January 2019

EY regulatory reporting brief EY regulatory reporting briefs explore Federal Reserve regulatory reporting, highlighting report requirements, recent news and updates and identifying common reporting challenges.

Report summary What is the FR 2510, and why does it matter? In response to the 2008 financial crisis, the Financial Stability Board (FSB) developed a list of G-SIBs that are subject to stricter regulatory requirements and monitoring. As part of this monitoring effort, the FRB has shared several iterations of the proposed FR 2510, including versions in 2012, 2013, 2014 and 2015. The 2018 iteration is the most simplified and incorporates previous feedback from US G-SIBs. The FR 2510 report is part of an internationally agreed-upon plan to improve monitoring and analysis of related exposures and funding dependencies for G-SIBs in all jurisdictions. The report is mandated by the FRB and only applies to G-SIBs in the United States (US G-SIBs); however, the template is consistent with data collected for G-SIBs internationally. Data from the FR 2510 feeds into the International Data Hub (IDH) and is combined with data from other reporters to create reports revealing risks related to common counterparties, foreign exchange swings and funding management.

The FR 2510 collects granular information related to the consolidated balance sheet, financial derivative positions and foreign exchange positions. The report essentially provides a deeper dive into data presented in three existing reports: the Consolidated Financial Statements for Holding Companies (FR Y-9C), the Consolidated Country Exposure Report of the Federal Financial Institutions Examination Council (FFIEC 009) and the Semiannual Report of Derivatives Activity (FR 2436). The FR 2510 consolidated balance sheet data includes breakdowns by instrument, currency, maturity and sector, which builds off of data in the FR Y-9C. Leveraging the FFIEC 009, the report provides detailed positions for the top 35 countries of exposure, on an immediate-counterparty basis, broken out by instrument and counterparty sector. The report also collects financial derivative instruments by valuation and foreign exchange derivatives by currency, which overlaps with the FR 2436. The FR 2510 affords regulators and supervisors a more thorough balance sheet analysis and provides a more comprehensive picture of funding dependencies and common exposures between G-SIBs. In addition to valuable systemic information, it helps firms to improve their ability to aggregate and report exposure data in an accurate, efficient and effective way.

FR 2510 Report of Institution-to-Aggregate Granular Data on Assets and Liabilities on an Immediate Counterparty Basis Background and key considerations

In focus: ► On August 22, 2018, the Federal Reserve Board (FRB) published in the Federal Register Notice (FRN) the draft reporting forms, draft

reporting instructions and draft Office of Management and Budget (OMB) supporting statement for the FR 2510. ► On August 27, 2018, the FRB published in the FRN a request for comment on the FR 2510; the request for comment closed on October 26,

2018; two comments were received, and the information is incorporated below.

Filing criteria

Firms in the US that are designated as global systemically important banks (US G-SIBs)

Filing criteria

The FR 2510 is to be filed quarterly, as of the last calendar day of the quarter (March, June, September and December). The quarterly filings are due 50 days (65 days for the fourth quarter) after the “as-of” date. The first filing is expected as of the reporting period ending on March 31, 2019.

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1 Banking Organization Systemic Risk Report

Report highlights The FR 2510 provides valuable information across US G-SIBs. Key highlights related to the report and its significance are as follows: ► Report simplification: The FRB has shared several drafts of the

FR 2510 and simplified the report based on feedback obtained from US G-SIBs.

► Overlap with existing reports: The FR 2510 has been designed to overlap and build off of existing US regulatory reports, including the FR Y-9C, FFIEC 009, FR 2436 and FR Y-15.1 The purpose is to minimize burden on reporters and ensure analytical consistency between reports. For additional information, see the “Relationships with other reports” section below.

► Consolidation criteria: Data in the FR 2510 should be reported on a fully consolidated basis, aligned with instructions for the FR Y-9C.

► Timing of report filing: The FR 2510 must be filed 50 days after the last calendar day each quarter and 65 days after the year-end. During this same time, G-SIBs have a high volume of filings, including the FR Y-9C (40 days after quarter-end), FFIEC 009 (45 calendar days after quarter-end) and FR Y-15 (50 days after quarter-end). It is critical to note that there will be a high volume of filings during this time throughout the year.

► Supervisory usefulness: The FRB and other supervisors will have readily available data, including comparative reports across G-SIBs, showing currency and maturity mismatches; G-SIBs’ funding needs; and an assessment of concentrations across instruments, countries and sectors.

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Overview of schedules The FR 2510 consists of three schedules. Below is an overview of each of the report schedules.

1. Main Schedule

The Main Schedule (also referred to as the I-A Immediate Counterparty (I-A IC) Schedule) includes a granular breakdown across two tables of the reporter’s consolidated financials, including assets, liabilities and off-balance sheet contingent liabilities.

Table 1 includes the full balance sheet broken down by:

► Instrument

► Currency

► Remaining maturity

A separate Table 1 is required for all instruments in each of the seven currencies listed below. However, per the FRB instructions, all amounts on the FR 2510 should be reported in US dollars regardless of the currency in which the position is denominated. The seven currencies that are in scope for the FR 2510 include:

► USD: United States dollar

► EUR: Euro

► JPY: Japanese yen

► GBP: British pound

► CHF: Swiss franc

► CNY: yuan renminbi (includes CNY, Chinese yuan onshore, and CNH, Chinese yuan offshore)

► Other: sum of all other currencies not listed above

Table 2 includes the consolidated balance sheet and provides a more detailed look at certain instruments provided in Table 1, as well as additional information, including asset and liability memorandum items and contingent liability information. A separate Table 2 is required for each country ranked in the top 35 countries where its exposure amounts (excluding financial derivatives) to a minimum $2 billion over the previous four quarters. This means that the number of Table 2 forms that are submitted by an institution may vary quarter over quarter depending on the institution’s exposures as of a particular quarter-end. Instruments for the top 35 countries should include positions by counterparty sector and remaining maturity.

2. Financial Derivatives Schedule

The Financial Derivatives Schedule collects valuation information, including the gross positive and negative fair value and gross notional amounts across the reporter’s consolidated derivatives portfolio held for its own account (excluding derivatives held for the reporter’s customers’ accounts). Derivatives should be reported by execution type, as well as by the predominant risk of the instrument, as follows: ► Equity

► Interest rate

► Foreign exchange

► Credit derivatives

► Commodity derivatives

► Other derivatives

All positions on the Financial Derivatives Schedule are to be reported gross regardless of whether netting is permitted under US GAAP.

3. Foreign Exchange Derivatives Schedule

The Foreign Exchange Derivatives Schedule collects the gross notional amount by currency of the reporter’s consolidated foreign exchange derivative contracts, including currency forwards and currency swaps. A separate schedule is required for each of the following categories of maturity on the derivatives: ► Non-maturity instruments (including on-demand and open

positions)

► Overnight and less than three months

► Three months and less than one year

► One year and over

Schedules

1. Main Schedule

2. Financial Derivatives Schedule

3. Foreign Exchange Derivatives Schedule

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Overview of common challenges The FR 2510 requires the reporting of granular information related to the consolidated balance sheet, financial derivative positions and foreign exchange positions data that is often found in disparate data sources. Common challenges expected to be encountered by G-SIBs include sourcing and validating data, overall data sourcing and data availability at the required level of granularity, and interpretation of reporting requirements.

Reporting requirement challenges

The FR 2510 instructions should provide more clarification on the following line items to allow for accurate and consistent reporting:

► Clarification on reporting client clearing activities for the Financial Derivatives and Foreign Exchange Derivatives Schedules: The FR 2510 Financial Derivatives Schedule anchors to the FR Y-15 instructions, which require reporting of client clearing activities, including riskless principal transactions and agency trades when the firm guarantees the performance of the client to a central counterparty clearing house (“CCP”). However, the FR 2510 Foreign Exchange Derivatives Schedule anchors to the FR Y-9C and FR 2436, which do not include any client clearing derivatives.

► Negotiable and/or tradable certificates of deposit (CDs): The FR 2510 instructions explicitly include “negotiable and/or tradable” CDs on two different lines: Main Schedule, Table 1, Assets Line 1, “Cash and Balances due from Banks,” and Main Schedule, Table 1, Assets Line 5.3, “Unsecured Debt Securities.” Additional clarification is required from the FRB to ensure that negotiable and/or tradable CDs are not double counted.

► Top tier counterparties: The FR 2510 instructions reference “top tier counterparties” in the requirements for Main Schedule, Table 2, Assets Line 2, “Resale Agreements,” and Main Schedule, Table 2, Liabilities, “Repurchase Agreements.” For both, if netting is permitted under US GAAP, the net assets or liabilities should be reported based on the country and sector of the top tier counterparty. The FRB should provide additional detail on the definition of a top tier counterparty.

► Reconciliation between FFIEC 009 and FR 2510: The FR Y-9C requires reporters to prepare and file the report in accordance with US GAAP; however, FFIEC 009 instructions follow different CUSIP netting rules for derivative contracts and trading assets. Though the instructions currently point to the FR Y-9C, some filers believe that they will be unable to reconcile the FR 2510 with the FFIEC 009 using this approach.

Table 1: Netting differences between FR Y-9C and FFIEC 009 (FRB)

Reporting item

FR Y-9C FFIEC 009

Netting of derivative contract

Offsetting of positive and negative fair values is permitted when a “right of setoff” exits.

Offsetting of positive and negative fair values is permitted; however, only net positive fair values are reportable.

Netting of trading assets

It is industry practice to net trading assets and liabilities in the same security.

CUSIP netting is allowed. In addition, short positions in the same issuer and asset class may be reported as an offsetting position for schedule C.

► The FR Y-15 has the same filing time period as the

proposed FR 2501 (50 calendar days after the March, June and September as-of dates and 65 calendar days after the December as-of date). This may eliminate the ability to auto populate the data from the FR Y-15 to the FR 2510 for reporters using vendor tools (e.g., Financial Derivatives Schedule, Line Item 2, Notional amount: Centrally Cleared Over the Counter Derivatives).

Challenges with reporting granularity

Organizations will face difficulties in defining the scope of reportable assets and liabilities at the position level. Due to the level of granularity required by the FR 2510, reporters will need to liaise with operations or treasury functions to source data. Firms should ensure that data providers have been provided clear requirements related to FR 2510 reporting and, in addition, the appropriate level of training on the report. This is critical as functional areas that traditionally own the data required for the FR 2510 may not be prepared to meet the granularity requirements of the FR 2510.

As challenges with data sourcing and granularity are addressed, regulatory reporting teams may find it challenging to assess data based on the volume of transactions (transactions might include payment of invoice payments, loan repayments, etc.) associated with liabilities. Liability data often amounts to billions of dollars and requires rounding to the nearest million, which may not be easily available for review at a position level.

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Implementation challenges

While the comment period closed October 26, 2018, firms are awaiting the finalization of the form and the instructions from the FRB. Firms will need sufficient time ahead of the first filing (as of March 31, 2019) to design, build and test their reporting processes. Any changes to the proposed instructions and form will result in a short time frame for firms to update and adjust their production design.

Firms also must consider the following implementation challenges in advance of the first filing: ► Designing an end-to-end strategic implementation plan,

including a contingency in case the report needs be filed manually in a tactical state

► Developing a data sourcing strategy, including a report data dictionary, identification of data providers and accountable owners for data, implementation of data quality controls and data governance documentation

► Defining the business process that incorporates existing reporting processes for overlapping data collection and reports

► Ensuring effective transition of the reporting tool to business-as-usual processes through user trainings, policies and procedures, and transition to regulatory reporting and technology groups

Operational challenges

The current version of the instructions includes a requirement that firms need to be able to add additional countries to Table 2 of the I-A IC Schedule within two weeks upon request from the FRB (which may not be part of the regular quarterly production process). This will present both process and technology challenges for reporters.

Additionally, the FR 2510 must be filed 50 days after the last calendar day each quarter and 65 days after the year-end. During this same time, G-SIBs have a high volume of filings, including the FR Y-9C (40 days after quarter-end), FFIEC 009 (45 calendar days after quarter-end) and FR Y-15 (50 days after quarter-end). It is critical to note that there will be a high volume of filings during this time throughout the year. As much of the FR 2510 data is anchored to the FR Y-9C and FFIEC 009, this timeline may pose challenges for sourcing data.

Feedback from the industry

The FRB comment period on the FR 2510 closed on October 26, 2018. Two public comments are available on the FRB website: one from the Bank Policy Institute (BPI) and another from a former regulator. Below are the summarized key points across these two comment letters: ► The BPI requests relief for first filing until Q4 2019 (and no earlier than Q3 2019) with a “best effort” filing for the prior

quarter. ► There are similarities between the FR 2510 data collected and the FR 3036 (Central Bank Survey of Foreign Exchange and

Derivatives Market Activity) and the TIC B (Reports by Financial Institutions of Liabilities to, and Claims on, Foreign Residents by U.S. Residents) and D (Report of Holdings of, and Transactions in, Derivatives Contracts with Foreign Residents) forms. Reporters’ exposures to specific currencies are captured in the FR 2436.

► Reporting Central does not currently have the ability to support a schedule with a varying number of occurrences (e.g., Main Schedule, Table 2). The current Reporting Central will need to be enhanced or a specific FR 2510 portal will need to be developed.

► All firms filing the FR 2510 will be required to make significant changes to their current reporting systems and processes, including reliance on external third-party vendors to update reporting tools. Updated software may not be ready for the March 31, 2019 filing period as the rule has not yet been finalized.

► There are many conflicting initiatives at US G-SIBs (e.g., upcoming CCAR cycle, current process enhancement programs, single counterparty credit limit proposed reporting requirements) that may be put at risk as resources are diverted to support the FR 2510 implementation.

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Relationships with other reports The FR 2510 report includes multiple overlapping data points with other regulatory reports. It is important that organizations implement mechanisms for reconciling data across reports as regulators often perform this analysis in order to identify reporting inconsistencies.

Some examples include explicit and direct ties to the FR Y-9C, FR Y-15, FR 2436 and FFIEC 009. Given these overlaps, organizations should be identifying these common key data elements (KDEs) to support their regulatory reporting.

Synergies from other regulatory reports include the following: ► There are similarities between the FR 2510 data and the

FR 30362 and TIC B forms for claims and liabilities by country and counterparty.

► Reporters’ exposures to specific currencies are captured in the FR 24363 and the Treasury Foreign Currency (TFC) reports.4

2 Central Bank Survey of Foreign Exchange and Derivatives Market Activity 3 Semiannual Report of Derivatives Activity

► Per the current version of the FR 2510 instructions, several lines of the FR 2510 report will be populated automatically from either the FR Y-9C or the FR Y-15, including:

FR 2510 Populated from

I-A Immediate Counterparty (I-A IC) Schedule: Liabilities, item 13, “Total Equity”

FR Y-9C, Schedule HC, item 28

Financial Derivatives Schedule, item 2, column 3, “Central cleared OTC derivatives: Notional amounts”

FR Y-15, Schedule D, item 1

Financial Derivatives Schedule, item 3, column 3, “Bilateral/ Uncleared OTC Derivatives: Notional Amounts”

FR Y-15, Schedule D, item 2

► The Foreign Exchange Derivatives Schedule requires the reporting of all deals involving an exchange of more than one currency or with exposure to an exchange rate; however, it should be noted that the currencies are displayed in a matrix structure with the short currency (the currency sold or paid at maturity) in the columns and the long currency (the currency bought or received at maturity) in the rows. The currency forward and currency swaps are also reported in the FR 2436, but the FR 2436 does not distinguish between long and short positions; hence, the reconciliation may be a challenge in this situation.

► Additional reporting overlaps (e.g., lines with partial definition coverage) can be found in the FR 2510 Anchoring Document on the FRB’s website.5

4 Consolidated Foreign Currency Report of Major Market Participants (weekly, monthly, quarterly) 5https://www.federalreserve.gov/reportforms/formsreview/FR%202510_anchoring%20document_draft.pdf

FR 2510

FR Y-9C

FR 2436

FR Y-15 FFIEC 009

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What’s next? While the FRB still needs to finalize the instructions and form of the FR 2510, G-SIBs should be preparing for their first filing as of March 31, 2019, including the reporting of substantial data regarding assets, liabilities and off-balance sheet exposure. The first filing of the report is due to the FRB on May 20, 2019. Plans should be in place to address technology and data challenges through scalable and sustainable data sourcing solutions and should include training and accountability throughout the process.

For further information, please visit the EY Insights on regulatory reporting website.

Anita Bafna Partner +1 212 773 3938 anita.bafna@ey.com

Steven Thiakodemitris Partner +1 212 773 0903 steven.thiakodemitris@ey.com

Christine Burke Senior Manager +1 212 773 5607 christine.burke@ey.com

Vadim Tovshteyn Principal +1 212 773 3801 vadim.tovshteyn@ey.com

Alberto Rosello Executive Director +1 212 773 7714 alberto.rosello@ey.com

Sarah Sy Senior Manager +1 212 773 3811 sarah.sy@ey.com

Ernst & Young LLP contacts To learn more about how the changing regulatory reporting environment might affect your organization and how Ernst & Young LLP can help, please contact one of our professionals:

We appreciate contributions from the following individuals who assisted in the development of this report:

Josh Leon, Vipin Gandhi and Amey Duduskar.

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