Update on 5G Liquidity Reporting Requirements and Framework

The issuance unveiled a new 5G Reporting Framework that enhances and replaces the existing liquidity monitoring programs (3G/4G) for US domestic banks and Foreign Bank Organizations. Banks will now be required to include more specificities into their Liquidity Coverage Ratio (LCR) calculation.

On November 13, 2015, the Board of Governors of the Federal Reserve System (FED) published the final instructions for its FR 2052 reporting requirements. The issuance unveiled a new 5G Reporting framework that enhances and replaces the existing liquidity monitoring programs (3G/4G) for US domestic banks and Foreign Bank Organizations (FBOs).

Previously, the FR 2052a focused primarily on Global Systematically Important Banks (G-SIB) supervised by the Large Institution Supervision Coordinating Committee (LISCC). The framework has now been extended to include firms with assets in the range of US$50B and US$700B. The FR 2052b reporting requirement has been reserved for firms with assets under US$50B. As a result of the framework extension, large regional banks who were previously reporting the lighter FR 2052b requirements have now been burdened with new requirements.

The framework update comes with higher granularity compared to other reports, such as FR 2052b and Liquidity Coverage Ratio (LCR), and an increased reporting frequency of up to T+2, for qualified financial institutions. The increased granularity is designed to support the effort from regulators to more closely monitor the financial institutions, including their internal risk management models and procedures.

The production of regulatory reports is a massive undertaking that is further complicated by further complexity resulting from the comprehensive aggregation of data (product hierarchy, new product dimensions, variation from LCR reporting). Furthermore, a new reporting platform architecture has been suggested that will require banks to shift from a spreadsheet template to xml format.

The final instructions also reveal the mapping of the new 5G reporting framework to LCR. However, the data collection requirement goes beyond what is required to produce the LCR. Moreover, the provided LCR mapping confirms that the regulator will re-compute its own calculation, therefore emphasizing the key role of data governance and consistency across reports.

The evolving regulatory landscape is putting pressure on banks to increasingly harmonize the processes for implementing new requirements, while simultaneously complying with existing requirements. Implementing the FR 2052a is a significant challenge for large foreign banks due to the increased expectations from regulators in terms of data volume, reporting capability and overall infrastructure.

5G will capture a consolidated view of the US Operations, including flows for related Cayman/Nassau entities, intercompany flows that are separate from US Operations, and the initiation of the reporting framework which occurred in 2008. 

1 to 3G (2008)

The framework was created in 2008 to monitor the emerging and imminent threats to banks’ liquidity during a financial crisis. The focus was on short-term wholesale liabilities and that there were high quality unencumbered resources available to meet those obligations. This initial framework laid the foundation for the  FR 2052a abbreviated report.

4G (2011)

This updated framework was implemented in 2011 to formalize the daily liquidity data collection and fill information gaps with respect to funding products, legal entity exposures, and banks’ maturity profiles. It incorporated elements of the December 2010 release of the Basel III LCR standard on a preliminary basis. Moreover, it was the foundation for the FR 2052a full report.

5G (2014)

The 5G framework is a supervisory tool that aims at establishing a data framework that leads to amending the current FR 2052a Liquidity Report. It proposes to collect quantitative information, on a consolidated basis and by reporting entity on selected assets, liabilities, funding activities, and contingent liabilities, to monitor the overall liquidity profile of institutions. It intends to provide a deeper understanding of exposures and collateral types in legal entities by region and currency. The expectation is to align with the US LCR where there is overlap. On August 15, 2014, a Federal Register notice was issued to authorize the FR 2052a under the ad-hoc reporting collections section.

The 5G proposal would build upon the existing FR 2052a data framework to meet supervisory expectations including:

• Assessment of regulatory standards;
• Systemic monitoring of funding and liquidity risk

The majority of changes would involve increased granularity of data currently reported for the full FR 2052a, with several others broadening the scope of analysis:

There have been some key changes between the draft and the final requirement proposal. The FED initially released a first draft of the new framework in late 2014 to gather feedback from the financial industry. After extensive Q&As and numerous roundtables, the FED released the final rule on November 15, 2015. The scope of changes was limited to large banks as defined by the Large Institution Supervision Coordinating Committee. In contrast, the final rule was amended in a favorable manner for all other financial institutions subject to the framework. 

The chart below illustrates the scope, reporting frequency, and compliance timeline:

The FR 2052a Report uses a standard syntax to refer to specific tables, fields, and products in the FR 2052a data hierarchy. As an example, the chart below illustrates the structure of the report provided by the Federal Reserve Bank: 

• Each table within the 5G framework would have a unique set of fields based on the characteristics of the underlying data.
• 5G “data elements” would represent unique combinations of non-numeric fields (e.g., reporting entity, currency, etc.), across which numeric values (e.g., maturity amount, collateral value, etc.) are aggregated.   

In the final version of the 5G Requirement, the FED provided multiple clarifications aimed at reducing potential definition gaps between a firm’s reported LCR and that derived by the portions of the data submitted within the FR 2052a.

In addition, the regulator provided an LCR to FR 2052a mapping which is summarized in the diagram below (for more details see appendix VI of the final requirement).

This 5G/LCR mapping confirmed that the FED will use more granular data provided by the FR 2052a to compute its own version of the LCR from the reporting entity. 

Banks are under increasing pressure from the FED to continuously enhance their liquidity profiles to be able to efficiently adapt to changing requirements. Sia Partners expects the FED to issue various regulations in the coming months, including the net stable funding ratio. Such regulatory updates will require immediate action from effected banks. Hence, there is a need for a robust compliance approach to the new reporting requirements to ensure the banks have ample time to implement compliance solutions. Sia Partners is well suited to tackle the challenges facing the industry. 

Key Takeaways

• The final instructions released by the FED for its FR 2052 reporting requirements provided an enhancement to the existing liquidity monitoring program (3G/4G) for US domestic banks and FBOs
• Banks are facing specific challenges to continuously enhance their liquidity profiles to be able to efficiently adapt to changing requirements: data collection, technology, governance and controls, and resourcing
• Banks will now be required to use more granular data in the computation of their LCR
• Sia Partners believes there is a need to have a robust compliance approach for the new reporting requirements to enable banks to implement compliance solutions in an effective and timely manner

Sources

1. http://www.federalreserve.gov/apps/reportforms/default.aspx

2. https://www.federalreserve.gov/reportforms/formsreview/FR2052ab_20141126_ifr.pdf

3. https://www.federalreserve.gov/newsevents/press/bcreg/bcreg20161219a1.pdf