To Party or Not To Counterparty, That Is the Question

February 13, 2018 –

A renewed focus on Qualified Financial Contracts (QFC) Rules

In the past QFC 371 was applied to a specific set of GSIBs, as driven by the FDIC. However, the new set of rules require a much more detailed view of counterparty risk relationships on the books of a Financial Institution that has Total Assets of more than $50 Billion and significant derivative activity.

The QFC rules encompass 8 reports comprising 111 data points with more than 100 data checks and 60 validation rules to prepare the information required. In addition, QFC record keeping has to be made available to the FDIC upon request, within a 24 hour window.

Rather than viewing this as a regulatory burden, another way to look at this request is having a systematic view on all of your financial counterparties and thus the information necessary for resolution planning.

Counterparties… where are you?

The type of counterparties required for QFC include: a.) Sovereign b.) Financial Institution, c.) Corporate, or d.) Funds across a wholesale banking book. In addition, the specification requires all of the relevant data that explains the exposures to such parties. Thus for each counterparty, a QFC filing requires:

  • Pricing metrics, optionality and underlying instrument details for derivative securities
  • Master Netting Agreements including supplements or modifications to such agreements
  • All credit supporting documents such as credit support annexes, guarantees & net worth maintenance agreement
  • Assignment and novation documents with respect to the counterparties

Just a cursory look at the landscape of requirements and we can see that QFC reporting will require:

  • a detailed look at the derivative book, securitized products and funding deals
  • the extraction of contract details from existing structured sources within the regulatory environment
  • data from unstructured sources owned by compliance and legal

Unexpected Counterparties at the Party

There is a 24 hour window to produce a view of a wholesale counterparty and collateral book for an institution. Our approach is to address the implementation phases in the following manner:

  • Identify a list of systems that house all data for a QFC filing
  • Develop a strategy to re-use existing regulatory content to minimize data redundancy, thereby managing reconciliation risks
  • Specify the data elements present in the organization to meet the requirements for a QFC filing

The Reconciliation Party

As we consolidate the counterparty data set that meet the QFC filing criteria, the next challenge is to reconcile the consolidated view of counterparties with the Financial Institution’s positions. From our experience, discrepancies may occur in the following areas:

  • Granular exposure at a position for a counterparty may not reconcile with an aggregated perspective
  • There may be difference between the QFC filing for an entity versus a regulatory filing for the same entity
  • The collateral associated with a credit facility for an entity is illuminated through this process and will shed light on over / under-utilization from a risk management perspective

Impact on Resolution Planning

Finally, the benefits of implementing QFC Reporting would include the following:

  • The consolidated view of positions and an understanding of liabilities provide the basis for resolution planning
  • Create the filing in line with other related regulatory obligations
  • A daily perspective on counterparty risk not only to evaluate micro-risks but also a nuanced perspective on enterprise risk management process

AxiomSL and QFC Filing

AxiomSL combines deep industry expertise with an intelligent platform and applications to deliver financial regulatory reporting, liquidity, capital & credit, operations, trade & transactions and tax analytics. Our global footprint spans 70 regulators across 50 jurisdictions, serving financial institutions with more than $39 Trillion in Total Assets. Our expertise in implementing QFC can be summarized as follows:

  • A data dictionary to house all QFC counterparty related information to meet the filing requirements
  • Data validation and integrity checks specifically to support QFC filing and reconciliation
  • On demand generation of a QFC filing including a pre-processing step for review, reconciliation and sign-off
  • Aggregate position level details to generate exposures for a given counterparty
  • Trend analysis and portfolio composition of counterparties on a daily basis

For more information, contact Supriya Sonar at ssonar@axiomsl.com