Examining IT infrastructure capabilities and reconciling data will be key for meeting the new EFS requirements from the Australian regulator, according to Douglas Cheung, Regulatory Product Manager for Wolters Kluwer’s Finance, Risk & Reporting business in Asia Pacific.
The Australian Prudential Regulation Authority (APRA) has made it clear that data quality is a “key impetus” for its ongoing effort to update the reporting forms used to collect Economic and Financial Statistics (EFS) from financial institutions. The exercise aims to reduce the relatively high rates of resubmissions and revisions that accompany some forms.
Failure to meet quality thresholds will likely result in banks having to resubmit forms, or even repeat the ‘parallel runs’ that are intended to accompany the introduction of the new reporting regime. These runs present a substantial administrative burden and can take months to prepare and execute, therefore it is critical that institutions lay the groundwork early to get their output right.
Though APRA’s proposals are still in the consultation phase, Wolters Kluwer has identified a few specific ‘pressure points’ for Financial IT that the evolving data requirements are likely to create.
New data requirements
The new Statement of Financial Position form (ARF 720.0/1/2) requires the incorporation of non-residency data in the balance sheet form that was previously segregated, as well as more details on foreign currency-denominated positions. Phase 2 of the APRA exercise, which includes replacement finance forms and new forms on interest rates, will require new breakdowns of rate and cost of funds data by categories such as purpose, industry, business size and maturity.
Refinements or the addition of new categories to existing forms will be accompanied by entirely new requirements for data that may not be readily available in institutions’ current systems. Form ARF 722.0 on derivatives, applicable to institutions with gross derivative positions of A$1bn or more, includes data on derivative movements and valuations that is not part of the current reporting framework and can’t be easily sourced from typical front-end and accounting systems.
Institutions will also have to reconcile data across new forms. Form ARF 723 on margin lending for example, designed to replace the Reserve Bank of Australia’s quarterly margin lending survey, incorporates additions designed to comply with new international reporting standards that will require more detailed breakdowns of loans and the assets underlying them. These will also need to be included in and reconciled with new financing reports, such as ARF 741 and 745.
Overall, therefore, banks will be facing additional processes and possibly brushing up against system limits. In our view there a few important points to keep in mind when preparing for these changes. First, the exercise is a work in progress, and particularly in the early stages of implementation, APRA will be watching industry reaction and outcomes closely. If elements of the new requirements are unclear or seem open to interpretation due to ambiguous instructions or unique institutional scenarios, the onus is on the bank to approach the regulator for guidance.
Attempts to simply ‘guess’ what new instructions mean are likely to lead to inaccurate data submissions and additional regulatory burdens, no matter how advanced a bank’s systems or reporting abilities. Alerting APRA to unclear aspects of the EFS transition, by contrast, should provide the institution with more certainty, and, by potentially encouraging the regulator to change or refine instructions, could benefit the industry as a whole.
Gauging the gaps
It’s also key for banks to take a good, hard look at their systems to hone in on likely problem areas or limitations. Some bank infrastructure, for example, will struggle to produce data on forex exposures -- a major emphasis of the first phase of the EFS -- in anything other than the head office currency or US dollars. Affected banks may have to invest in these capabilities, or prepare for more manual work to cater for the changes.
Institutions should also examine the ‘people’ aspect of the data quality equation. Some may consider hiring more resources, or preparing for a period of extended working hours. While the transition to the new regime will primarily fall on the finance and IT departments, in some cases it will involve treasury as well.
Directors and particularly CFOs should already be aiming to ensure the EFS transformation is given appropriate budgeting and resources across the implementation period, which (given the phased rollout and parallel runs) will in effect span from now to 2020, including time for training, planning and proper project closure.
When developing approaches to the new EFS regime, institutions confronting significant reporting overhauls or system shortfalls should consider engaging the support of an outside partner with deep regulatory expertise and solutions that are built to evolve with expanding compliance requirements. This can help institutions lay a foundation for consistent data quality that will withstand future regulatory demands.