There has been a lot of talk in the broader market about Solvency II, the new capital and risk regime currently aimed at insurance companies, but that is likely to end up impacting pension funds as well, although not so much in securities lending. The implementation dates keep moving and there is a real push from insurance companies for EOPIA to reduce the complex approach and requirements, but it is coming and it will, in whatever form it ends up in, need some focus from lending agents.
Like Basel II, Solvency II is based on three pillars with the third, Supervisory Reporting and Public Disclosure, providing the biggest issue for agent lenders. In its current form the reporting requirements require daily analysis, of loan and collateral positions, on a security by security basis and including any underlying cash investments, even if they are made via money market funds. If agent lenders are lucky, their clients will only require the detailed daily reporting of these outstanding positions, but, given there are specific requirements for lending activity, it is more likely that they will require completion of the regulatory reporting templates (known as Quantitative Reporting Templates – QRT).
These templates require significant and detailed enrichment of each security, whether it’s lent or held as collateral, and the complexities involved in gathering, mapping and enriching the data mean that existing in-house reporting packages are unlikely to give beneficial owners the information they need. Additional attributes that are not otherwise required in the business or for client reporting mean that agent lenders will need to find a way to source the additional data either from internal securities databases or from vendors such as Bloomberg or Reuters
In the last MX Corner, I talked about transparency and that lenders have often relied on tactical solutions for the delivery of regulatory reporting. For Solvency II the complexities and frequency mean that it is impossible to think that a tactical or manual process will be acceptable. Although the implementation dates remain uncertain and the requirements still have some ambiguity, many lenders have already started to look at the requirements and are realising that delivery is complex and requires significant thought, planning and development. Although current timeframes suggest delivery in late 2013, actually time is short!
But it’s not all doom and gloom: once the numbers are crunched (via Pillar 1 – Quantitative Capital Requirements) securities lending seems very attractive compared to many other asset management strategies, so if agent lenders can understand this and present the business to clients using Solvency II analysis, insurance companies should become more enthusiastic for lending activities and be prepared to consider lending proposals and strategies more favourably.