27/03/2018 – By Wissam El-Zeenni, Product Manager, AxiomSL EMEA
The Prudential Regulation Authority (PRA) has published a Policy Statement (PS 2/18) in February 2018 which sets out the final rules for a cashflow mismatch framework (CFMR), following the outlining of its Pillar 2 objectives and a round of two consultation papers (CP 21/26 and CP 13/17). The new framework builds on the European Banking Authority’s (EBA) C66 maturity mismatch template and incorporates features from the LCR as well as the legacy FSA047 and FSA048 templates.
The Pillar 2 liquidity framework aims to complement the Pillar 1 regime (the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR)), by focusing on liquidity risks not fully captured under Pillar 1. The new framework particularly intends to address low point risk, cliff risk, HQLA monetisation risk and foreign exchange (FX) mismatch risk.
With the introduction of PRA110, a new liquidity reporting template will be in place from July 2019 replacing the FSA047 and FSA048 submissions. Applicable to all UK banks, building societies and PRA designated investment firms, the reporting frequency will depend on the firm’s profile. Large firms (total assets of €30 billion or above) are required to submit the PRA110 template weekly with a one-day remittance period and smaller institutions are expected to submit the template monthly with a fifteen-day remittance period.
Although based on the C66 EBA maturity mismatch template, the PRA110 presents a three-way expansion: Firstly, new rows have been added to align with the LCR wherein the C66 template is more concise. Secondly, new sections have been added to address the risks mentioned earlier, eg: HQLA monetisation. Thirdly, 92 days of daily granularity have been incorporated into the maturity bucketing classification. Altogether, almost turning the LCR from a 30 days measure into an enhanced daily compliance metric.
With nearly 260 rows by 112 columns totalling up to around 29,000 data points, the PRA110 compliance effort is not to be underestimated. This extreme granularity is the utmost challenge presented by the regime which raises the question on whether firms have the systems and processes in place that can handle the data collection and submission requirements that could potentially be as frequent as daily, if requested by the PRA.
From a practical perspective, many banks are likely to struggle to meet the requirement if they have separate systems for regulatory compliance and internal risk management. The key is to align these two systems without disruption and with a single solution for end to end risk management and reporting characterised with a streamlined workflow as well as a robust, flexible and future proof infrastructure.
Getting ready for PRA110
As the PRA110 compliance deadline has been postponed from January 2019 to July 2019, impacted institutions should take advantage of this time and make full use of the implementation period by ensuring their PRA110 systems are all set well in advance. It is critical to allow a period of parallel run with the FSA047 and FSA048 before they phase out and make sure all the data is reconciled with the Pillar 1 metrics.
AxiomSL’s strategic regulatory reporting and risk management platform ensures that the regulatory compliance metrics (LCR, NSFR, AMM, PRA110 and AE) are all fully integrated and aligned to the internal risk management and ALM functions like Interest Rate Risk in the Banking Book (IRRBB), Funds Transfer Pricing (FTP) and cashflow management. A Unified Liquidity Data Model means all the internal and external liquidity risk management measures are utilising common data sources and modelling assumptions.
Transparency and full auditability are the key aspects of our solution offering. Every single step of the calculations and data transformations are entirely tracible and auditable. This is a key feature that empowers firms to easily justify how the results are produced, the data sources they originated from and the different stages of transformation the data goes through.
Financial institutions in the UK and around the globe are under regulatory scrutiny more than ever which makes it crucial to be confident that reporting meets the requirements. Even though banks have until July 2019 to comply with PRA110, now is the time to prepare for the standard by automating and integrating the systems to effectively tackle the substantial challenges presented by the new regime.
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