Fermat_ALM

Cash Flows Computation for IFRS and Liquidity

Gary Loong, Systems Solutions Specialist 26th May 2011

Moody’s Analytics

Fermat User Group Conference

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Agenda1. 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?

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Regulators RequirementLiquidity Risk Management

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Regulatory regime discussions oscillate between Quantitative and Qualitative regime

Principles for

» Governance

» Internal controls and IA

» Policies and procedures

» Risk tolerance and limits

» Stress testing

» Contingency Funding Plan

US Banking RegulatorsInteragency Policy

StatementMarch 2010

Two key standards

» Liquidity Coverage Ratio

» Net Stable Funding Ratio

Monitoring metrics

» Funding mismatch, concentrations

» Available unencumbered assets

» Market-related monitoring tools

Basel Committee Consultative Paper

December 2009

Detailed guidance

» Systems and control

» Individual Liquidity Adequacy Standards

» Liquidity reporting

» Stress testing and scenarios

» Liquid Assets Buffer

UK FSA

Policy Statement

October 2009

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Data item Description Frequency

FSA047: Daily flows Collects daily flows out to 3 months to analyze survival periods and spot potential liquidity squeezes early

BAU: Weekly (Daily if liquidity stress)Respectively Monthly/Weekly for Simplified ILAS

FSA048: Enhanced Mismatch Report (EMR)

Captures the ILAS risk drivers and contractual flows across the full maturity spectrum

As above

FSA050: Liquidity Buffer Provides more granular analysis of firms’ marketable assets holding

Monthly

FSA051: Funding concentration Captures firms’ borrowings from unsecured wholesale funders, by counterparty class

Monthly

FSA052: Wholesale liabilities Collects daily transaction prices and transacted volumes for wholesale unsecured liabilities

WeeklyMonthly for SimplifiedILAS

FSA053: Retail, SME and Large Enterprises and Corporate funding

Captures firms’ retail and corporate funding profiles and the stickiness of various retail deposits

Quarterly

FSA054: Currency analysis Provides an analysis of FX exposures on firms’ balance sheets

Quarterly

FSA055: Systems and Controls Questionnaire

Allows FSA to monitor a non-ILAS BIPRU firm’scompliance with the new requirements

Annual

New regulatory reporting requirements

From Basel II to Basel III

Basel III – Required Ratios 6

Liquidity Coverage Ratio = Stock of liquid high quality assetsNet cash outflow over 30 days ≥ 100%

Net Stable Funding Ratio = Available stable funding Required stable funding

≥ 100%

Leverage ratio = Tier 1 .balance sheet and off balance sheet exposures ≥ 3%

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

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

ROLL OUT:Tested 2013 to 2017 Binding in 2018

ROLL OUT:Tested 2011 to 2014Binding 2015

ROLL OUT:Tested 2012 to 2017Binding 2018

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Short Term Medium Term

ScopeEnsures that the bank can be financed safely via secured short term funding.

Enables the bank to forecast liquidity requirements to sustain its activity / strategy for the coming months / years.

Calculation Frequency Daily or weekly Monthly

Stress testing scenario

4 scenarios:- on going,- systemic crisis,- specific (downgrade),- specific + systemic crisis

Time Horizon Daily time bands up to 1M/3M Maturities Monitored are 1M, 3M, 6M, 12M, 18M, 24M and 36M (not limited)

Perimeter Consolidated/Entity level

Approach Static or semi-dynamic approach Dynamic approach

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

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Regulators RequirementIFRS

IFRS

Recognition of Financial Assets

and Financial Liabilities

-Classification and measurement of financial instruments- Fair value- Amortized cost- Effective Interest Rate

Hedge Accounting

- Micro / Portfolio- Effectiveness Ratio Calculation- Embedded derivatives

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Impairment of Assets

- Individual /Collective Assessment- Different provision calculation methods

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Fermat Cash Flow Computation Framework

Data Management

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Fermat supports multi-source

data feeds, synchronized or not

A single Fermat instance addresses

consolidated and local needs

Fermat provides a complete

data loading platform. Fermat

can also be interfaced using ETL

tools

Fermat provides data

quality checking tools,

dedicated reports and

recycling screens

Fermat architecture performance

enables to handle large

historically amounts of

detailed data

Each user’s activity is in a

dedicated workspace.

Sessions are fully secured

(authentication, data

access)

Fermat architecture enables

concurrent data access and

processing

FERMAT Data Mart Platform Overview

SourceSystems

Upstream

Front Office

Murex

Back Office

Calypso

Excel

Text

2009-01-03

2009-01-02

2009-01-01

MA Data Mart

Data Management – Flexible and Comprehensive

Workspace = Country / Branch / Department

CalculationParameters

Referential Settings

ResultConfiguration



ResultConfiguration



ResultConfiguration

Workspace #1

Workspace #2

Workspace #3

Results #1

Results #2

Results #3

Liquidity GAP

Rate GAP

Earning

Sensitivities

FTP

Liquidity GAP

Stress Testing

EAR

Prepayment

Rate Shifts

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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 deal detail.

This editable windows allows data recycling.

List of rules violated on the selected deal

Fields related to selected error are highlighted in red

Error message contains both functional and technical message

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Fermat Cash Flow Computation Framework

Liquidity Risk

Extinction sets

» Extinction sets : to model funding risk for instruments modeled in LOANDEPO table for a given scenario set.

» 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.

Loan Deposit

Accelerated extinction Prepayments Early redemption

Delayed extinction Delayed payments/roll-over Stickiness/roll-over

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.

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Accelerated Extinction setsM1 M2 M3 M4 M5 M6 M7 M8 M9 M10 M11 M12 Total

Loan_1 200 200 200 200 800 Loan_2 200 200 200 200 800 Loan_3 200 200 200 200 800 Loan_4 200 200 200 200 800 Loan_5 200 200 200 200 800

Total 1,000 - - 1,000 - - 1,000 - - - 4,000

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

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

M1 M2 M3 M4 M5 M6 M7 M8 M9 M10 M11 M12 TotalLoan_1 200 600 800 Loan_2 200 200 200 200 800 Loan_3 200 200 200 200 800 Loan_4 200 200 200 200 800 Loan_5 200 200 200 200 800

Total 1,000 600 - 800 - - 800 - - 800 - - 4,000

M1 M2 M3 M4 M5 M6 M7 M8 M9 M10 M11 M12 TotalLoan_1 200 120 160 160 160 800 Loan_2 200 120 160 160 160 800 Loan_3 200 120 160 160 160 800 Loan_4 200 120 160 160 160 800 Loan_5 200 120 160 160 160 800

Total 1,000 600 - 800 - - 800 - - 800 - - 4,000

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Accelerated Extinction sets

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.

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Delayed Extinction sets: Delayed Payment

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

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

M1 M2 M3 M4 M5 M6 M7 M8 M9 M10 M11 M12 TotalLoan_1 200 200 200 200 800 Loan_2 200 200 200 200 800 Loan_3 200 200 200 200 800 Loan_4 200 200 200 200 800 Loan_5 200 200 200 200 800

Total 1,000 - - 1,000 - - 1,000 - - - 4,000

M1 M2 M3 M4 M5 M6 M7 M8 M9 M10 M11 M12 TotalLoan_1 200 200 200 200 800 Loan_2 200 200 200 200 800 Loan_3 200 200 200 200 800 Loan_4 200 200 200 200 800 Loan_5 200 200 200 200 800

Total 800 200 - 800 200 - 800 200 - 800 200 - 4,000

M1 M2 M3 M4 M5 M6 M7 M8 M9 M10 M11 M12 TotalLoan_1 160 40 160 40 160 40 160 40 800 Loan_2 160 40 160 40 160 40 160 40 800 Loan_3 160 40 160 40 160 40 160 40 800 Loan_4 160 40 160 40 160 40 160 40 800 Loan_5 160 40 160 40 160 40 160 40 800

Total 800 200 - 800 200 - 800 200 - 800 200 - 4,000

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Delayed Extinction sets: Delayed Payment

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Delayed Extinction sets: Rollover

Requirement: 80% of Deposit rollover 100% of Balance

M1 M2 M3 M4 M5 M6 M7 M8 M9 M10 TotalDeoposit_1 1,000 1,000 Deoposit_2 1,000 1,000 Deoposit_3 1,000 1,000 Deoposit_4 1,000 1,000 Deoposit_5 1,000 1,000

Total - - - - 5,000 - - - - - 5,000

M1 M2 M3 M4 M5 M6 M7 M8 M9 M10 TotalDeoposit_1 1,000 1,000 Deoposit_2 1,000 1,000 Deoposit_3 1,000 1,000 Deoposit_4 1,000 1,000 Deoposit_5 1,000 1,000

Total - - - - 1,000 - - - - 4,000 5,000

M1 M2 M3 M4 M5 M6 M7 M8 M9 M10 TotalDeoposit_1 200 800 1,000 Deoposit_2 200 800 1,000 Deoposit_3 200 800 1,000 Deoposit_4 200 800 1,000 Deoposit_5 200 800 1,000

Total - - - - 1,000 - - - - 4,000 5,000

Fermat: 100% of Deposit rollover 80% of Balance

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Delayed Extinction sets: Rollover

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:

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

( ) ( )( )hpriceSsecuritiesedunencumberofNbtCF t −×××= 1%Round

Maturity date

Reporting date

Sell-off flows

t

Haircut

» Haircuts represent the decrease in market value of a security.

» Haircuts can be defined in the following window:

-120-100-80-60-40-20

020406080

100

1D 1W 1M 1Q 1Y 2Y 50Y

Assets

Liabilities

Liquidity Gap (cumulative)

Liquidity Gap (period)

Buffer

Liquidity buffer is a key component

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“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 Liabilities

Long term assets 130 Own funds 150Long term debt 135

Loans 800 Sight deposits 575Marketable securities 370 Term Deposits 100

Market liabilities 195Treasury assets 200 Treasury liabilities 345

1500 1500

Reserve HaircutsMarketable & Unencumbered securities 370Bonds Aaa 320 10%Securities Aa3 50 25%

Survival period

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

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Fermat Cash Flow Computation FrameworkIFRS – Fair Value, Amortized Cost, Effective Interest Rates

Fair Value

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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

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

Fair Value Pricing Methods

Instrument Pricing modelSecurity position on Bonds Quoted price

security position on Equity Discounted cash flows

Repo Depending on agreement

Loandepo Discounted cash flows

Facility Value must be imported

Interest rate swap Discounted cash flows

Cross interest rate swap Discounted cash flows

Swaptions Model

FRA Discounted cash flows

Forex Discounted cash flows

Forex options Garman Kholhagen model

Future Discounted cash flows

Cap/Floor Black model

Options Black & Scholes generalized model

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Effective Interest Rates

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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

Amortized Cost

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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

Events Management

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Contract eventLOANDEPO only (fixed and floating rate)

EIR impact P&L EIR reassessment

RD1 Event date RD2

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

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Prepayment models1. Maturity

» prepayment percentage is X% until RD + Maturity

2. Rate differential

» Deal’s rate - Replacement rate

» Replacement rate = future market rate (for deal’s residual maturity)

+ future client margin (for deal’s residual maturity)

» Delay effect: Market Rate is taken N month before cash flow date

3. Remaining Life

» Real Policy: Remaining Life =

» Nominal Weighted: Remaining Life is a duration

4. Burn out

» In years: Cash flow date – Issue Date

Remaining Maturity after cash flow

Deal Original Maturity

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Statistical Prepayment Cash Flows

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Fermat Cash Flow Computation FrameworkIFRS – Impairments

Flexible Calculation Methodologies

MethodStatus Collective Assessment Individual Assessment

Performing Expected loss

Expected loss

Default point

Defaulted Recovery curve Recovery cash flows

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Expected Loss MethodProvision

Where :

» = one year Basel II PD converted into a n months PD

» is calculated based on CRM recovered amount

effLIP LGDPDEaD ××=Provisions

EaDLGDCollCollCollEaDLGD xn

eff×−−−−

=)...( 21

12recovery totime

)1(

1__EY

RRcollateralamountnominalColl Cnn

+×=

LIPPD

effLGD

MethodStatus

Collective Assessment

Individual Assessment

Performing EL EL

Defaulted

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Default Point MethodDP

(Dafault Point)

t t t tt

t t tCnC1 C2DP

i21today

ACtoday CF

1 CF2 CF

i CFC1

CFC2

CFCn

time [date]

Defaul Point in the deal

Provision

: Discounted Cash-flows according to payment

schedule discounted with the EY of the contract

: Discounted Collateral cash-flows discounted with

the EY of the contract

+−= ∑ DND CFCFEaDProvisions

NDCF

DCF

MethodStatus



Performing EL EL/DP

Defaulted

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Recovery Cash Flows

+

−= ∑ tiEYCF

EaD)1(

Provisions recovery

recoveryCF

Provision

Where are the estimated recovery cash-flows by the bank for an individual impaired transaction

Cash Flows discounted at effective yield or client interest rate in case of non maturing transaction

default

Reporting date Recovery

cash flows

MethodStatus



Performing EL EL/DP

Defaulted RCF

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Recovery Curve Method

×

−−= F

PEaDEaD

)1(Provisions

100%

Today90 days

After default

F= Still to recover (20%)

P= Recovered (80%)

Default

Provision

MethodStatus



Performing EL EL/DP

Defaulted RC RCF

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Fermat Cash Flow Computation FrameworkIFRS – 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

Effectiveness Testing – Prospective

Dollar OffsetCash Flow Hedge

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Dollar OffsetFair Value Hedge

Hypothetical

Hypothetical derivative is built to have CF that perfectly offset the hedged instrument’s CF.

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 OffsetCash Flow Hedge

Dollar OffsetFair Value Hedge

Constant Non Hedge Factor SELECTED CNHF Not selected

Risk factors : Exchange risk, interest rate risk, credit rating

Note: Hypothetical and Linear regression is similar to Prospective Testing

Effectiveness testing - Homogeneity

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» 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?

FERMAT Data Mart – Oracle Platform

Loans & Deposits Derivatives Securities

Loans Account Facility Swap FRA Future Option Bond Equity

ADM / Reference

ADM Currency Rates

Parameters Parameters Parameters Parameters

CreditRisk

CalculationEngine Market

Risk

CalculationEngine Liquidity

CalculationEngine

CalculationEngineIFRS

Results

RRTRegulatory Reporting Tool

MARTMA Reporting Tool

ExternalReporting Tool

Excel, Business Objects etc

Modular base

Liquidity Context

IAS Context

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On the same Oracle instance in place for Fermat Basel II

Addition of Dedicated Oracle Schema for IFRS reporting

Imported dataData import interface design is 2 partsEIR & Amortized Cost calculation + Hedge Accounting:

Market Rate, Imported Cash flows

IAS impairment:

same ETL interfaces design as currently implemented for Basel II

Extra data RequiredIAS impairment purpose: Imported CFs, Internal PDs & LGD (if necessary)

ConfigurationConfiguration of the IFRS environment based on Basel II modelsBasel 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

Additional Configurations specific to IFRS implementationMicro and Macro Hedge portfolio description

Impairment decision tree for establishing ‘Objective evidence of Impairment

GL posting valuation formula for IFRS

Transactions

Counterparties

Credit Risk Data

Transactions

Market Rate Data

Cash Flow Modeling

Basel Datasets

BII Engine

MA Data Mart

Leverage on Basel II Implementation

IAS

Engine

Liquidity

Engine

BII Context

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Our Basel customers grow with us

Xavier Pernot

ALM Product Management [email protected]

moodys.com

57

Rick Ho

Taiwan Sales [email protected]

Gary Loong

Systems Solutions [email protected]

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© 2011 Moody’s Analytics, Inc. and/or its licensors and affiliates (collectively, “MOODY’S”). All rights reserved. ALL INFORMATION CONTAINED HEREIN ISPROTECTED BY COPYRIGHT LAW AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED,TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANYFORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY’S PRIOR WRITTEN CONSENT. All information contained herein isobtained by MOODY’S from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors,however, all information contained herein is provided “AS IS” without warranty of any kind. Under no circumstances shall MOODY’S have any liability to anyperson or entity for (a) any loss or damage in whole or in part caused by, resulting from, or relating to, any error (negligent or otherwise) or othercircumstance or contingency within or outside the control of MOODY’S or any of its directors, officers, employees or agents in connection with theprocurement, collection, compilation, analysis, interpretation, communication, publication or delivery of any such information, or (b) any direct, indirect,special, consequential, compensatory or incidental damages whatsoever (including without limitation, lost profits), even if MOODY’S is advised in advance ofthe possibility of such damages, resulting from the use of or inability to use, any such information. The ratings, financial reporting analysis, projections, andother observations, if any, constituting part of the information contained herein are, and must be construed solely as, statements of opinion and notstatements of fact or recommendations to purchase, sell or hold any securities. NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS,COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN ORMADE BY MOODY’S IN ANY FORM OR MANNER WHATSOEVER. Each rating or other opinion must be weighed solely as one factor in any investment decisionmade by or on behalf of any user of the information contained herein, and each such user must accordingly make its own study and evaluation of eachsecurity and of each issuer and guarantor of, and each provider of credit support for, each security that it may consider purchasing, holding, or selling.

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