Regulations Defining New Liquidity Management Frameworks

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Three specific regulations have recently been brought forth that are currently influencing and helping to define new liquidity management frameworks. These include the US Federal Reserve’s recovery and resolution planning (RRP) requirements, qualified financial contract (QFC) specifications in the US, and the European Union’s Securities Financing Transactions Regulation (SFTR). Across the industry, executives have identified the importance for a holistic collateral architecture framework and deemed it as the ideal solution for oversight of comprehensive liquidity management strategies.

RRP

The evolution of living will reporting was derived from section 165(d) of the Dodd Frank Wall Street Reform Act. This legislation requires designated bank holding companies and non-bank financial companies to submit annual resolution plans to the Federal Reserve and Federal Deposit Insurance Corporation detailing their resolution plan in the event of financial stress or company failure. The largest and most complex banking organizations are required to submit this reporting by July 1 and other mandated financial institutions must submit their resolution planning by December 31.

Within section 165(d) regarding resolution plan reporting there are a few key areas that directly address the matters of liquidity management. Specifically, financial companies are required to track and report on firm and counterparty collateral by jurisdiction. Financial companies must closely track and report on the sources and uses of collateral at a security level across all legal entities. Companies must also implement processes for conducting scenario planning and reporting to simulate potential market stresses. This planning is required to broadly detail the estimated impact of various financial stress scenarios on collateral and liquidity positions. To comply with these newly defined processes and requirements, reporting and integrated communication with liquidity management groups is essential for accurate reporting.

Liquidity Management Reporting for QFCs

A second aspect of added reporting regarding liquidity management in the US includes documentation on QFCs. These rules were defined by the Federal Deposit Insurance Corporation and published on July 31, 2017 with an effective date of October 1, 2017. They require designated financial companies engaging in qualified financial contracts to track and report daily information on their collateral and liquidity positions specifically including position level information as well as counterparty-level exposures, legal agreements and detailed collateral information. These new requirements also add emphasis on the importance of liquidity management planning and reporting for financial companies and require efficient communication with liquidity management groups for reporting.

SFTR

In Europe the SFTR is another legislation that adds significantly to the required financial reporting of liquidity management processes and controls. The legislation seeks to increase the transparency of securities finance in European markets. It requires companies to comprehensively report their securities financing transaction activities to an approved European Union trade repository. SFTR is currently in the final phases of legislation and is expected to become a mandatory obligation in the first quarter of 2019.

SFTR will affect all firms engaging in securities finance. It is also expected to have a specific impact on undertakings for collective investment in transferable securities (UCITS) funds and alternative investment fund manager (AIFM) funds which actively integrate securities lending in their overall investment strategies.

Holistic Collateral and Liquidity Management Systems

Overall, American and European industry experts have deemed a holistic collateral and liquidity management system as the ideal solution for managing the evolving regulations in collateral and liquidity management. To do this, executives believe it is important to integrate front office management more comprehensively with middle and back office processes. The final result requires, integrated technology strategies and system architectures for more holistic interaction. With collateral, liquidity and securities finance activities all being more closely regulated, holistic architecture systems can help companies comply with evolving regulations while also more strictly managing and reducing costs. As markets evolve it will be essential for compliance and operational areas to streamline and integrate their communications and reporting in order to meet the demands of evolving regulations that are focusing on resolution planning and increased reporting of liquidity management, collateral and securities finance transactions.

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