Whether your firm has adopted one of the new approaches to credit risk introduced by the CRD on 1 January 2007, or it is taking advantage of the transitional provisions, you will have noticed some changes in the way you report to the FSA.
In addition to submitting their usual monthly or quarterly return, which will have been grandfathered from their previous regulator, firms are now required to submit data item FSA009: ‘Key data for 2007’.
Data items are the FSA’s new term for regulatory reporting forms. FSA009 contains key data required to calculate a firm’s capital adequacy under the new rules, as existing reporting formats do not allow for this.
It has a number of initial questions which allows the FSA to identify the categorisation and type of firm that is reporting, in addition to establishing whether the firm is reporting on an individual or consolidated basis. It also requires the firm to confirm whether or not it has adopted a new approach to credit risk, before providing a series of boxes in which the user is required to insert the firm’s capital resources – calculated in accordance with the relevant sections of GENPRU 2.2.
FSA009 then requires the user to input the variable risk requirements using either the new rules introduced by the CRD or the transitional provisions which incorporate aspects of the pre 1 January 2007 rules and those introduced by the CRD. This is where the form can appear complicated, although there are separate guidance notes available on the FSA website.
The following areas have been highlighted during our experience.
- Illiquid assets could have previously been deducted from a firm’s financial resources. Under the new rules, firms can calculate their financial resources by either deducting material holdings or illiquid assets. If the material holding deduction is followed (this is the default position), then on data item FSA009, the liquidity adjustments on both fixed and current assets are now included in box 26 ‘Credit risk under existing rules’.
- Under the transitional provisions, full scope firms will continue to apply their expenditure base requirement (EBR) rather than an operational risk capital requirement. However, as EBR does not exist under the CRD, the previously calculated EBR should be included in box 28 ‘Other capital requirements’.
- Under the previous rules, the other asset requirement (OAR) for investment management firms represented a measure of credit risk attached to such balances. Therefore, the OAR calculation should be incorporated within box 26 ‘Credit risk under existing rules’.
A point to note is that as the financial resources and the financial resources requirement on the legacy form and data item FSA009 will have been calculated using different bases, the level of surplus or deficit reported on each is likely to be different.
An example of where this may arise is in relation to the illiquid asset point highlighted above. However, it is the deficit or surplus on FSA009 that the FSA will take as the firm’s financial resources position.
Another new data item that has been introduced is FSA028. It contains similar information to FSA009, but is specifically for firms that report on a consolidated basis and have a non-EEA sub group within their consolidation group. The form allows the FSA to gather capital adequacy and large exposures information on group entities outside of the EEA.
Both of these forms can be found in the Integrated Regulatory Reporting (IRR) section of the FSA’s website: www.fsa.gov. uk/pages/Doing/Regulated/Returns/ IRR/index.shtml
The data items are in Excel format and should be downloaded from the FSA’s website, completed offline and submitted electronically using the Early Reporting System (ERS). In January 2007, firms affected by the CRD should have received an email from the FSA informing them of their reporting requirements, in addition to providing a user name and password to access the ERS.
In the transitional period both the data items and current returns should be submitted in accordance with existing submission deadlines.
Finally, if firms are reporting on a consolidated basis, they will need to submit two copies of FSA009 at the consolidated reporting deadline, one on an individual basis and another on a consolidated basis.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.