FDSF: Tranche-two banks must not lose sight of the bigger picture

November 7, 2014 – By: David Attenborough, Head of EMEA Business Development

Over the past 12 months, the banks that are of the greatest systemic importance to the UK’s economy have had to get to grips with the Firm Data Submission Framework (FDSF). Now the exercise is being expanded and a second tranche of banks in a lower category of systemic importance must start complying with the Prudential Regulation Authority’s (PRA) stress testing requirements.

AxiomSL - FDSF Stress TestingFor these tranche-two banks FDSF compliance begins in the first quarter of 2015, when they have to submit stressed market risk reports. Over the course of the year, they will also have to start reporting on their counterparty credit, assets and liabilities, and other types of risk.

The first thing to note about FDSF is that it is being managed by banks’ risk teams. As discussed in an earlier post, risk is usually an internal monitoring process, and FDSF presents serious challenges for risk teams because it is the first time they have been required to report externally.

In order to comply, risk teams have to aggregate and consolidate data from different lines of business; ensure it is in the correct format; then run the necessary stress test calculations and report the results to the PRA. This has proved difficult for the tranche-one banks that already have to do FDSF reporting across many types of risk.

With the Q1 deadline now fast approaching, there is a great temptation for tranche-two banks to focus exclusively on the market risk reports that are due first. However, I believe this is a short-sighted approach that will prove costly.

Instead of using a tactical solution from their market risk reporting infrastructure to get past the first deadline, banks need to put in place a strategic platform that can be used to produce not only the market risk reports, but also all of the other FDSF reports that will be required later next year. The best prepared organizations will treat the Q1 requirements as an opportunity to fine-tune the solution they will use to comply with all other aspects of FDSF.

As they prepare for the new stress testing regime, tranche-two banks should also be mindful of the fact that, ultimately, the PRA wants them to incorporate compliance with FDSF into their business and performance management processes. As a result, they need to make sure the platform they use will enable them to integrate FDSF into their normal, run-the-bank activities.

Finally, there is a wider regulatory context to consider. FDSF has not be developed in a vacuum – it is part of an increasing regulatory focus on stress testing around the world, which includes the US Federal Reserve’s Comprehensive Capital Analysis and Review (CCAR) and the European Banking Authority’s (EBA) stress testing program. If firms are to get the maximum return on their investment in an FDSF solution, they should ensure that they can use the same platform to comply with other stress testing and regulatory reporting requirements globally.

By keeping the bigger picture in mind, tranche-two banks can reduce the burden of compliance and get the most out of their FDSF solution.

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