15 Mar Changing NSFR Liquidity Reporting Requirements In The EU, UK, And Switzerland – Three Pointers For The Homestretch
By: Yang Zhang, Global Product Manager, Capital and Liquidity, AxiomSL and Jean Olivera, Subject Matter Expert, AxiomSL
Financial institutions operating in a post-Covid-19 new normal are all too aware that regulators continue to focus on liquidity monitoring. Indeed, one of their brightest spotlights is aimed at the significantly changing NSFR liquidity reporting requirements in the EU, UK, and Switzerland. With a June 2021 deadline looming, organizations across Europe are racing to finish their preparations for the Net Stable Funding Ratio (NSFR) changes.
Those preparations are further complicated by jurisdictional timeline differences. UK firms have some deadline relief because the PRA and FCA have delayed adoption of the EBA’s Capital Requirements Regulation 2 (CRR2). However, this ‘relief’ will likely manifest as another high hurdle further down the track, because firms reporting in both the UK and EU will need two sets of systems and processes to handle the jurisdictionally divergent requirements.
Nevertheless, most firms are rounding the last corner just about now, and the June 2021 finish line is coming into view down the homestretch.
Will Financial Firms Finish The Race In Good Form?
Their success depends on what sort of fitness program firms set for themselves. Most banks and other financial institutions with liquidity reporting obligations have already chosen their ‘coach,’ established a ‘nutrition and exercise’ regime, and are being monitored by a ‘medical’ team. They will soon find out if their plan will enable them to comply with the changing NSFR liquidity reporting requirements in the EU, UK, and Switzerland on time – and emerge from the effort in good condition.
But, even in the homestretch of the race, qualified runners might want to consider these three pointers.
1. Kick The Tires – Does Your Approach Need Adjusting?
Driven by the EBA’s CRR2 reforms framework, the changing NSFR requirements in the EU and UK mean that firms have to collect new relevant data, prepare changed calculations, and, at a minimum, complete one of two sets of templates and instructions depending on their size and complexity:
- Standard NSFR (C80.00, C81.00, and C84.00)
- Simplified NSFR (C82.00, C83.00, and C84.00)
The EBA COREP reforms include a template each for ASF and RSF items, along with a common summary template (C84.00). The Standard NSFR templates bring increased granularity and are designed to be aligned with LCR templates (C72.00 to C77.00) by asset level and LCR haircuts. In both cases, the new reporting requirements also bring treatment changes such as new RSF and ASF factors for SFTs with specific collateralization, derivatives, and trade financing transactions. Similarly, the FINMA Liquidity Ordinance (LiqO) revisions coming into effect include a swath of under-the-hood changes, including treatments of initial and variation margins, operational deposits, and other position types.
In Switzerland, with NSFR enforcement coming into effect in July 2021, the situation remains unsettled because new reporting templates have not yet been revealed. Once the Swiss templates are released, firms will have little time to steady themselves before the final sprint to the finish line.
Beware of Preparation Missteps!
In light of all this complexity, it is fair to say that correctly executing NSFR reporting is proving more complicated than many organizations recognized at the outset. Already under pressure from frequent crisis-induced scrutiny, firms’ liquidity risk management teams must not compromise NSFR compliance with preparation missteps.
Ideally, to be functionally, technologically, and operationally ready to meet the changing NSFR liquidity reporting requirements in the EU, UK, and Switzerland, firms should be able to rely upon a sophisticated, high-performance solution that:
- Ingests required data seamlessly from potentially multiple banking source systems
- Accommodates jurisdiction-specific classifications for ASF and RSF calculation
- Handles both regulatory and internal NSFR calculations
- Delivers net cash flows and NSFR rule categorizations to give accurate NSFR ratios
- Provides full transparency and auditability of the monitoring and reporting logic applied
Without such an end-to-end solution in place, however, it is prudent to kick the tires now to see if the plan needs adjustment. Firms utilizing manual processes may find that although assembling data and refining calculations may be progressing, preparing accurate and technically valid final reporting templates and submission files may be proving too high a hurdle.
Even as they round the corner to the straightaway, firms can still opt to onboard fully vetted automated NSFR reporting templates. Indeed, AxiomSL is providing many clients with this last-mile confidence lift to ensure successful compliance with changing NSFR liquidity reporting requirements in the EU, UK, and Switzerland.
2. Check The ‘Jurisdictions Light’ – Are You Single, Double, Or Triple Exposed?
This major regulatory deliverable is made more complex by the jurisdictional nuances layered on across the changing NSFR liquidity reporting requirements in the EU, UK, and Switzerland. Organizations must carefully consider to which of the three regimes they are exposed. Most large and medium-sized banking and credit institutions in Europe will be obligated to perform liquidity reporting in at least two of the three jurisdictions. They must also be mindful of reporting-layer variations (validations, forms, etc.) across EBA jurisdictions and adjust for Brexit-induced adoption timing differences.
Switzerland’s incomplete requirements status adds another point of risk in the homestretch. Although the data and calculation requirements can be prepared – Swiss jurisdictional interpretation of the framework adds detail that is more explicit on derivatives and netting – FINMA and SNB have not yet released their final reporting layer requirements. So, entities that must report under FINMA rules, have even less time to prepare the Swiss templates.
Yet more jurisdictional nuance arises from the aforementioned divergent timing between the EU and UK regarding CRR2 adoption. Previously unified, this divergence provokes the need for two sets of reporting requirements. Furthermore, firms’ use of Simplified NSFR will be subject to supervisory approval by national competent authorities (NCAs) based on criteria related to size of assets, trading book size, and derivative positions. NCAs can adjust these criteria at their discretion.
Given this nuanced landscape, firms should check the jurisdictions-light indicator, and then may wish to explore implementing fully vetted automated reporting templates that can be quickly onboarded for each jurisdiction and firm-driven requirement.
3. Look Beyond The Finish Line – Can You Strategically Exploit Emerging NSFR/LCR Alignment?
A common theme in the changing NSFR liquidity reporting requirements in the EU, UK, and Switzerland is the trend to align NSFR with LCR, in particular in the breakdown and reporting of HQLA. This change in allocational granularity is founded on more subtle shifts that impact calculation stages, as explored earlier.
Firms that take the time to look out beyond the June 21 finish line can benefit from this shift across their liquidity risk management approach. With the changed NSFR firms can:
- More easily reconcile their LCR and NSFR positions, particularly if they are leveraging a common data preparation and calculation framework
- Align and reconcile NSFR to LCR at the HQLA categorization level
Operational efficiencies are an obvious benefit. Organizations that have already been reporting LCR via AxiomSL’s liquidity risk management ecosystem, for example, are already sourcing most of the data and performing most categorizations necessary for NSFR. Those firms are positioned to easily implement the closely aligned NSFR reporting.
In addition, the alignment of reporting granularity between NSFR and LCR needs paves the way for firms to enhance their BCBS-239 compliant data management and overall liquidity risk management.
For example, AxiomSL’s flexible and extensible data dictionary for liquidity enables client data to enter the liquidity solution ecosystem and – with only a single centralized mapping step – be made fit for purpose for Basel and CRR2 frameworks across the spectrum of liquidity risk management and reporting encompassing LCR, NSFR, LMT/ALMM, and Asset Encumbrance.
Having trusted liquidity data with transparent lineage readily accessible in an end-to-end liquidity risk management system enables firms to respond nimbly to regulatory changes, enhances insight into liquidity risk, facilitates compliance, and supports successful audit defense.