Moodys Analytics Fermat User Group Conference

Cash Flows Computation for IFRS and Liquidity

Gary Loong, Systems Solutions Specialist

26th May 2011

Agenda
1. Regulators requirement Liquidity Risk IFRS 2. Fermat Cash Flow Computation Framework Data management Liquidity Risk IFRS 3. How can you benefit as a current user?

Regulators Requirement
Liquidity Risk Management

Regulatory regime discussions oscillate between Quantitative and Qualitative regime

US Banking Regulators Interagency Policy Statement March 2010
Principles for

Basel Committee Consultative Paper December 2009

Two key standards

UK FSA Policy Statement October 2009

Detailed guidance

Governance Internal controls and IA Policies and procedures Risk tolerance and limits Stress testing Contingency Funding Plan

Liquidity Coverage Ratio Net Stable Funding Ratio Funding mismatch, concentrations Available unencumbered assets Market-related monitoring tools

Systems and control Individual Liquidity Adequacy Standards Liquidity reporting Stress testing and scenarios Liquid Assets Buffer

Monitoring metrics

New regulatory reporting requirements

Data item
FSA047: Daily flows

Description
Collects daily flows out to 3 months to analyze survival periods and spot potential liquidity squeezes early

Frequency
BAU: Weekly (Daily if liquidity stress) Respectively Monthly/Weekly for Simplified ILAS As above Monthly Monthly Weekly Monthly for Simplified ILAS Quarterly Quarterly Annual

FSA048: Enhanced Mismatch Report (EMR) FSA050: Liquidity Buffer FSA051: Funding concentration FSA052: Wholesale liabilities

Captures the ILAS risk drivers and contractual flows across the full maturity spectrum Provides more granular analysis of firms marketable assets holding Captures firms borrowings from unsecured wholesale funders, by counterparty class Collects daily transaction prices and transacted volumes for wholesale unsecured liabilities Captures firms retail and corporate funding profiles and the stickiness of various retail deposits Provides an analysis of FX exposures on firms balance sheets Allows FSA to monitor a non-ILAS BIPRU firms compliance with the new requirements

FSA053: Retail, SME and Large Enterprises and Corporate funding FSA054: Currency analysis FSA055: Systems and Controls Questionnaire

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Basel III Required Ratios

A leverage ratio as a non risk-based metric to avoid excessive leverage (off balance sheet exposures using Basel regulatory CCFs and netting rules) Leverage ratio = Tier 1 . balance sheet and off balance sheet exposures

3%

ROLL OUT: Tested 2013 to 2017 Binding in 2018

Liquidity risk: a short term ratio (LCR) with a 30 days time horizon and a more long term one (NSFR) with a 1 year time horizon relying on regulatory factors and stress test scenarios

Liquidity Coverage Ratio = Stock of liquid high quality assets Net cash outflow over 30 days

100%

ROLL OUT: Tested 2011 to 2014 Binding 2015 ROLL OUT: Tested 2012 to 2017 Binding 2018
From Basel II to Basel III

Net Stable Funding Ratio = Available stable funding Required stable funding

100%

Monitor short-term and mid to long-term funding risk

Short Term Ensures that the bank can be financed safely via secured short term funding. Daily or weekly Medium Term Enables the bank to forecast liquidity requirements to sustain its activity / strategy for the coming months / years. Monthly 4 scenarios: - on going, - systemic crisis, - specific (downgrade), - specific + systemic crisis Maturities Monitored are 1M, 3M, 6M, 12M, 18M, 24M and 36M (not limited)

Scope

Calculation Frequency

Stress testing scenario

Time Horizon

Daily time bands up to 1M/3M

Perimeter Approach

Consolidated/Entity level Static or semi-dynamic approach Dynamic approach

Regulators Requirement
IFRS

IFRS

of Financial Assets and Financial Liabilities

Recognition

Hedge

Impairment

of

Accounting

Assets

-Classification

and measurement of financial instruments

Fair value - Amortized cost - Effective Interest Rate

Micro / Portfolio - Effectiveness Ratio Calculation - Embedded derivatives

Individual /Collective Assessment - Different provision calculation methods

Fermat Cash Flow Computation Framework Data Management

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FERMAT Data Mart Platform Overview

Fermat provides a complete data loading platform. Fermat can also be interfaced using ETL tools Fermat supports multi-source data feeds, synchronized or not

Fermat provides data quality checking tools, dedicated reports and recycling screens A single Fermat instance addresses consolidated and local needs

Fermat architecture performance enables to handle large historically amounts of Fermat architecture enables concurrent data access and processing Each users activity is in a dedicated workspace. Sessions are fully secured (authentication, data access)
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detailed data

Data Management Flexible and Comprehensive

MA Data Mart
Upstream
Front Office Murex Back Office

Workspace #1
Referential Settings Calculation Parameters

Results #1
Liquidity GAP Rate GAP Earning

Result Configuration

Sensitivities FTP

Workspace #2
Referential Settings Calculation Parameters
Liquidity GAP Stress Testing

Source Systems
Calypso Text Excel

Result Configuration

Results #2

2009-01-03 2009-01-02 2009-01-01

Workspace #3
Referential Settings Calculation Parameters
EAR Prepayment Rate Shifts

Result Configuration

Results #3

Workspace = Country / Branch / Department

Comprehensive Data Fields based by Financial Products

Portfolio/Deal

characteristics :

Portfolio/Deal description Counterparty information Product type information (ex. Loans, Deposits or etc)

Interest

Payment Characteristics:

Users configurable, no fixed values Cash flows modeled by users not by the system

Principal

Payment Characteristics

User configurable Multi amortization methods (Ex. Linear, Bullet, Constant)

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Fermat User Interface

Flexibility in managing, online tutorial availability

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Fermat contains more than 4,000 quality checks to validate data uploaded or manually captured in the Datamart

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Fermat delivers Error Reports and Data Recycling screens

List

of product having bad data quality

Selected This

deal detail.

editable windows allows data recycling. Fields related to selected error are highlighted in red

List of rules violated on the selected deal

Error

message contains both functional and technical message

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Fermat Cash Flow Computation Framework Liquidity Risk

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Extinction sets
Extinction sets : to model funding risk for instruments modeled in LOANDEPO table for a given scenario set.
Loan Accelerated extinction Delayed extinction Prepayments Delayed payments/roll-over Deposit Early redemption Stickiness/roll-over

A new entry for extinction in the client options set menu. The mechanic of adding a new extinction set is standard. They are similar of adding a prepayment set.

Accelerated Extinction sets

Accelerated extinction set Accelerated extinction sets are used to model a scenario in which money is either withdrawn from a deposit in an accelerated way or loans are reimbursed faster than expected. In both cases the loan or deposit is terminated earlier than expected.

Accelerated Extinction sets

Loan_1 Loan_2 Loan_3 Loan_4 Loan_5 Total M1 200 200 200 200 200 1,000 M2 600 M3 M4 200 200 200 200 200 1,000 800 M5 M6 M7 200 200 200 200 200 1,000 800 M8 M9 M10 200 200 200 200 200 800 M11 M12 Total 800 800 800 800 800 4,000

600 -

Requirement: Fermat:

20% of Loan early terminate next month 100% of Balance

100% of Loan early terminate next month 20% of Balance

M2 120 120 120 120 120 600 M3 M4 160 160 160 160 160 800 M5 M6 M7 160 160 160 160 160 800 M8 M9 M10 160 160 160 160 160 800 M11 M12 Total 800 800 800 800 800 4,000

Loan_1 Loan_2 Loan_3 Loan_4 Loan_5 Total

M1 200 200 200 200 200 1,000

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Accelerated Extinction sets

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Delayed Extinction sets

You can use delayed extinction sets to model the following The delayed withdrawal of money from maturing deposits. The delayed reimbursement of loans. The rollover rate of maturing deposits.

Delayed
Loan_1 Loan_2 Loan_3 Loan_4 Loan_5 Total M1 200 200 200 200 200 1,000 800 M2 M3

Extinction sets: Delayed Payment

M5 M6 M7 200 200 200 200 200 1,000 800 M8 M9 M10 200 200 200 200 200 800 M11 M12 Total 800 800 800 800 800 4,000

200 200

M4 200 200 200 200 200 1,000 800

200 200

200 200

200 200

Requirement: Fermat:

20% of Loan delayed 1 month payment 100% of Balance

100% of Loan delayed 1 month payment 20% of Balance

M3 M4 160 160 160 160 160 800 M5 40 40 40 40 40 200 M6 M7 160 160 160 160 160 800 M8 40 40 40 40 40 200 M9 M10 160 160 160 160 160 800 M11 40 40 40 40 40 200 M12 Total 800 800 800 800 800 4,000

Loan_1 Loan_2 Loan_3 Loan_4 Loan_5 Total

M1 160 160 160 160 160 800

M2 40 40 40 40 40 200

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Delayed

Extinction sets: Delayed Payment

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Delayed
M1 Deoposit_1 Deoposit_2 Deoposit_3 Deoposit_4 Deoposit_5 Total M2 M3 M4

Extinction sets: Rollover

M6 M7 M8 M9 M10 1,000 1,000 1,000 1,000 4,000 Total 1,000 1,000 1,000 1,000 1,000 5,000

M5 1,000 1,000 1,000 1,000 1,000 5,000 1,000

Requirement: Fermat:

80% of Deposit rollover 100% of Balance

100% of Deposit rollover 80% of Balance

M5 200 200 200 200 200 1,000 M6 M7 M8 M9 M10 800 800 800 800 800 4,000 Total 1,000 1,000 1,000 1,000 1,000 5,000

M1 Deoposit_1 Deoposit_2 Deoposit_3 Deoposit_4 Deoposit_5 Total

M2

M3

M4

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Delayed

Extinction sets: Rollover

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Sell-off
A bank may expect to sell outright or repo assets in order to reduce the short notice borrowing requirements.

A window is available to define sell-off sets by keys and by additional columns

Sell-off profile modeled through a time series; securities in a repo-style agreement are not eligible for outright sales.

Sell-off cash flow

The Sell-off cash-flows are generated according to the following formula:

CF (t ) = Round (Nb of unencumber ed securities S t % price (1 h))

The contractual cash-flows are computed on the basis of the available securities after outright sales. Sell-off flows

Reporting

Maturity

date

date

Haircut
Haircuts represent the decrease in market value of a security. Haircuts can be defined in the following window:

Liquidity buffer is a key component

The liquidity buffer represents a reserve of highly liquid unencumbered assets that the bank can sell outright or repo in case of liquidity crisis
Assets Long term assets Loans Marketable securities Treasury assets Liabilities 130 Own funds Long term debt 800 Sight deposits 370 Term Deposits Market liabilities 200 Treasury liabilities 1500 150 135 575 100 195 345 1500

Reserve Marketable & Unencumbered securities Bonds Aaa Securities Aa3

Haircuts 370 320 50

10% 25%

100 80 60 40 20 0 -20 -40 -60 -80 -100 -120 1D 1W 1M 1Q 1Y 2Y 50Y Assets Liabilities Liquidity Gap (cumulative) Liquidity Gap (period) Buffer

Survival period
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Liquidity risk indicators

Liquidity gap and liquidity buffer
Can be generated daily Offers cash-flows or cumulated view With user-defined time-bands

Concentration analysis
Analysis of the diversification of funding sources Top 20 depositors/lenders including modelling of the client & bank group structure Monitoring of these indicators can be performed per group, legal entity, business line or currency.

Liquidity ratios
Balance-sheet or cash-flow ratios Short term assets / Short term liabilities

Fermat Cash Flow Computation Framework

IFRS Fair Value, Amortized Cost, Effective Interest Rates

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Fair Value
Pricing Models
FINCAD library based pricing and discounted cash flow based pricing

Match Term Pricing All other instruments are evaluated at fair value using the market rate of a similar terms

Discount Curve reflects

Market Rate Rating Based Credit Spreads
DF(t) 1
t

[1+ ZC (t) + CS (Class)]

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Fair Value Pricing Methods

Instrument
Security position on Bonds security position on Equity Repo Loandepo Facility Interest rate swap Cross interest rate swap Swaptions FRA Forex Forex options Future Cap/Floor Options

Pricing model
Quoted price Discounted cash flows Depending on agreement Discounted cash flows Value must be imported Discounted cash flows Discounted cash flows Model Discounted cash flows Discounted cash flows Garman Kholhagen model Discounted cash flows Black model Black & Scholes generalized model

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Effective Interest Rates

Effective Interest Rate calculation For Held-to-maturity contracts and Originated-loans-&receivables > Assessed on expected streams of cash receipts > The contractual cash flows includes fees

EIR Calculation Daily EIR Annual EIR

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Amortized Cost
Amortized Cost Calculation
> > >

For Held-to-maturity contracts and Originated-loans-&-receivables Sum of expected streams of cash receipts Contractual cash flows and prepayments probabilities Discounted with the effective interest rate

Amortized cost Calculation

Dirty AC

Clean AC

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Events Management
Event Management > EIR Revaluation
Change on the client interest rate New fee that should be integrated to effective income Change in the contractual or Expected maturity of the

contract

>

P&L Posting
Partial Prepayment Reversal from Impairment status

RD1

Event

date

RD2

Contract event LOANDEPO only (fixed and floating rate)

EIR impact

P&L

EIR reassessment

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Prepayment models
1. Maturity prepayment percentage is X% until RD + Maturity 2. Rate differential Deals rate - Replacement rate Replacement rate = future market rate (for deals residual maturity) + future client margin (for deals residual maturity) Delay effect: Market Rate is taken N month before cash flow date 3. Remaining Life Real Policy: Remaining Life =
Remaining Deal

Maturity after cash flow Original Maturity

Nominal Weighted: Remaining Life is a duration 4. Burn out In years: Cash flow date Issue Date

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Statistical Prepayment Cash Flows

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Fermat Cash Flow Computation Framework

IFRS Impairments

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Flexible Calculation Methodologies

Method Status

Collective Assessment

Individual Assessment Expected loss

Performing

Expected loss

Default point

Defaulted

Recovery curve

Recovery cash flows

Expected Loss Method

Provision

Method Status
Performing Defaulted

Collective Assessment

Individual Assessment

EL

EL

Provisions = EaD PDLIP LGDeff

Where :

PDLIP

= one year Basel II PD converted into a n months PD is calculated based on CRM recovered amount

LGDeff

LGDeff =

( EaD Coll1 Coll2 ... Colln ) LGDx EaD

1 (1 + EY )
time to recovery 12

Colln = nominal _ amount _ collateral RRCn

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Default Point Method

DP Dafault ( Defaul in Point )

Method Status
Performing Defaulted

Collective Assessment

Individual Assessment

Point the deal

EL

EL/DP

time [ date ] t today AC

today

1 t CF
1

2 t CF 2

i t CFi t
DP

C1 t CF
C1

C2 C2

Cn t CF
Cn

CF

Provision

Provisions = EaD CFND + CFD

: Discounted Cash-flows according to payment CFND schedule discounted with the EY of the contract CFD: Discounted Collateral cash-flows discounted with
the EY of the contract

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Recovery Cash Flows

Status
Performing

Method

Collective Assessment

Individual Assessment

EL

EL/DP RCF

Reporting date Recovery cash flows default

Defaulted

Provision

CFrecovery Provisions = EaD (1 + EY ) ti

Where

are the estimated recovery cashflows by the bank for an individual impaired transaction

CFrecovery

Cash Flows discounted at effective yield or client

interest rate in case of non maturing transaction
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Recovery Curve Method

Provision

Method Status
Performing

Collective Assessment

Individual Assessment

EL RC

EL/DP RCF

EaD Provisions = EaD (1 P) F

Defaulted

100%

F= Still to recover (20%) P= Recovered (80%)

Default

90 days default

Today

After

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Fermat Cash Flow Computation Framework

IFRS Hedging

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Micro / Portfolio Hedge folders

Pre defined folder documentation Folder

Hedged contracts

Hedging contracts

Effectiveness results - Retrospective periodic - Retrospective cumulative - Prospective

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Hedge Accounting: Status flow

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Effectiveness Testing Prospective

Dollar Offset Cash Flow Hedge

Dollar Offset Fair Value Hedge

Hypothetical derivative is built to have CF that perfectly offset the hedged instruments CF. Hypothetical 1 (Delta FVhedging/Delta FVhypo) If constant non-hedged factor(CNHF) selected then Delta FV = FVscenario1(RDcurr)-FVscenario0(RDincept) If CNHF is not selected then Delta FV = FVscenario0(RDcurr)-FVscenario0(Rdincept)

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Effectiveness Testing Prospective

Linear Regression Method: Regression line is drawn in a diagram where abscissa axis : b FV hedged part

where: : net present value at current reporting with current market conditions : net present value at current reporting date with IMC for risk not covered

ordinate axis : - b FV hedging part

where: : net present value at current reporting with current market conditions : net present value at current reporting date with IMC for risk not covered

Effectiveness criterias are:

Slope of plotted regression line within confidence levels(ie 0.8 and 1.25) R2 of plot morethan 0.96 F_stat must be significant

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Effectiveness Testing Retrospective

Dollar Offset Cash Flow Hedge Note: Hypothetical and Linear regression is similar to Prospective Testing

Dollar Offset Fair Value Hedge

Risk

factors : Exchange risk, interest rate risk, credit rating

CNHF Not selected

Constant Non Hedge Factor SELECTED

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Effectiveness testing - Homogeneity

Full Test Method

The homogeneity ratio of every deal is computed thanks to the Dollar offset method:

The relative change of every deal can be checked with the relative change of the portfolio.

Ratio to be confirmed by bank and defined in PROCEDURE HOMOG_CONSISTENT

Deals that did not pass the test of homogeneity must not proceed

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What can you benefit as a current user?

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Modular base
RRT Regulatory Reporting Tool MART MA Reporting Tool

External Reporting Tool

Excel, Business Objects etc

Results

Credit Risk

Calculation Engine

Market Risk

Calculation Engine

Liquidity

Calculation Engine

IFRS

Calculation Engine

Parameters

Parameters

Parameters

Parameters

Loans & Deposits

Derivatives

Securities

ADM / Reference

Loans

Account

Facility

Swap

FRA

Future

Option

Bond

Equity

ADM

Currency

Rates

FERMAT Data Mart Oracle Platform

Leverage on Basel II Implementation

On the same Oracle instance in place for Fermat Basel II Addition of Dedicated Oracle Schema for IFRS reporting

MA Data Mart

Imported data
Data import interface design is 2 parts
EIR & Amortized Cost calculation + Hedge Accounting:
Transactions Counterparties Credit Risk Data

Transactions Market Rate Data

Market Rate, Imported Cash flows IAS impairment: same ETL interfaces design as currently implemented for Basel II

Extra data Required

IAS impairment purpose: Imported CFs, Internal PDs & LGD (if necessary)
Basel Datasets

Cash Flow Modeling

Configuration
Configuration of the IFRS environment based on Basel II models
BII Engine IAS Engine Liquidity Engine Basel II internal models can be reused Cash flow generation models needs to be implemented Adaptation of Rate data, and Schedule characteristics Addition of Prepayment statistics models

BII Context IAS Context Liquidity Context

Additional Configurations specific to IFRS implementation

Micro and Macro Hedge portfolio description Impairment decision tree for establishing Objective evidence of Impairment GL posting valuation formula for IFRS

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Our Basel customers grow with us

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moodys.com
Rick Ho Taiwan Sales Representative rick.ho@moodys.com Xavier Pernot ALM Product Management Team xavier.pernot@moodys.com Gary Loong Systems Solutions Specialist gary.loong@moodys.com

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