BIPRU 12.3 and 12.4) All BIPRU firms will be subject to liquidity risk-management, stress testing and contingency funding plan (CFP) requirements» Pricing liquidity risk» Management of collateral positions» Robustness of stress testing and CFPs» Individual Liquidity Adequacy Standards (BIPRU 12.5 and 12.6 for Simplified ILAS) Introduction of new quantitative standards based on three separate stress tests: an idiosyncratic liquidity stress (2 weeks), a market-wide liquidity stress (3 months) and a combination of the two ILAA/SLRP/ILG process» Granular and frequent regulatory reporting requirements Data in a standardized format and on a contractual basis is vital to form firm-specific, sector- and market-wide views on liquidity risk 4

New requirements Issues to be addressed More on FSA Liquidity Modifications Overall liquidity adequacy rule (Self-sufficiency principle) UK branch Whole-firm liquidity modification UK solo entity Intra-group liquidity modification Effect: branch can rely on liquidity resources available elsewhere within the firm Impacts on reporting requirements Effect: firm can rely on liquidity resources available elsewhere in its group foreign parent (non-uk DLG) other entity in UK (self-sufficient ILAS Group or UK DLG) 5

New requirements Issues to be addressed Some useful terminology» Short description of Full ILAS and non-ilas firms Full ILAS» Banks Building societies Full-scope investment firms not meeting the criteria below Non-ILAS» Limited licence Limited activity firms Full-scope investment firms with a balance sheet less than or equal to 50m» Firms can obtain a simplified ILAS waiver from the FSA if they meet some eligibility criteria which depend on the bank s business model A simplified ILAS firm will be authorized to use a standardized buffer ratio instead of adhering to the full ILAS process 6

New requirements Issues to be addressed New data items created by FSA Data item Description Frequency FSA047: Daily flows FSA048: Enhanced Mismatch Report (EMR) FSA050: Liquidity Buffer FSA051: Funding concentration FSA052: Wholesale liabilities FSA053: Retail, SME and Large Enterprises and Corporate funding FSA054: Currency analysis FSA055: Systems and Controls Questionnaire Collects daily flows out to 3 months to analyse survival periods and spot potential liquidity squeezes early Captures the ILAS risk drivers and contractual flows across the full maturity spectrum Provides more granular analysis of firms marketable assets holding Captures firms borrowings from unsecured wholesale funders, by counterparty class Collects daily transaction prices and transacted volumes for wholesale unsecured liabilities Captures firms retail and corporate funding profiles and the stickiness of various retail deposits Provides an analysis of FX exposures on firms balance sheets Allows FSA to monitor a non-ilas BIPRU firm s compliance with the new requirements BAU: Weekly (Daily if liquidity stress) Respectively Monthly/Weekly for Simplified ILAS As above Monthly Monthly Weekly Monthly for Simplified ILAS Quarterly Quarterly Annual 7

New requirements Issues to be addressed When to report? Class of Firm (according to current liquidity requirements) FSA047, 048, 052 FSA050, 051, 053, 054 Sterling stock bank 1 June 2010 1 November 2010 Building Society (Standard ILAS) Building Society (Simplified ILAS) 1 June 2010 1 November 2010 1 October 2010 1 November 2010 Mismatch Banks 1 October 2010 1 November 2010 Branches, with or without GLCs Investment firms 1 November 2010 1 November 2010 8

Agenda 1. New liquidity regulatory reporting requirements from FSA 2. Issues that need to be addressed in the process of generating the reports 3. Practical implementation of Regulatory Reporting 9

New requirements Issues to be addressed Granular Contractual Frequent Standardized Key features Granularity & contractual basis High reporting frequencies and short submission deadlines Standardized data items Several levels of reporting reflecting liquidity flows within a firm or group of firms System requirements Transaction-level data handling Financial transactions modeling Platform high-availability Rapid computations on high volumes Delivery of regulatory final formats Full auditability Intra-group consolidation 10

New requirements Issues to be addressed Transaction-level data & Intra-group consolidation Centralized data repository which provides: Historical Data Management Data Loading, Checking, Reconciliation Financial Instruments modelling Customer & Exposure-Level Information Calculation framework which enables: Group vs Legal entity independent access Multiple setups (per Jurisdiction) Support for Stress-Testing Reporting framework which enables: Regulatory reports generation Drill-down analysis of results Web-deployment of dashboard reports Trend analysis with on-line historical data What-if scenarios results comparison Group calculation Home supervisor Workspace 2 2005-01-05 11

New requirements Issues to be addressed Cash-flow generation Calculation framework Inflows Outflows» Need for cash inflows and outflows over a certain period of time (FSA047/FSA048) Relying on comprehensive data model versus importing all cash-flows Ability to define behavioural assumptions» Security position management for Liquidity Buffer Handling encumbered positions in maturing Repurchase Agreements» Stress testing framework Marketable assets using haircuts and selling assumptions Wholesale funding with non roll-over assumptions Retail funding with stickiness assumptions Draw-down assumptions for facilities 12

New requirements Issues to be addressed Standardized data items Regulatory mapping: from bank s data to regulatory data Bank s data Mapping rules Regulatory data FSA reports Internal reports for Liquidity Risk Management A system designed for regulatory reporting should provide the regulatory data (for each supervisor involved in bank s group) include rules to map bank s data to regulator s data allow quick & easy update of regulatory data and rules to follow changes in the regulation 13

New requirements Issues to be addressed Standardized data items Regulatory mapping: an example for FSA048 Mapping order Bank Product Type Supervisor Table name Sub Type Flag transferable Liq. Product Type 32 BANK_LOAN_A FSA LOANDEPO WHOLE T WHOLE_LOAN_TRAN 33 BANK_LOAN_A FSA LOANDEPO WHOLE F WHOLE_LOAN 34 * FSA LOANDEPO * * OTHER_LOAN Rule 32: for the supervisor FSA, all loans with bank s product type BANK_LOAN_A marked as transferable will be mapped to regulatory product type WHOLE_LOAN_TRAN FSA048 production rule: data with regulatory product type WHOLE_LOAN_TRAN will be used to fill row 9 Rule 33: for the supervisor FSA, all loans with bank s product type BANK_LOAN_A marked as not transferable will be mapped to regulatory product type WHOLE_LOAN FSA048 production rule: data with regulatory product type WHOLE_LOAN will be used to fill rows 20, 21 or 22 according to entity type mapping rules 14

Agenda 1. New liquidity regulatory reporting requirements from FSA 2. Issues that need to be addressed in the process of generating the reports 3. Practical implementation of Regulatory Reporting 15

Practical implementation Main Concerns 16 Regulatory risk reporting main concerns» Producing the reports: Time and complexity to produce the reports (thousand of cells) Availability and quality of information coming from various systems and calculation engines Checking report quality and consistency before sending to regulator Comparing report over time and scenarios» Justifying and auditing reports: Justifying aggregated figure, going into the detail of individual contribution Being able to go through the details of calculation of individual indicators Top-down and bottom-up audit» Developing and maintaining the reports definition: National regulations evolve over time Calculation and reporting engines need to maintained simultaneously 16

Practical implementation Delivery Regulatory final formats are delivered» Reports are generated in the format required by the regulator. Reports are generated either in database (improved security) or as a disk file Final XML format and validation are generated, ready to be uploaded in GABRIEL platform» Maintenance is contractually guaranteed. It includes: Changes to formats or templates Changes to aggregation rules New reports No effort for regulatory updates or new regulation installation» Scope of the delivery Report FSA047 to 055 File converter Excel to XML (compliant with Gabriel) 17

Practical implementation RRT 18 Integrated solution with a dedicated menu entry for the Regulatory Reporting Tool FDM : Financial datamart (central data repositery) RRT: Regulatory Reporting Tool 18

Practical implementation RRT 19 Generated reports are stored within the datamart to improve security and audit List of generated reports 19

Practical implementation Final Format Regulatory reports are delivered in both Excel and XML 20

Practical implementation Auditability Regulatory reports are provided with full auditability Auditing the full report: Top Down 60+ are already referenced in the Fermat Solution Auditable columns of the Excel file can be retrieved in a OLAP cube 21

Practical implementation Auditability Regulatory reports are provided with full auditability Auditing the full report: Bottom Up Rows of the Excel file Columns of the Excel file Drill down can be performed on any line Dimensions are chosen by users. Any dimension of the system is available in audit cubes You can drill down to contract reference 22

Practical implementation Reconciliation Reconciliation & Adjustments at each level of the process Fermat Datamart GL reconciliation Financial system Technical reconciliation Liquidity results Technical reconciliation Validation rules Regulatory reporting 23

Practical implementation Validity Checks Validity Checks» The regulatory maintenance offered by Fermat also comprises the validity checks published by the regulator We deliver the system with all regulatory checks Whenever the validity changes, we update the application» Users can implement their own validity checks Improvement of the regulatory checks (checking other columns) Check values of the reports against figures from external systems» Example: reconciling reports cells with data from accounting reports 24

Practical implementation Adjustments Reports adjustments» Adjusting the contents of a report is a common situation: Accounting reconciliation can reveal gaps that need to be adjusted Last-minute deals may need to be imported» Fermat offers several ways to perform adjustments: It is always possible to insert a new contract and relaunch only an incremental calculation An adjustment line can be inserted after a liquidity calculation» Manually» Automatically at the end of a reconciliation process. Every manual change is subject to access rights and audit trail 25

Practical implementation Submission Fermat EFS (Electronic File Submission tool) for FSA GABRIEL Standard Step 1: Launch the conversion Step 2: Select start, end and submission date of reporting Step 3: Users can see the XML file and submit it to GABRIEL 26

Q&A 27

Summary 28

Key Contacts Antoine Spinelli Director, Head of Global Business Solutions Moody s Analytics Tel: + (331) 5330 2188 E-mail: antoine.spinelli@moodys.com Xavier Pernot Director, Product Management Moody s Analytics Tel: + 33 (0) 4563 817 18 E-mail: xavier.pernot@moodys.com 29

2009 Moody s Analytics, Inc. and/or its licensors and affiliates (collectively, MOODY S ). All rights reserved. ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY COPYRIGHT LAW AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY S PRIOR WRITTEN CONSENT. All information contained herein is obtained by MOODY S from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, all information contained herein is provided AS IS without warranty of any kind. Under no circumstances shall MOODY S have any liability to any person or entity for (a) any loss or damage in whole or in part caused by, resulting from, or relating to, any error (negligent or otherwise) or other circumstance or contingency within or outside the control of MOODY S or any of its directors, officers, employees or agents in connection with the procurement, collection, compilation, analysis, interpretation, communication, publication or delivery of any such information, or (b) any direct, indirect, special, consequential, compensatory or incidental damages whatsoever (including without limitation, lost profits), even if MOODY S is advised in advance of the possibility of such damages, resulting from the use of or inability to use, any such information. The ratings, financial reporting analysis, projections, and other observations, if any, constituting part of the information contained herein are, and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell or hold any securities. NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY S IN ANY FORM OR MANNER WHATSOEVER. Each rating or other opinion must be weighed solely as one factor in any investment decision made by or on behalf of any user of the information contained herein, and each such user must accordingly make its own study and evaluation of each security and of each issuer and guarantor of, and each provider of credit support for, each security that it may consider purchasing, holding, or selling. 30