PRA plans for interim LCR reporting will increase pressure on firms

AxiomSL | Liquidity Coverage Ratio

June 26, 2015 – By Ed Royan, Chief Operating Officer, EMEA, AxiomSL

The Prudential Regulation Authority (PRA) provided useful information in its final policy document on the Liquidity Coverage Ratio (LCR), which it published earlier this month. At the British Bankers’ Association’s (BBA) Annual Liquidity AxiomSL - Liquidity Coverage RatioConference this week, a speaker from the PRA elaborated on this, sharing valuable insights into the regulator’s plans for interim LCR reporting, the phasing out of existing liquidity reports and the introduction of LCR add-ons.

The PRA has set a minimum LCR threshold of 80% from 1 October 2015. The PRA representative explained that, in order to ensure firms are meeting this requirement, they will be obliged to start reporting on their LCR position using the European Banking Authority’s (EBA) amended template from the end of October. This is two months before LCR submissions based on the EBA’s 2.4 taxonomy begin.

During the PRA’s interim LCR reporting period, firms will be expected to use Excel to report the LCR for their total currency holdings (i.e. their total liquidity across all of the currencies they hold) rather than the LCR for each individual currency.

Firms would ideally like to approach the PRA’s interim LCR reporting strategically. They would like to combine the development and testing of their interim Excel reports with the development and testing of the XBRL reports they will need to use when reporting using the 2.4 taxonomy begins at the start of 2016. Unfortunately, this will be difficult to do unless the EBA releases the 2.4 taxonomy shortly.

At the BBA conference, I raised the issue of the keenly-awaited 2.4 taxonomy with a speaker from the EBA. In order to ensure a smooth implementation of the LCR and to avoid doing throwaway work, I believe it is time for the industry to come together and underline the importance of receiving the 2.4 taxonomy soon.

In other news, the PRA has confirmed that although firms will need to have processes in place to produce and monitor the LCR on a daily basis, they will not be required to submit daily reports. This is an important change from the existing FSA047/FSA048 requirements and will be welcomed by the industry.

The PRA has also taken into consideration the increased volumes of data that firms will need to report as part of the LCR and has updated its plans for phasing out the incumbent liquidity reporting regime. The new timetable is as follows:

  • Reporting of FSA047/FSA048 will be required for at least one year from 1 October 2015. A review of the decision to discontinue the requirement will take place in the first half of 2016.
  • Reporting of FSA050 – FSA053 will cease after the equivalent Additional Liquidity Monitoring Metrics (ALMM) returns are reported.
  • Reporting of FSA054 will stop on 1 October 2015.

At the BBA event this week, the PRA speaker explained that when reporting under the Capital Requirements Directive IV (CRD IV) begins in 2016, firms will need to do LCR reporting separately for all of the different currencies they hold. However, the PRA’s 80% LCR threshold will only be applied to the total currency figure.

It is not only the LCR reports that firms need to prepare for. The PRA has also announced it will set add-ons (requirements for additional liquidity) to reflect risks not captured by the LCR. These add-ons will be set on a firm-by-firm basis and will be based on firms’ existing individual liquidity guidance requirements.

There is a lot to consider in the PRA’s final LCR policy document. Without a doubt, the announcement of interim LCR reporting increases the urgency for firms to act now.