An article in Securities Lending Times - In 2012 the focus and leading priority for many IT departments that service securities lending businesses will be the provision of risk, compliance and regulatory reporting reflecting the wave of regulation that is engulfing financial services.
Agent Lenders who have insurance fund clients will have to contend with Solvency II, driven by the European Insurance and Occupational Pensions Authority (EIOPA), which like Basel II for banks, is driving insurance companies to supply large quantities of data to the regulator. EIOPA and the FSA both currently state that the new regime will go live on 1st January 2013 when it will replace the Solvency I requirements and the current regulatory regime for insurance supervision for firms in the UK.
There are three pillars of Solvency II, Pillar 1 ‘Quantitative Capital Requirements’, Pillar 2 ‘Qualitative Supervisory Review and Pillar 3, ‘Supervisory Reporting and Public Disclosure’. Pillar 3, concerns market discipline and has a provision that means any agent lending on behalf of insurance funds will need to supply Quantitative Reporting Templates (QRT) information to the insurance companies for onward provision to the regulator. Two templates D5 for loans trade data and D6 for collateral positions will need to be supplied to the beneficial owners. There is also potential that data supplied in the Pillar 3 QRTs could be used within Pillar 1.
ISLA has already reviewed and commented to the FSA on the provision of data within the two templates. It is fair to say that some of the information required is not standard to securities lending and that the provision of data between loan and collateral positions does not align itself that well compared with that which is utilised for current regulatory disclosures like ALD (Agent Lending Disclosure) or for normal day to day business management reporting. The FSA has advised that EIOPA is reviewing responses from the public consultation held in November 2011 on Solvency II reporting. EIOPA will publish final ‘Level 3’ guidance in respect of reporting during early 2012. It is probable therefore that there will be some further changes to the loan and collateral templates requirements at some point in 2012.
It is unlikely, however, that the ambiguous descriptions of the requirements will be fully clarified. Agent lenders will need to carefully analyse the meaning of the requirements and spend time educating those individuals working for insurance companies on the wider Solvency II data gathering projects about the securities lending business and guide them in the reporting process with the regulator. Clients may also demand additional data for their own internal risk models which can further complicate matters.
In the past many agent lenders have relied on spreadsheets or tactical solutions to supply regulatory data or find that current in-house reporting packages have sufficed. The problem with Solvency II reporting for agent lenders is that it has additional complexities involved in the gathering and mapping of data that such solutions will not adapt to so readily. Now that agent lenders face so much additional scrutiny from beneficial owners it is incumbent on them to ensure that the data supplied to insurance fund clients is correct in order to protect this discretionary activity and its income stream. If an insurance fund client has issues with the regulator caused by the provision of incorrect data the funds first and most likely course of action is to review involvement with the lending programme. Beneficial owners have now become very sensitive to any issues that arise with regulators and see no short term benefit other than the most conservative of responses.
The addition of attributes that are not normally required means that agent lenders will need to find a way to source the data either internally from in-house securities databases or externally with securities vendors such as Bloomberg or Reuters. Both loan and collateral securities also have to be mapped to more than one type of new asset class which is defined by Solvency II.
In recent years the majority of agent lending businesses have switched to using tri-party agents to collateralise their daily loan positions. Many agent lenders only hold within their systems the total collateral value for each borrower and lending legal entity. This is problematic for Solvency II reporting purposes as the actual daily underlying positions of the collateral will need to be communicated to the beneficial owner and regulator. Further issues arise as in-house securities databases will not necessarily be able to reference attributes like the clean price for bonds for collateral securities allocated by the tri-party agent each day as there is no relationship to any securities positions the agent lender may normally source data for.
Many agent lenders also have multiple tri-party agents. This means that collateral positions required by the regulator will need to be received in from each agent before being utilised for Solvency II purposes. This leads to another problem in that collateral held by the tri-party agent is allocated by counterparty. However, the collateral for Solvency II needs to be allocated at the fund legal entity level. So a further complexity is that any solution needs to be able to pro-rata the collateral based on the overall legal entity fund loan value for each counterparty.
These are only some of the issues that Solvency II creates concerning the management of securities loan and collateral data and it should be obvious to the reader that the analysis and solution requirements for this regulatory regime requires a high level of analysis and thought and that tactical solutions are unlikely to give the level of comfort required.
Given that insurance company beneficial owners are running large and complex programmes of work for Solvency II they will be demanding the full attention of their agent lenders in 2012 to meet their own internal deadlines. MX Consulting is in the process of implementing our Solvency II solution for a large UK based agent lender.
The application which can be white labelled for use via a clients intra-net can manage the entire process of data collation from trading systems such as Global One, 4Sight or proprietary in-house systems, tri-party agents and other third parties, handling the derivation and mapping of the data, reporting, audit and release of the QRT reports to insurance fund clients for onward provision to the regulator.