Institutional investor & regulatory reporting for investment funds

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 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 is a harmonized, transparent, and risk-oriented EU-wide insurance regulatory framework aiming to reduce insolvency risk of insurance and reinsurance undertakings.

By providing incentives in form of potential reduced capital requirements, the regulatory authority encourages insurance companies to implement appropriate risk management systems and sound internal controls. These internal risk management procedures are framed by a consistent supervisory system at sectorial level across all member states. The supervisory system under Solvency II involves reporting obligations for (re-)insurances companies in form of Solvency Capital Requirement (SCR) and Quantitative Reporting Templates (QRT) reporting.

In order to comply with the above mentioned reporting obligations and benefit from reduced capital requirements, insurance and reinsurance undertakings need relevant information on the holdings of investment funds they are invested in.

With the objective to facilitate the data exchange between investment funds and insurance companies, various industry associations across different member states agreed on a Standardised EU template (Tripartite template, or TPT). The data provided by way of the Tripartite template is relevant for both, SCR and QRT reporting, however, it only accounts for the part of the (re)insurer’s balance sheet that consists of exposures to the corresponding investment funds.

Still under the Solvency II framework, and for the purpose of enabling a harmonized approach to supervision across the EU, other templates are required “QAD”. The Quarterly Asset Data reporting are based on EIOPA Solvency II DPM and XBRL taxonomy package version 2.4.0, EIOPA filing rules and its underlying regulations.

Our service offering includes the different templates; QAD 230, 232, 233, 234, 236.

Monthly and Quarterly “Directe Rapportage” for Dutch Insurance and pension funds required them to classify their investments in accordance with DNB guidelines (De Nederlandsche Bank). The information disclosed will be used to assess the National balance of payments and several National and European Statistics.

Following the Capital Requirements 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
• Exposures 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.

Following the implementation of IORP II Directive on the activities and supervision of institutions for occupational retirement provision in Europe (Directive (EU) 2016/2341), pension funds will face more data reporting requirements starting from the third quarter of 2019.

The European Central Bank (ECB) and the European Insurance and Occupational Pensions Authority (EIOPA) are working together in their monitoring and analysis of the pension funds sector and issued a common set of standardized pension fund reporting templates, as well as technical instructions for the completion of such templates. The data points and the format of the templates are very close to the Solvency II Quantitative Reporting Template applicable to the insurance industry.

However, the reporting population subject to ECB and EIOPA requirements differs and compared to the statistical reporting requirements for pension funds of the ECB, EIOPA introduces a higher degree of transparency from market participants, requiring a look through approach on investment funds under certain conditions.

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 should not give special focus to the legal structure of the assets but rather to 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.

Additionally, 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 quarterly FTK reporting emphasizes on 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 on 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.

“Vereist eigen Vermogen” is a standard computation model of regulatory capital requirement for Dutch pension funds in accordance with DNB guidelines (De Nederlandsche Bank) including the computation of stress testing over their exposures by class of assets.

The Pension Fund administrator (AFP) required from Chilean pension funds to classify their exposures across their investments through the “Informes Activos Subyacentes AFP” template in accordance with rules and specifications issued by LVA Indices in its quality of information collector on investment funds. The report is required on a quarterly basis.