• Selwyn Blair-Ford, London-based Head of Global Regulatory Policy at Wolters Kluwer


• 27.09.2016 12:15 pm
The Single Resolution Mechanism , Compliance and Regulations

Preparing for The Single Resolution Mechanism will mean ensuring financial IT systems and management processes are built and maintained. In fact, it means a preparing for a whole host of regulatory reporting obligations so firms need to start exploring their options, according to Selwyn Blair-Ford, London-based Head of Global Regulatory Policy at Wolters Kluwer.

The Single Resolution Mechanism is one of the three pillars that are the key elements of the European Banking Union. The Union brings together all Eurozone banking entities under a single supervisor (The European Central Bank), a single resolution body (Single Resolution Board), with a single resolution fund. These three pillars are overlaid with a single CRR/CRD4 rulebook that applies to all EU member states.

The resolution mechanism was proposed in 2013 and came into force on 19^th August 2014 and fully operational from January 2016. It includes pooled funding arrangements in cases of an institutions resolution. These funding arrangements explicitly exclude support from the EU taxpayer.

The European Central Bank (ECB) has responsibility for day to day prudential supervision of the Eurozone banking sector. However, the Single Resolution Board (SRB) makes the decision about when an institution has reached the point that it will need to be resolved. The SRB includes representatives from the ECB, the European Commission and the more than 18 national regulatory authorities (NRAs).

The SRB takes direct responsibility over cross-border and significant (asset greater than €30 billion) banks. Other institutions are supervised through their NRAs. A decision to resolve an institution will be made by the SRB, but NRAs will be still involved.

The reporting requirements relating to the Banking Recovery and Resolution Directive (BRRD) was issued through the European Banking Authority (EBA) in July 2015 and went live on 31^st December 15. These reporting requirements include the information a resolution body will need in the event a bank will needing to be resolved. These include information about legal entities, critical functions, interconnectedness and others.

What is the reporting?

The EBA templates consists of 12 schedules.

1. Organisational Structure - legal entities, identifiers, capital, voting rights etc.
2. Governance and management - Includes, key personnel details, jurisdiction of incorporates
3. Critical and core business functions  - Includes list of critical functions by legal entity, location, manager responsible
4. Critical Counterparties - 3 schedules dealing with assets, liabilities and material hedges
5. Liability structure - Balance sheet items with details of tenor
6. Pledged Collateral - Collateral pledges including, types of collateral, to whom, jurisdiction, currency etc.
7. Off-Balance Sheet - Includes by item, name of counterparty, core business line etc.
8. Payment and Settlement systems – Includes entity details, system type, critical function etc.
9. Information Systems - 2 schedules Includes System, type, description, person responsible, impact of resolution. The second maps system to a critical function
10. Interconnectedness - List of connected legal entities and type of connection
11. Authorities - List of authorities to which legal entities are responsible to, and full contact details
12. Legal impact of Resolution schedule.

For 2016 schedules IV), v) and VI) were replaced by SRB defined schedules for 2016. These 3 schedules have been replaced by 8 new schedules.

1. Liability Structure - Items split between the carrying amount as per that accounting balance sheet, and the outstanding amount which is the valuation relevant in the event of resolution
2. Own funds schedule - Pillar1 and Pillar 2 capital requirements items detailed according to current regime which includes country discretions, and fully fledged  which uses a harmonised rule book
3. Securities - Details of the top 1000 securities issued by the institution
4. Deposits - Details of the top 50 deposits with maturity greater than 1 year, not covered by a deposit guarantee scheme
5. Financial Liabilities - Details of financial liabilities including own funds
6. Derivatives – Top 50 derivative netting sets (before application of collateral)
7. Securities Financing Agreements – Top 50 funding agreement details
8. Intragroup Support Guarantees  - A comprehensive list of all intragroup guarantees

In addition to these schedules the SRB have also set their own Minimum Requirement for Own Funds and Eligible Liabilities (MREL).  This is designed to ensure European institutions have a minimum amount of loss absorbing and recapitalisation capacity available at all times.

The MREL will include regulatory capital and capital available to be drawn down without negatively affecting its creditors.  The MREL will generally be the sum of both pillar 1 and pillar 2 capital requirements, the capital buffers and an allowance for any pillar 2 stress testing requirements. Please see the diagram below.

The SRB will set the MREL at a level generally not less than 8% of total assets. The MREL will be the amount agreed by the firm with its regulator on a case-by-case basis.

The agreement of the MREL is part of the resolution-plan-approval-process. The resolution plan and the MREL will be reviewed annually. The MREL effectively introduces a new capital requirement that firms need to adhere to on a consistent basis.

The first set of MREL are due to be set in the 3^rd and 4^th quarter of 2016. With on-going requirement to be able to report and adhere to the MREL starting as of 2017. The requirement will be that firms must be able to produce MREL reporting on an ad-hoc basis from that date. Submitting of SRB reports for 2015 will occur from May to July for the respective quarters of 2016.

What is required of firms now?

Firms will be required to build and maintain a system and management process to complete the MREL reporting on an ad-hoc basis. This will include the verifiable results of pillar 1, pillar 2 additional requirements including any additional capital charges imposed, details of any additional regulatory capital buffers, the results of the leverage ratio calculation, and any SRB specific imposed capital adjustments. On a detailed level firms are expected to be able to reconcile security positions, deposits and other liabilities on a position basis, and to track the top 50 exposures to each.

There may also be additional reporting required by the national regulatory authorities. Firms can expect to be tested on this ability over time by their auditors and regulators. As a result of this requirement, firms will need a single process that combines pillar 1, pillar2 and resolution plans data.

From 2017 and beyond, there is an increased likelihood that there will be additional regular reporting related to resolution planning beyond and above the annual reporting.

For now, firms need to understand the EBA/SRB reporting and how the changing requirement will affect them. Efforts required to build an enhanced reporting infrastructure given the wide breadth of information required should not be underestimated.  Firms will also need to include resolution metrics as part of their internal regular management reporting. The challenge for firms will be to simultaneously ensure that their information repositories can and will store all the required data and calculation results in an effective format, and to include the resolution planning metrics as part of the business as usual monitoring process.

The SRB and associated reporting represents a new challenge for firms, and increases the demands on already busy resources.  Effective implementation and business benefits can only be gained from having the correct planning and understanding of the requirement together with the right reporting infrastructure. The best outcome will come to those best prepared.