Risk transparency reporting for funds

Services

Risk transparency regulatory reporting for investment funds and their institutional investors

Basel III, CRR, Solva, VAG, GroMiKV, Solvency II, SCR

Insurance companies, pension funds, and credit institutions are requesting comprehensive risk transparency data on their investment funds from their asset managers, in a timely manner, in order to fulfil their regulatory requirements.

The ability to provide such information (eg., VAG, Solva, GroMiKV, CRR, TPT, FTK, PKG, QMV) within very short deadlines is a factor increasingly considered by institutional investors prior to investment; on the other hand, the inability to provide such reports for existing investors can trigger disinvestments in order to maintain compliance with regulatory limits or mitigate cost in capital.

Your institutional client reporting challenges

Within the Capital Requirements Directive (CRD) framework, European banks and investment firms are required to calculate their capital requirements in relation to the risk profile of their balance sheet exposures, including their investment fund holdings. The implementation of the CRD IV package increased transparency requests from credit institutions toward investment funds in relation to their credit risk weighted exposure (Solva) under the Standardized or Internal Rating Based Approach, currency exposure (FX position ratio), country credit risk exposure, large exposures (GroMiKV) and other elements.

Some European regulators, such as the BaFin in Germany, require a high level of transparency for investment fund exposures held by insurance companies and credit institutions and have established dedicated reporting templates in coordination with the German investment fund association (BVI).

The Solvency II (SII) Directive has also aligned solvency capital requirements (SCR) for insurance companies with the risk profile of their assets and liabilities, with a look-through requirement on their investment fund holdings. The forthcoming implementation of the PRIIPs regulation will increase data exchange requests between asset managers and their insurance company’s investors.

Currently, regulatory requirements for pension funds are established by each national regulator, with a notable increase in transparency requirements for investment funds since 2011: in Austria (QMV or PKG reporting), in Italy (COVIP reporting), in Germany (VAG reporting), in the Netherlands (FTK reporting), and in Sweden (Traffic Light).

Asset managers must take these requirements and their evolution into consideration when developing or marketing new products and be ready to deliver a comprehensive set of data in country-specific reporting templates.

Leveraging on an expertise built since 2006, Deloitte can assist you in meeting these risk transparency requirements by outsourcing the production of requested reports (CRR, CVA-risk, GroMiKV, VAG, Solva, KSA, QMV, PKG, Solvency II, SCR, TPT, Club Ampère), reducing your time to market and enhancing your client satisfaction.

Download our Market Zooms

Dutch FTK reporting for investment funds – Regulation overview & new challenges

Market Zoom - June 2018
PDF - 1mb

Since the introduction of the new FTK (in Dutch “Financieel Toezichtskader” or translated “Financial Assessment Framework”) requirements, Dutch pension funds are obliged to report on investment statements. The greater transparency in reporting requirements for pension funds translates into new challenges for the investment managers. As of today, many different asset managers are still facing the challenge on timely and correctly reporting.

Investment fund transparency reporting for German institutional investors

Market Zoom - October 2016
PDF - 393kb

Recent European regulatory frameworks place more importance on the disclosure of institutions’ assets and true risk profiles in order to increase transparency, including look-through on their holdings in investment funds. These regulations cover credit institutions, insurance companies, and pension
funds.

Dutch FTK reporting for investment funds: a new struggle

Market Zoom - May 2016
PDF - 956kb

Since the introduction of the new FTK (in Dutch “Financieel Toezichtskader” or translated “Financial
Assessment Framework”) requirements on assets and liability reporting, Dutch pension funds are obliged to report on investment statements. The greater transparency in reporting requirements for pension funds means that investment managers have been facing new challenges by the time they needed to report the holdings of the investment fund. As of today, one year later, many different asset managers are still facing the challenge on timely and correctly reporting.

Who needs risk transparency reporting?

Asset Managers

  • Enable their investors to reduce capital requirements and fulfill regulatory disclosure requirements
  • Facilitate institutional due diligence and reduce time to invest
  • Enhance portfolio optimization according to Basel III and Solvency II
  • Provide added value client reporting and client service

Custodians, fund administrators

  • Key competitive advantage to demonstrate capabilities in complex reporting (e.g. GroMiKV, CRR, Solva, Solvency II, SCR, QMV or VAG)
  • Provide added value services
Who needs risk transparency reporting?

Risk transparency reporting services

We collaborate with more than 50 global fund promoters and administrators, representing over 15,000 reports annually for more than 2,000 funds and 5,000 share classes, covering all institutional investor reporting.

Credit Institutions

Following the CRR Regulation, the Solvability ratio is derived by attributing risk weights in accordance with the credit quality of the issuer/issue and by computing credit risk for both on- and off-balance sheet exposures. This ratio is then used by credit institutions to derive their capital requirements for the credit risk associated with the respective investment fund.

Two main computation methods are used in practice: the Credit Risk Standardized Approach (KSA) based on pre-defined risk weights and external credit risk assessments, and the Internal Rating-Based Approach (IRBA) based on internal credit risk assessment.

From this Solva reporting, two additional pieces of information are derived:

  • The currency exposure (FX position ratio or Kreditrisiko-Standardansatz KSA), which indicates the credit institutions’ currency exposure through its investments.
  • The country credit risk exposure (or KSA Risikogewichte nach Ländern zur Ermittlung des antizyklischen Puffers), which indicates the credit institutions’ credit exposure per country. This additional report allows the credit institution to calculate their own fund requirement related to the counter-cyclical capital buffer.

Deloitte offers assistance in the provision of required data related to the calculation of the Basel III capital requirement, based on the CAR Directive and on the French regulation. Under the French approach, the risk weights applied in the computation of capital requirements depends on the type of transaction, type of issuer, and credit qualities of the issuers. The French reporting does not require to calculate the solvency ratio (like German or Austrian reporting) but only to map each exposure according to the mapping provided by clients.

ECD-CVA (Equity Capital Deductions and Counterparty Valuation Adjustments) reporting allows credit institutions to estimate two additional capital adequacy requirements introduced by the EU Capital Requirements Regulation for:

  • Direct and indirect exposures to financial sector entities: ECD
  • Exposure to OTC counterparty valuation risk: CVA-risk

The ECD computes the percentage of the assets of an investment fund invested directly or indirectly in equity or equity-like securities issued by financial sector entities. The objective is to limit and control cross-investments between credit institutions and decrease systemic risk.

The CVA risk charge seeks to capitalize against the volatility of the credit risk component of unilateral CVA (i.e., changes in the CVA due to changes in the counterparty’s credit quality).

Credit institutions investing in investment funds need to ensure that aggregated underlying exposures (at entity and group levels) do not reach a certain threshold for the fund to be considered “granular”; i.e., the fund should not be taken into account when assessing large exposures. If exposures are above threshold, then they need to be combined with all other assets of the credit institutions to calculate related capital requirements.

The GroMiKV (Großkredit und Millionenkreditverordnung) reporting supplements the German Banking Act (Kreditwesengesetz or KWG) and discloses investment funds’ large exposures in order for credit institutions to comply with their additional capital requirements and reporting for large exposures.

Credit institutions are required to calculate the Liquidity Coverage Ratio and to assess the liquidity of their assets. Institutional investors may rely on the asset management company to report a breakdown of assets based on liquidity.

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Pension Funds

Austrian pension funds are required to monitor the economic exposure of their portfolio.

The financial crisis has highlighted that it is not possible to give a true and fair picture of the asset and risk situation of an investment without taking the actual risk level of investments into account. This means that when performing a look-through, one needs to pay attention not that much on the legal structure of the assets but rather on their economic effect. The FMA (Financial Market Authority) has issued a list of assets classes into which an investment fund’s holdings need to be split along with their respective market or commitment values.

Consequently, PKG reporting provides a breakdown of the economic exposures of the target portfolio, in line with the requirements set down in the Pension Fund Act or Pensionskassengesetz (PKG) and related texts in the Austrian regulation, as well as the guidelines issued by the European supervisory bodies for investment funds.

Aditionally, the FMA is requesting reporting of the quarterly financial statements according to a specific layout (Quartalsmeldeverordnung or QMV), which pension funds need to fill in as part of the Austrian Pension Fund Act.

The FTK is the part of the Pensions Act in the Netherlands that lays down the statutory financial requirements for pension funds. It builds on the principles of market valuation, risk-based requirements, and financial transparency. FTK aims to improve the insight of both the supervisory authority and the supervised institution, focusing on the institution’s financial position, as well as its possible short and medium term developments. The determination of the required capital is risk-based, meaning the requirement varies depending on the degree of risk exposure.

All pension funds are required to report statements on the financial undertakings to the Dutch regulator, however the relevant set of statements can differ from fund to fund. The statements cover various areas including annual statements about organization, expected and required premium calculation, recovery plan reporting, a pension fund feasibility test, coverage ratio, reporting of the investments, and the future cash flow distribution.

The FTK Quarterly States emphasizes a detailed reporting of the fund’s investments and requires a look-through on investment funds. Dutch pension funds will likely request from investment funds managers to perform a look-through on their own and to provide two types of reports:

  • Cash flows report: contains the yearly discounted cash flows for the investment funds
  • K-reports: classification mapping, exposure conversion of derivatives, currency exposure, credit and interest rate exposure, sensitivity analysis and stress scenarios applied on derivatives. As of Q1 2018, reports also include liquidity disclosure, both current and stressed. All calculations are in line with the Dutch regulatory standard, aligned with DNB FTK Statements Explanatory Notes.

Italian pension funds are required to monitor the economic exposure of their portfolio in line with rules on the investment criteria and limits of the assets of the pension funds. Required data concerns portfolio positions, activities, financial management, derivative instruments, funds of funds, and compliance. The report is required annually and quarterly.

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Insurance Companies

VAG reporting, which refers to Solvency I, covers pension funds and insurance companies. The stated VAG regulation is ensued from the German Insurance Supervision Act. In order to be compliant with the German financial supervisory authority (BaFin) requirements, the fund will have to provide its insurance undertakings clients with a detailed holding breakdown. The objective of this reporting is to monitor the insurance undertakings’ investment in the fund and ensure qualified investments.

Under the VAG requirements, the guarantee assets and the other restricted assets must be invested in a way that ensures maximum security and profitability, taking into account the type of insurance business conducted and the structure of the undertaking, while safeguarding the insurance undertaking’s liquidity at all times and maintaining an appropriate mix and diversification.

A dedicated VAG reporting Excel template and guidelines have been established by the German Investment Funds Association (BVI). This reporting is a NAV breakdown of the portfolio into specific VAG asset classifications. This output mainly highlights the asset type, the rating, and the market place geographical localization for the holdings of the investment fund.

Moreover, the value of market risk potential has to be indicated, measured by either the Commitment or the Value-at-Risk approach.

Solvency II rules introduce a harmonized, transparent, and risk-oriented EU-wide insurance regulatory regime including Solvency Capital Requirement (SCR) and Quantitative Reporting Templates (QRT) requirements.

The framework is intended to reduce the risk of insolvency of insurance and reinsurance undertakings by providing them with incentives, potentially in the form of reduced capital requirements, to implement appropriate risk management systems and sound internal controls, while delivering a supervisory system that is consistent across all member states at sectorial level.

In order to support insurance companies in their SCR calculation and QRT delivery, various industry associations across different member states agreed on a Standardized EU template (Tripartite template, or TPT).

The TPT supports investment management companies by providing a standardized way to exchange data between them and insurers. TPT fields are both relevant for SCR calculation and QRT delivery but they only account for the part of the (re)insurer’s balance sheet that consists of exposures to the corresponding investment funds.

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Our risk reporting platform is a proprietary solution fully integrated with our Solvency II reporting services, our KIID/KID & SRRI/SRI solution, our PRIIPs services, our AIFMD reporting services, and our quantitative risk reporting services, enabling us to leverage from significant economies of scale when working in addition to one of these services. Our platform is also connected to our pan-European tax reporting services, our fund registration services, our fund reporting services, and our quantitative cross-valuation services as part of our global outsourced reporting services.

Get in touch

Xavier Zaegel, FRM

Xavier Zaegel, FRM

Partner | Capital Markets/Financial Risk Leader

Xavier is a partner within the advisory and consulting department and is the head of the Capital Markets practice in Luxembourg. As a market and credit risk specialist, he has been leading various ass... More

Sylvain Crépin, FRM

Sylvain Crépin, FRM

Partner | Capital Markets/Financial Risk

Sylvain Crepin is Partner within Deloitte’s Financial Risk Management Department. He has specialised over the last 8 years in risk management advisory and quantitative risk solutions for investment fu... More

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