Practice Notes
Our team has a strong history of thought leadership and is recognised as providers of the latest thinking on strategy finance and risk management. Here are a selection of recent Practice Notes.
European Supervisory Authorities: Technical Standards on Risk Mitigation Techniques for OTC Derivatives Not Cleared by a CCP
The Joint Committee of the European Supervisory Authorities has published their discussion paper on draft Regulatory Technical Standards on risk mitigation techniques for Over-The-Counter derivatives not cleared by a Central CounterParty. Comments were invited during the public consultation period in which Stakeholders were asked to provide evidence to support their views on current methods and proposed rules, for the ESAs’ cost-and-benefit analysis. 67 responses were received and made available. On this basis, the European Supervisory Authorities will prepare a consultation paper to be published around summer 2012.
Bridging the elements of statistical (Central Bank) and supervisory reporting frameworks
In 2010, the European Central Bank (“ECB”) and the European Banking Authority’s (“EBA”) predecessor issued a joint methodological manual analysing the areas of potential overlap between the ECB’s statistical reporting requirements and supervisory reporting requirements. An updated version of the manual was issued in March 2012 together with a relational database.
CRD 4: Introduction of New Regulatory Requirements for the Quality of Tier 1 and 2 Capital
Increase the resilience of the banking sector, amongst others by strengthening the quality and quantity of regulatory capital.
European Banking Authority Basel III Monitoring Exercise Results
The European Banking Authority (EBA) has published its first impact assessment report on its Basel III monitoring exercise. 158 European banks from 20 countries submitted data for this study, which is based on the final Basel III framework. This avantage Practice Note reviews the results.
Definition of ‘Connected Counterparties’ and Structured Finance Vehicles under the Large Exposures Regime
The revised large exposures (“LE”) regime came into effect as part of the Capital Requirements Directive (“CRD 2”) as of 31 December 2010.
CRD 4: Introduction of New Supervisory Reporting Requirements (formerly known as ‘CoRep’)
This practice note is covering CRD 4 and the EBA's latest consultation paper on Implementing Technical Standards for Regulatory Reporting. This is likely to be of interest to those of you involved in regulatory reporting and regulatory and finance change.
The Pragmatic Implementation of an Operational Risk Control Framework in Market-Related Activities
The UK FSA has recently adopted EBA (formely CEBS) Guidelines within BIPRU 6, Operational Risk, stating that firms undertaking market-related activities should be able to demonstrate to the UK FSA that it has considered the EBA Guidelines (published in Oct 2010) on the management of operational risk in market-related activities. This practice note, outlines the regulatory expectations, highlights challenges institutions will face as they demonstrate compliance and explains what practical assistance avantage can offer in helping our clients address these challenges.
Credit Valuation Adjustment (CVA): The Standardised Method
Credit Value Adjustment (CVA): The Standardised Method Rapid and continuous growth of the OTC derivatives market with a volume of over USD600 trillion as of year end 2010 and the significance of losses due to counterparty default in such contracts caused regulators to introduce new regulation requiring additional capital with respect to counterparty risk.
CEBS (EBA) - Operational Risk Market Related Activities,Principles
On 12th October 2010, CEBS published its ‘Guidelines on the Management of Operational Risk in Market-related Activities, a response to recent operational risk events in financial services firms
FSA Recovery and Resolution Plans
The 2008 banking crisis highlighted the need for firms to have an effective recovery plan in place in order to better cope with the stresses that developed and failures that might have been avoided. During early August 2011 the FSA set out its proposals on what is expected of firms with regards to planning for a stressed situation which will require a firm to take action to recover, or, if necessary, wind-down in an orderly manner without putting taxpayers at risk of loss.
FSA Guidance: Assessing suitability
In January 2011, the FSA published its proposed guidance on Assessing Suitability.This draws on a number of FSA thematic reviews and investigations between March 2008 and September 2010 and identifies significant risks to the FSA’s consumer
EU Rules on Gender Discrimination
The Gender Directive (2004/113/EC) prohibits discrimination on the grounds of sex in the access to and supply of goods and services. However article 5 (2) provides an exemption or ‘derogation’, allowing insurers in member states to take into account an individual’s sex in calculating and costing benefits, cover and associated premiums where it can be supported by statistical and actuarial data. This exemption is currently being considered by the European Court of Justice. In this practice note we consider if there will there be an impact for UK life companies.
Developing an Operational Risk Appetite: Turning a “black art” into practical reality
Defining appetite for the operational risk category continues to be a particular challenge for many organisations, compared to the much longer established disciplines of credit and market risk, and is still considered by many to be something akin to a mysterious “black art.”
FSA “Dear Compliance Officer” Letter - Selling Insurance
This paper sets out the issues identified by the FSA and compares them with some observations we have made from experiences with other firms across a range of sectors. It also sets out our proven methodology for reviewing firms’ systems and controls around their sales process so that firms can use this approach to help deliver the required review
FSA s166 Skilled Person Reports: Why you should take them very seriously
The FSA has powers to commission a skilled person to report on known or suspected deficiencies within an authorised firm. These reports are known as “s166 reports” after the relevant section of the Financial Services and Markets Act 2000.
Changes emerging to the FSA’s supervisory approach
This article sets out our observations on how the FSA’s intensive supervisory approach is developing based on our experiences with clients in the banking sector and on formal and informal updates from the FSA. While our comments are directed primarily towards large banking groups, we anticipate that the FSA will read across some or all of its evolving approach to other firms prevent similar complaints arising in the future.
Improving the FSA’s use of Section 166 Skilled Person Reports
In its recent Discussion Paper DP3/10 the FSA put forward a number of proposals about how it could enhance the way it could make more effective use of Section 166 Skilled Persons Reports. This paper summarises these proposals and examines some of the potential implications for firms. It should be noted that this is a Discussion Paper only and no handbook or policy changes are being formally proposed at this time.
FSA Policy Statement (PS) 09/20: Stress and Scenario Testing
FSA policy statement 09/20 dated December 2009 provides feedback on CP 08/24 and confirms the associated final rules and prudential requirements for stress testing. With the final date for implementation of the supervisor’s regulatory requirements approaching (14 December 2010 for reverse stress testing), this paper is designed as a timely reminder and checklist of the key requirements of the new regulations. It contains some practicle observations from our work and discussions with clients.
FSA ARROW Governance Reviews: Be aware of the goverance hotspots and make sure you are prepared
Shortcomings highlighted during ARROW visits, in relation to the way in which a firm undertakes corporate governance, can make a significant difference to how a firm performs and also how its relationship with the regulator evolves. Our experience demonstrates that 25% of critical issues highlighted by the FSA in recent ARROW risk mitigation programmes have related to issues of management, governance and culture, often provoked by strategic uncertainty on the part of senior management.
FSA ARROW Reviews: Avoid the pitfalls and take early action
The FSA have warned Firms and individuals that they should be ‘very frightened’ as a result of their more ‘direct and intrusive approach’ to supervision. In this practice note we look at how ARROW reviews have increased in intensity and how supervisors are presenting a more robust challenge. We and look at how firms and individuals can prepare for an ARROW visit.
Firms’ Handling of Client Money and Assets
Earlier this year the FSA published its review of the handling of client assets in a number of investment and insurance broker firms. In this Practice Note we look at the FSA findings identifying the broad areas of concern that highlight FSA increased scrutiny and outline what actions Firms should be taking to ensure that appropriate controls and processes are in place.
A voice that must be heard: Customer Complaints
FSA recently published its review of complaints handling in major banks. It found serious failings in a number of banks referring two firms to enforcement action. In this Practice Note we look at how Complaints handling has been a major focus for the FSA and the steps that firms should take not only to comply with FSA requirements but to meet Customer expectations.
FSA change in emphasis of Supervisory Approach: Passing the Outcomes Test
Following the financial crisis the FSA has been keen to emphasise that it has evolved its supervisory approach to better manage risks to its statutory objectives. In this Practice Note we look at how the FSA has not only moved to greater emphasis on Prudential regulation and the “survivability” of firms, but has also strengthened the way it regulates firms’ conduct (Conduct Risk) by introducing the concept of Outcome Testing.
FSA Consultation paper (CP) 09/30: Capital Planning Buffers - Summary & Considerations
The FSA consultation paper 09/30 issued in December 2009 sets out to clarify the intended purpose and appropriate usage of a firm’s Capital Planning Buffer (CPB). This Practice Note will be of interest to all BIPRU firms who would like to address the issues arising from the use of CPBs.
Improved Risk Management in Times of Cost Reduction
At this time of year many clients are working on business plans and budgets for the year ahead and in this Practice Note we discuss the importance in risk management as part of the annual review process including both business and regulatory drivers.
FSA policy statement (PS) 09/16: Pricing Liquidity Risk – Mechanism to Allocate Cost or Incentivise Business Behaviour?
On 5 October 2009, the FSA published PS 09/16, Strengthening liquidity standards. The PS introduces systems and controls requirements (SYSC), including the accurate quantification of liquidity costs and benefits to be fully incorporated into product pricing through a mechanism that aligns the commercial incentives in relation to individual products, business lines or strategies with the associated liquidity risks that each pose. In this Practice Note, we review the rationale for pricing liquidity risk as well as practical implementation issues, taking into account the ‘Evidential Provisions’ provided in BIPRU 12.3.15.
ERM and Solvency 2 - Separate or the Same Initiative?
In this Practice Note we identify some of the key lessons that can be drawn from the banking industry in implementing Basel II – how this experience may be leveraged to deliver an enterprise-wide view of risk solutions.
Reforming Basel 2
This is the time of maximalist regulation and intrusive supervision. The re-regulation of financial services is high on the agenda of international regulators – and the reform of banking industry regulation is very close to the top. Just how afraid, then, should the industry be?
The Liquidity Risk Management Conundrum – Addressing the Requirements of CSSF Circular 09/403
Regulators have embarked on a series of initiatives culminating in a sea change in the way liquidity risk will be regulated. This Note provides an overview of CSSF Circular 09/403 issued on 28 May 2009 (the “Circular”). The Circular will impact Luxembourg credit institutions and investment firms
The Path to Solvency II: Interview with Karel Van Hulle
In this article Barry Smith of avantage discusses progress towards implementing Solvency II with Karel Van Hulle, Head of Unit, Insurance and Pensions at the European Commission.
Toughening up Pillar 2 – Risk Appetite moves centre stage
Governments and regulators have drawn many conclusions about the current market turmoil. The one that will have the biggest direct impact on the finance industry is that far more effective firm-wide risk management and governance is needed. Regulators like the FSA are already preparing to take a much more intrusive approach, toughening up Pillar 2 to ensure that this need is met.
Regulatory Trends and Developments - What Risk Managers Need to Know
The market turmoil that began in mid-2007 re-emphasised the importance of sound risk management for the effective functioning of financial markets and the banking system in particular. The financial difficulties arising from the global credit crunch prompted policymakers and regulators to propose a sea change in regulation that will significantly impact risk management practices. This paper sets out the more significant implications for credit institutions within the European Union (EU).
How Ready is the Insurance Industry for Solvency 2?
This article reviews the readiness of the insurance industry in the UK for Solvency 2. It is based both on direct discussions with clients and industry bodies, and on information from various publicly available sources – including regulator feedback on the QIS4 exercise carried out between April and July 2008.
ICAAP Implementation for UK Firms - Practical Difficulties and Handy Tips
This practice note examines the practical issues and summarises our experiences working with over 20 firms with respect to ICAAP including our observations and tips for implementing an ICAAP.
Reputation Risk – Can it be measured and how will it benefit the business?
This practice note examines the issue of reputation risk, how to address reputation risk, and what a reputation risk framework should include.
What has been the impact of the credit crunch on Liquidity Risk Management in Luxembourg?
This article reviews the impact of the credit crunch on Luxembourg banks in terms of the changes witnessed in business behaviour and liquidity risk management and outlines further changes that can be anticipated.
Incremental Default Risk – Have Banks Got Enough Time?
This Practice Note summarises the key challenges related to the incremental default risk charge (IDRC) and sets out how avantage's Integrated Risk and Performance Measurement (IRPM©) tool underpins complete end-to-end response to the IDRC challenge.
ICAAP Implementation for Luxembourg Banks – The Clock is Ticking
Despite the fast approaching deadline of 31 December 2008 for the implementation of the Internal Capital Adequacy Assessment Process (“ICAAP”) there is much work still to be done before many Luxembourg banks fully comply with the requirements of CSSF Circular 07/301, Implementation of the ICAAP.
Effective Operational Risk Management - more than just good software
ORM is not just about good software that collects, analyses and reports on data. This practice note provides an overview of two areas where ORM can add significant value to an organisation, i.e. (i) the minimisation of (potential) losses resulting from cultural change within business-as-usual (BAU) operations and (ii) the minimisation of (potential) losses resulting from change initiatives.
Basel II Internal Risk Models: Threat or Opportunity?
This practice note discusses the question whether Basel II capital adequacy rules would add to or alleviate crises similar to the market turmoil caused by the US sub-prime related problems.
CRD 4: Introduction of New Supervisory Reporting Requirements (Large Exposures)
The revised large exposures (“LE”) regime came into effect as part of the Capital Requirements Directive (“CRD 2”) as of 31 December 2010.
