05 Nov Lights, Camera, And Finally…ACTION! U.S. NSFR Final Rule Compliance Is Coming To Theaters Near You On July 1, 2021 – How To Secure Your Place On The Red Carpet
By: Don Mumma, Managing Director, Risk Management, AxiomSL and Robert Lee, Executive Director, North America Client Engagement, AxiomSL
After more than three years’ anticipation, three U.S. agencies – the Fed, OCC, and FDIC – jointly released the Net Stable Funding Ratio (NSFR) final rule on October 20, 2020. Like a much-hyped blockbuster movie release, there has been a great deal of anticipation around this finalization. Now the waiting is over. We have the NSFR final rule and most importantly, we now have the timeline.
The ‘movie’ will be released a mere eight months from now, on July 1, 2021. That is when affected banks must begin to perform compliance with the measure.
In addition, we now know when the sequel is scheduled to hit the big screen. The timeline calls for NSFR daily average calculations to be placed in the rule’s public disclosure report template starting on January 1, 2023 for the two quarters ending June 30, 2023 and reported 45 days later on August 14, 2023, and semiannually thereafter. In the meantime, the Fed will release NSFR-specific revisions to FR 2052a (Complex Institution Liquidity Monitoring Report) that will probably go into effect sometime in the second half of 2021.
July 1st Gets Top Billing
According to a previous rule that tiers organizations based on size and complexity, banks now know if they are compliance-eligible and to what extent. Those affected are officially on the clock. However, announcing a marquee role for July 1, 2021 as the first compliance deadline has come as something of a surprise to everyone.
Faintly acknowledging their aggressive near-term deadline, the regulators have hinted that the fact that so many financial institutions already implemented the liquidity coverage ratio (LCR) and FR 2052a reporting means that NSFR final rule implementation should not be a huge effort.
Indeed, there is major overlap in the datasets required for LCR and NSFR calculation, and yes, banks operating frequent LCR calculations and FR 2052a reporting have a basis upon which to approach the NSFR final rule. However, the devil is in the detail. At the core of NSFR attributes and measures, is a thorny data challenge that all by itself turns banks’ preparation into a major undertaking.
The data challenge, the July 1st compliance deadline, the lack of clarity so far on FR 2052a modifications coupled with the 2023 public disclosure deadline – all these elements add up to significant efforts that start now and extend over the next two years.
The Story Board
Recall that the objective of NSFR is threefold:
- Reduce funding instability, promote sound liquidity risk management, and support operational stability
- Compliment LCR by adding a long-term liquidity standard
- Conform fundamentally to the BCBS standards, particularly as adopted by EU countries
NSFR is the available amount of stable funding (ASF) relative to the required amount of stable funding (RSF) where ASF is determined by characteristics of liabilities and equity and RSF is determined by characteristics of assets, commitments, and derivatives. These characteristics are measured based on carrying values and certain adjustments to carrying values.
Targeted to be 100% or more on an ongoing basis, NSFR is designed to limit the risks emanating from excessive maturity mismatches over the medium to long term and will require banks to maintain a stable funding profile in relation to the composition of their assets, derivatives activity, and off-balance sheet commitments.
Calculating NSFR therefore, means banks will have to incorporate new datapoints into the liquidity realm – new territory for some liquidity risk management teams.
But It Turns Out That The Real Diva…Is Data
On examination of the NSFR final rule, the incremental data gap between LCR and NSFR is significant. Most of the incremental datapoints arise from the capital side of the house. ASF brings certain liabilities and tier 1 regulatory capital not required in LCR. Likewise, RSF brings asset categories and derivative measures not considered in LCR calculation.
Liquidity risk management teams will have to find and incorporate the required datapoints in alignment with risk-based capital rules. Undoubtedly, they will need to perform internal forensics to understand and locate them.
Banks will also need to slice existing data differently than for LCR. For example, where for LCR, accrued interest and principal are sometimes comingled in a maturity amount, firms now have to explicitly split out these items for the principal carrying value and also split the carrying value for amortizing deals.
Firms will discover that the final rule has made aspects of compliance more onerous than the preliminary rule indicated. For example, banks must treat trapped ASF as they are now treating trapped high-quality liquid assets (HQLA) for LCR. And under the final rule, understanding how to handle derivatives becomes more difficult. In contrast to LCR, which only looks at 30-day amounts and collateral, NSFR requires netting current mark-to-market payables, receivables, and collateral. So, identifying and sourcing required derivatives datapoints is another challenge.
Learning The Lines Means Serious Study And Significant Effort
In addition, NSFR sets up a friction between liquidity reported daily and the need to flow in capital data reported monthly. Banks will need to think strategically about the daily frequency conundrum associated with merging data from sides of the organization that have different reporting frequency bases.
Another implication of sourcing new datapoints is that banks probably will also need to either integrate new systems or automate and control new data entry into their liquidity risk management processes – injecting an additional element of complexity into implementation plans.
Regardless of state of preparation, now that the rule has been finalized there is absolutely no escaping that banks’ preparation efforts for implementing the NSFR final rule will be significant. At least three major workstreams are shaping up that firms will need to orchestrate to hit the milestones:
- Regulatory Reporting Updates
- Public Disclosure
Action Behind The Scenes
Based on the proposed rule, AxiomSL has been preparing for NSFR for some time and we believe we accounted for about 75% of the now-known final datapoints and requirements. Because we laid the groundwork well in advance with a prototype build (NSFR calculations and public disclosure), we are on a fast track to identify the remaining datapoints gap by mid-November 2020. And we expect our NSFR software module and public disclosure template to be ready before year-end 2020.
Our behind-the-scenes actions will enable firms to speed preparation and execute dry runs to be ready for July 1st. The NSFR solution will enable organizations to quickly remediate the datapoint gaps, test data readiness, run pro forma NSFR calculations and review them versus internal results utilizing the adapted public disclosure template.
Likewise, we have mapped a longer-term timeline to make the necessary changes to the FR 2052a solution well before the regulatory reporting leg starts. Of course, that timeline is dependent on the Fed’s activities in terms of finalizing the new requirements.
Visionary Stage Direction
With all the liquidity calculation and reporting changes afoot, banks need a strategy for NSFR compliance that leads to futureproofing liquidity risk monitoring and reporting, especially given the expected changes to FR 2052a. AxiomSL offers that vision and clear stage directions for getting there.
Whether an organization is utilizing AxiomSL’s FR 2052a/LCR solution strategically, in part, or not yet at all – no matter its current approach, any affected bank can tap into the foundation we have laid to efficiently implement the NSFR final rule. Firms can utilize our U.S. liquidity ecosystem on the ControllerView® data management platform at the entry point that best suits their need.
For example, a bank not currently using AxiomSL for U.S. liquidity reporting would provide us with its FR 2052a-tagged data. We would identify the NSFR datapoint gaps that the firm would close, and then enable NSFR compliance and produce the public disclosure – thus encompassing FR 2052a/LCR reporting and compliance in a single workstream on the ControllerView platform. Working with AxiomSL for July 1st NSFR compliance would also position the bank for a seamless update when the Fed releases its revision to FR 2052a.
Step Out Onto The Red Carpet On July 1st
No matter what else needs to be done to prepare for NSFR inception – and there is more to consider – clearly, immediately tackling the incremental data gap paves the way to a starring role. A referential implementation timeline for the NSFR final rule that encompasses the three major workstreams (compliance, regulatory reporting updates and public disclosure) looks something like this for AxiomSL clients:
Addressing the datapoint gap early and progressing through an orderly NSFR implementation will enable your organization to make an appearance on the red carpet on July 1, 2021 – and ensure a starring role in all the sequels!