CRR/CRD IV (COREP/FINREP) Mandate in Europe
The first set of filings for this reporting mandate, which affects Credit Institutions and Investment Firms in Europe, has just been completed as of June 30th, 2014 and so I thought I would share some of the background and experiences from this initial round and look towards the future for what this this will mean for all the stakeholders.
What exactly is this mandate all about?
CRD IV consists of a Capital Requirements Regulation (the "CRR" - a law that is uniformly applied throughout Europe), and the fourth edition of the Capital Requirements Directive (the "CRD" - which requires national implementation and admits a certain degree of variation). It implements the Basel III banking accords in Europe but it admits some inconsistences since it applies to securities firms as well as banks.
The CRR imposes a single set of prudential rules, which are automatically and directly binding to all 8,000 plus banks operating within the EU and does not require any implementing legislation by the various EU Member States. Actually, the mandate also applies to Norway and Iceland, both EEA countries that are not in the EU. Some rules (those in the directive but not in CRR) are implemented by Member States. The relevant legislation was passed by the European Parliament in April 2013, signed into law 26th June, 2013 and published in the Official Journal of the EU 27th June 2013. It has therefore been effective as of 1st January, 2014
It includes the following components:
COREP (Guidelines on COmmon REPorting) covering consolidated, sub-consolidated and solo reporting of the capital requirements and own funds, and
FINREP (FINancial REPorting) covering Financial Reporting for supervisory purposes based on IAS/IFRS
The central authority is the European Banking Authority (EBA). Its role includes issuing guidelines and recommendations and technical standards. It receives reports from each country's "National Competent Authority" (NCA), typically a central bank such as the Deutsche Bundesbank in Germany or other regulatory bodies such as the Financial Conduct Authority and the Prudential Regulation Authority in the UK. The NCA decides on exact definitions and standards for institutions reporting at the national level and the EBA defines standards for the NCAs to report at the European level.
What kinds of reports are required?
The reports to be filed are defined in the ITS (Implementing Technical Standards), which contains a set of rules and a number of “Annexes”. The Annexes are essentially Excel Workbooks providing templates to be filled out by the reporting body and the data in them transmitted to the receiving body. The EBA requires that the NCAs transmit this data to them using the XML based language XBRL (eXtensible Business Reporting Language). The NCAs are at liberty to define their own reporting format for the data they receive from the reporting institutions. Many NCAs have decided to use XBRL as well. Some NCAs (notably in Germany and Spain) have used the EBA’s formats as a base but have created extensions for their own national purposes.
In order to enable reporting institutions and NCAs to produce the XBRL formatted report, the EBA defined an XBRL “taxonomy” that is used to describe the data values being reported. The approach taken was to create a “Data Point Model” (DPM) that defines the dimensionality of every data carrying cell in every workbook and then to translate this into an XBRL taxonomy. In the first DPM from the EBA there are 35,259 such data points defined for COREP and FINREP but many of these are reused for what are called “open templates” (i.e. those with a variable number of rows or sheets). So a typical complete set of reports could consist of upwards of 50,000 data values. Reports have to be filed at varying intervals depending on the nature of the data involved: Monthly, Quarterly, Semi-Annually and Annually.
How does IBM help?
The IBM Cognos Disclosure Management (CDM) solution is ideally suited to producing these reports. It produces the XBRL directly from the completed workbooks plus its comprehensive workflow management, data connectivity and audit trail features are essential for a complete solution. The templates from the EBA are delivered to the CDM user “pre-tagged”; which means they are already connected to the XBRL taxonomy so that the XBRL generation functions of CDM will produce the XBRL output -without the need for the user to perform any tagging (mapping of cells to XBRL concepts) themselves. A user simply connects one time to the data sources and the workbooks are automatically populated with data and updated when that data changes.
What were some of the learnings from the first round of reporting?
One of the more awkward aspects of this mandate is that the NCAs were allowed to make their own modifications to the EBA’s original requirements, both in terms of data to be reported and some arcane technical limitations that were imposed on the XBRL that they were prepared to accept. With 30 countries, each able to make their own, sometimes subtle, rule changes from the EBA’s rules, this reduced the benefit of standardization somewhat. Software had to be modified to accommodate some of these deviations while preparers were getting ready to file. Indeed, some of these variations were discovered almost by chance since they had not been well documented by the NCAs and it was not until test filings were made that they surfaced. IBM responded very quickly to any such discoveries and issued software updates as necessary to accommodate them.
A second key piece of learning was that the requirements to use “open templates” meant that it was not practical to know in advance what all the templates were that needed to be filled out. Some of the templates were repeated numerous times, once for each country of residence of the counterparty for example. With over 200 possible countries it was necessary to build a mechanism to handle such variations and to add (or remove) different template versions as the need was discovered during the data preparation phase.
During the lead up to the June 30th filing deadline the EBA discovered that some of the built in validation rules that they had published were either in error or inappropriate or not possible to check within the reporting framework that they had defined. They did not re-issue the taxonomy so users were instructed simply to “ignore” rule “failures” for these rules. However, some NCAs decided that the EBA got it wrong and that some of the “deactivated” rules would be reactivated for that country. This made for more complexity and confusion. In the end, all the reports were produced, validated and filed on time.
What can we expect going forward?
To date, only COREP reports have been required. Starting with Q3 2014, FINREP reports will also be required, and in Q4 2014 Asset Encumbrance (monthly) and Funding Plans (annually) reports will be added to the requirements. Changes will also be made to the current templates. To accommodate these additional requirements, the EBA has laid out a plan to update the DPM and XBRL taxonomy numerous times over the next 12 months. This will require software updates as well as updates to the pre-tagged templates. As soon as new versions are published by the regulator they need to be analyzed and new “pre-tagged” templates produced. Update tools need to be provided to effect the changes to the old templates without losing the data connections that have already been built. Users will need to review all the changes made by the regulator and ensure that their data is correct. For some changes they will need to make manual adjustments to their data collection, such as where a more detailed breakdown of a reported number is required.
CRR/CRD IV is a complex reporting mandate that affects all financial institutions in the EU (plus Norway and Iceland). A large amount of data has to be reported at frequent intervals to the relevant regulators. Only with the use of a tool such as IBM Cognos Disclosure Management can the complexities and difficulties of producing and validating these reports on a regular basis be managed with confidence.