(1) Diversified Funding: Problems with Steering Towards Long-Term Stable Funding; (2) Analysing the Best Internal Mechanism for Managing new Liquidity Requirements

1. 4th Annual
Practical Funds Transfer Pricing and Balance Sheet Management Forum
17th September 2014, London, UK
NSFR LIQUIDITY FRAMEWORK:
Practical Implementation
Requirements
IMPLEMENTATION REQUIREMENTS TO ADAPT
TO NEW NSFR LIQUIDITY PARAMETERS
WORKSHOP
Rodrigo Zepeda
Independent Consultant

2. Section 1:
Diversified funding: Problems with steering towards long-term stable
funding
Section 2:
Analysing the best internal mechanism for managing new liquidity
requirements

3. Diversified funding: Problems
with steering towards long-term
stable funding
SECTION 1
3

4. “Assuming a 50
percent retained
earnings payout ratio
and nominal annual
balance-sheet growth
of 3 percent through
2019, capital
requirements in
Europe are expected
to increase to about
€1.2 trillion, short-term
liquidity
requirements to €1.7
trillion, and long-term
funding needs to
about €3.4 trillion.”
(McKinsey 2010, p.1)
4
“The task is
monumental
however. Banks face
a significant
challenge merely to
achieve technical
compliance with the
new rules and ratios,
let alone to reorient
the institution for
success.”
(McKinsey 2010, p.2)
2

5. What is Long Term Stable Funding?
GLOBAL FINANCIAL CRISIS FUNDING
Wholesale Funding
• Cheaper wholesale funds with shorter maturities.
• Funds secured against collateral (e.g. securitized
debt or repurchase agreement transactions).
• Increasingly interconnected bank and non-bank
financial system, drying up liquidity and
triggering calls on collateral.
• Not sufficiently monitored.
• e.g. Interbank loans.
• e.g. Brokered deposits.
• e.g. Repurchase agreements (“Repos”).
• e.g. Commercial paper.
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BASEL III FUNDING
LongTerm Stable Funding (“LTSF”)
• Customer deposits.
• Regulatory capital (equity).
• Debt with maturities of more than one year.
• Deposits with maturities of less than one year (but
expected to continue to be held in a stress scenario).
• Preferred stock.
• Covered bonds.
• Domestic and international capital markets.
• Diversified funding, but not necessarily all maturity
matched (i.e. limited maturity transformation).
3

6. Problems faced by Banks pre-Basel III
Senior Supervisors Group (“SSG”) Findings (SSG, 2009):
• Only 7 out of 20 major global financial firms stated they had fully aligned
liquidity risk with transfer pricing practices (13 firms were stated to be partially
aligned).
• Managers acknowledged that if robust Funds Transfer Pricing (“FTP”)
practices had been in place which factored in liquidity as well as funding risks,
firms would not have carried the significant levels of illiquid assets and off-balance
sheet (“OBS”) risks that led to sizeable losses
• Many firms’ information technology (“IT”) infrastructure was inadequate to
accurately monitor risk exposures.
• It was noted that firms need to re-examine the priority that was traditionally
given to revenue-generating businesses over reporting/control functions.
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7. Impact of the New Basel III Liquidity Risk Paradigm
McKinsey Report Findings (McKinsey, 2010):
• By 2019 European banking sector will (absent any mitigating actions) need:
• €1.1 trillion of additionalTier 1 capital;
• €1.3 trillion of short-term liquidity; and
• €2.3 trillion of long-term funding.
• By 2019 US banking sector will (absent any mitigating actions) need:
• US$870 billion (€600 billion) of additionalTier 1 capital;
• US$800 billion (€570 billion) of short-term liquidity; and
• US$3.2 trillion (€2.2 trillion) of long-term funding.
• By 2019 pre-tax Return on Equity (“ROE”) of European banks will decrease by 3.7-4.3 percentage points (“pp”) (from
pre-crisis levels of 15%) (there will be a gradual decline in ROE, 2013 (-0.3 pp), 2016 (-2.1 pp)):
• 0.8pp – capital quality;
• 1.3pp – increased risk weighted-assets (“RWA”);
• 1.3pp – increased capital ratios (made up of 0.3pp (new minimum ratios), 0.8pp (additional cushion), and 0.2pp (further national
discretions));
• 0.1pp – leverage ratio;
• 0.2pp – expense of holding more liquid assets; and
• 0.6pp – cost of holding more long-term funding.
[Assessment based on an analysis of the balance sheets of the top 45 European banks as of their most recent filings at November 2010]
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8. Impact of the New Basel III Liquidity Risk Paradigm
Deloitte European Bank FTP Survey Findings (Deloitte, 2014):
• Larger banks displayed more advanced methodologies and more integrated processes and systems; smaller banks had more limited
methodologies and low levels of integration; but many had a long way to go to meet Liquidity Transfer Pricing (“LTP”) requirements.
• Many banks did not estimate the Liquidity Asset Buffer in their FTP frameworks.
• Many banks still lacked independent validation of their FTP models (e.g. 40% did not have it carried out by risk area).
• Only the biggest banks adopted behavioural adjustments (from Internal Rate of Return (“IRR”) and liquidity risk models) which
reflected the behavioural characteristics of financial instruments and contractual profiles of transactions involved.
• Weaknesses in banks’ FTP infrastructure included: (1) manual processes; (2) limited granularity of single components; and (3) poor
integration.
[Deloitte survey involved functions (Treasury, ALM, Risk and PerformanceManagement) of 15 financial institutions from the UK, France, Germany, Italy, the Netherlands, and Greece]
BCBS andCommittee of European Banking Supervisors (“CEBS”) (2010) Findings:
• Group 1 banks have an estimated average LCR of between 67% (CEBS, 2010) and 83% (BCBS, 2010).
• Group 2 banks have an estimated average LCR of between 87% (CEBS, 2010) and 98% (BCBS, 2010).
• Group 1 banks have an estimated average NSFR of between 91%(CEBS, 2010) and 93% (BCBS, 2010).
• Group 2 banks have an estimated average NSFR of between 94% (CEBS, 2010) and 103% (BCBS, 2010).
[BCBS findings based on a survey of 94 Group 1 banks and 169 Group 2 banks; CEBS findings based on a survey of 50 Group 1 banks and 196 Group 2 banks]
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9. Basel III Effects on Risk Coverage
9
Anticipated effects of the changes to risk
coverage (Linklaters 2011, p.3)
Anticipated effects of the changes to risk
coverage (Accenture 2011, p.5)
3

10. The New Basel III Regulatory Landscape
Basel II Implications
• Increased capital reserves, liquidity buffers and funding costs under the Basel III framework.
• New global minimum liquidity standards and two new liquidity ratios, i.e. the Liquidity Coverage Ratio
(“LCR”) and the Net Stable Funding Ratio (“NSFR”).
• Increased need for equity funding in the market.
• Decreased availability of funding by central banks.
• Increased capital requirements for counterparty credit risks for (1) derivatives; (2) securities financing; and
(3) repo transactions.
• Some bank lobbyists are claiming Basel III NSFR will increase repo transactional costs by more than 850%
(from 7 bp to 67 bp) (Becker, 2014).
• Hedge funds face higher prime broker charges under Basel III (Devasabai, 2014).
• Banks exiting or scaling back from aircraft financing or leasing operations (e.g. BNP Paribas, Société
Générale, and Royal Bank of Scotland) (loans with maturities of between 6-12 years) (Watt, 2012).
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3

11. GENERAL Problems With Steering Towards LTSF
• Banks are still struggling to return to pre-crisis ROE levels.
• Banks have additional high compliance costs, i.e. EMIR, Dodd-Frank, SEPA,AML/CTF, etc.
• Decreased ROE and overall profitability levels:
• Banks must adhere to lower levels of leverage under Basel III (and must include OBE when calculating leverage);
• Minimum solvency ratio of 7% Core Tier 1 Capital (2019), but with changes in Regulatory Capital and RWA
necessitating increased capital or decreased lending leading to crowding out effects on capital;
• Increased bank equity capital (4.5% common equity Tier 1 ratio) will reduce small and medium-sized (“SME”)
lending capacity and overall SME ROE (higher risk, higher capital);
• Mandatory conservation and countercyclical buffer; and
• Adherence to new monitoring metrics.
• General reduced lending capacity or credit availability, and/or increased cost of credit.
• Likely overall ‘crowding out’ of smaller and weaker banks.
11
3

12. SPECIFIC Problems With Steering Towards LTSF
• Change in sourcing demand from short-term funding to long-term funding arrangements.
• Likely negative impact on pricing (higher) and margins (lower) in the short-term (as banks adjust).
• NSFR assets: increasing HQLA holdings or shortening loan maturities (<1 year) will significantly
increase costs and reduce product offerings.
• NSFR liabilities: increased demand for long-term wholesale funding making it more costly (squeezing
smaller banks), and there will now be increased aggressive competition for retail deposits.
• Likely significant pressures on operating capacity as pre-existing high volumes of specific product
segments are likely to translate to increased liquidity operating costs.
• Likely significant changes in business operating models of some banks needed.
• Potential for international regulatory arbitrage (e.g. US Basel III proposals stricter).
• Basel III is not a panacea for all structural banking problems, it is likely the beginning not the end, and
future proposals such as ‘ring-fencing’ may make liquidity rules even more complex or expensive.
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3

13. Problems With Steering Towards LTSF
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• Increased allocation of capital to larger trading books.
• Changing tenor structures (greater than 7-10 years).
• Capital efficiency measures.
Financial
• Adjusting or changing existing business models.
• Evaluating and improving capital and liquidity management practices.
• Restructuring of balance sheet.
Operational
• Integrating new risk management standards and regulatory requirements
into existing or new IT architecture and reporting systems.
• Auditing (new or required) of data availability, quality, and completeness.
Technological
•Maturity transformation practices are affected and must be re-optimised.
• Exiting from unprofitable product lines.
• Questioning what drives balance sheet consumption.
Strategic
• Loan agreement terms.
• Group reorganisations.
• Disposing of part/whole portfolios or operating entities.
Legal
4

14. Changes in Funding Structures
Basel III transition challenges to stability (IMF, 2013):
• Advanced economies rely more on wholesale funding, whereas emerging market economies (and Japan) have large retail
deposit bases, and are much more homogenous in their use of funding instruments.
• Banks have diverse funding structures that change only gradually over time.
• Bank funding structures are affected mainly by bank-specific factors and to a lesser extent by macrofinancial and market
variables.
• The overall (ambiguous) effect on funding costs will depend on:
• the proportion of various types of funding instrument;
• relative funding costs;
• level of equity capital; and
• underlying riskiness of banks’ assets (encumbered and unencumbered).
• Basel III regulatory reforms can affect bank funding structures positively and negatively, so reforms need to be calibrated to
ensure that there is not an overuse of secured funding or banks excessively encumber assets.
[IMF empirical study based on liability structure (equity, non-deposit liabilities, deposits) and loan-to-deposit ratio (indicates need for wholesale funding ) for 751 banks, applying
a dynamic panel regression with bank-specific fixed effects for a large set of countries]
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4

15. Changes in Funding Structures
Breakdown of Bank Liabilities (IMF 2013, p.108)
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Customer deposits
 At Par/On Demand deposits – high liquidity risk owing to
maturity mismatch (and runs), but retail deposits relatively stable
in practice (may be covered by deposit guarantee scheme).
 Other deposits – i.e. uninsured, foreign currency, internet
banking, non-residents, corporations, money market fund, high-net-
worth individuals, are less stable.
Wholesale funding
 Encumbered (assets secured as collateral) – designated for
payment of secured creditors; senior unsecured funds may rank
equal to depositors or belowdepositors (depends on country).
 Encumbered (short-term secured funds) – repos; swaps;
asset-backed commercial paper.
 Unencumbered (short-term unsecured funds) – interbank
loans; commercial paper (“CP”); wholesale certificates of deposit
(“CDs”).
 Long-term funds - bonds; different securitizations (e.g.
covered bonds, private-label mortgage-backed securities).
Regulatory capital (retail/wholesale)
 Common equity, certain types of subordinated debt – highest
quality is “Common Equity Tier 1” (“CET1”). Subordinated debt
types (paid after other debt holders) include contingent
convertible debt (“CoCos”), preferred shares, and perpetual
bonds which qualify as additionalTier 1 andTier 2 capital.
4

16. Changes in Funding Structures
Banks’ Long-Term Wholesale Funding across
Major Economies and Regions (as of 31 July 2013)
(IMF 2013, p.109)
Determinants of Bank Funding (Relative sizes
of factors; percentage points) (IMF 2013, p.112)
Sources: Bloomberg, L.P.; and IMF staff estimates.
Note: CA= current account, cap. =capitalization; FX = foreign exchange; LDV = lagged-dependent variable; Nil share = net
interest income in percent of operating income. Regulation and disclosure are the first and second principal component
scores, derived from four World Bank indicators of regulatory and institutional quality. Figures show the economic
relevance of bank characteristics and macrofinancial regulatory factors on bank funding through equity, deposits, and debt
(as a percent of total assets), and on loan-to-deposit ratios based on panel estimations for all banks, advanced economy
banks, emerging market economy banks (from developing Asian and central and eastern Europe), and global and domestic
systematically important banks. Economic relevance is computed as coefficients multiplied by 1 standard deviation of each
variable (averaged across banks). Variables shown are chosen using the general-to-specific selection method, which starts
with a general regression model and narrows it down to a model with only significant variables.
16
2

17. Analysing the best internal
mechanism for managing new
liquidity requirements
SECTION 2
17

18. Overview of New Basel III Operational Elements
18
Increasing quality, consistency and
transparency of the capital base;
increasing Tier 1 Capital,
harmonizing Tier 2 Capital
instruments, and eliminating Tier 3
Capital instruments
Raising capital requirements
Introducing LCR and NSFR, and a
new common set of monitoring
(trading book, complex
securitizations); capital for
counterparty credit risk; capital
charges for credit valuation
adjustment (CVA); and establishing
standards for central counterparties
(Introducing Leverage Ratio to new CCPs) and collateral management
risk-based Basel framework
tools
Introducing countercyclical buffer
and capital conservation buffer;
addressing systemic risk (and
interconnectedness); and promoting
forward looking provisioning and
dampening cyclicality parameters
(Accenture 2011, p.2)
Regulatory Capital
Risk Coverage
Leverage Ratio
Procylicality
Liquidity Standards
3

19. Responses to Managing Basel III: (KPMG, 2011)
“Stronger banks with a higher NSFR will be able to influence market pricing of assets.
Weaker banks will see their competitiveness reduced, which will potentially decrease the
level of competition” (KPMG 2011, p.11).
• Banks need to consider improving their performance of current internal assessment
methodologies – credit risk (ratings-based) and market risk (models).
• Banks need to consider reorganising legal entities in order to optimise the impact of capital
deductions.
• Banks need to consider increasing active balance sheet management and hedging
strategies.
• Banks need to consider redesigning businessmodels and reviewing portfolio strategies.
• Banks will very likely have to increase proportion of wholesale/corporate deposits (maturities
>1 year), due to continuing limited market demand.
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3

20. Responses to Managing Basel III: (Accenture, 2011)
For the NSFR banks must consider whether: (1) they must increase HQLA; (2) obtain more long-term stable sources of
funding; and (3) improve liquidity risk management systems.
1. Operational Responses
• Banks need to consider (1) processes; (2) methods; and (3) data.
• e.g. improve liquidity risk management (i.e. stress testing, contingency funding plans); closer integration of risk and
finance functions; reducing credit exposure (i.e. limits, credit approval processes); RWA optimization; and subsidiary
integration through group-wide risk and capital management standards.
2. Tactical Responses
• Banks need to consider (1) pricing; (2) funding; and (3) asset restructuring.
• e.g. increasing HQLA levels; changing funding mix and liquidity reserves to long-term debt and extending maturity of
deposits; reducing total exposure (risk and profitability); shifting to higher-value clients or less risky portfolio segments.
3. Strategic Reponses
• Banks need to consider (1) business model; (2) group organisation; and (3) equity.
• e.g. more active balance sheet management; issuing new capital; more active client management (e.g. segmentation);
strategic cost reductions; changing business model or group structure; changing liquidity risk and funding strategies.
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3

21. Responses to Managing Basel III: (McKinsey, 2010)
• Improve capital
efficiency
• Identify and ameliorate
subpar liquidity and
funding management
No-regret
moves
Balance-sheet
restructuring • Product design/mix
• Capital quality and
deductions
• Balance-sheet
management
• Reduced long-term
funding costs
• Customer mix
• Geographical mix
• Risk transfer
• Cost and pricing
Business-model
adjustments
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3

22. Financial Conduct Authority (“FCA”)‘Liquidity Standards’
• BIPRU 12.3 (Liquidity Risk Management)
• A firm must have in place robust strategies, policies, processes and systems that enable it to identify, measure, manage and
monitor liquidity risk over an appropriate set of time horizons, including intra-day, so as to ensure that it maintains adequate levels
of liquidity buffers. These strategies, policies, processes and systems must be tailored to business lines, currencies, branches and
legal entities and must include adequate allocation mechanisms of liquidity costs, benefits and risks [12.3.4 R].
• The strategies, policies, processes and systems referred to in [12.3.4 R] should include those which enable it to assess and
maintain on an ongoing basis the amounts, types and distribution of liquidity resources that it considers adequate to cover: (1) the
nature and level of the liquidity risk to which it is or might be exposed; (2) the risk that the firm cannot meet its liabilities as they
fall due [12.3.4AG].
• A firm must, taking into account the nature, scale and complexity of its activities, have liquidity risk profiles that are consistent
with and not in excess of those required for a well-functioning and robust system.
• In complying with [12.3.4 R], a firmmust ensure that it has access to funding which is adequately diversified, both as to source and
tenor [12.3.29 R].
• In relation to all significant business activities, a firm should ensure that it accurately quantifies liquidity costs, benefits and risks
and fully incorporates them into: (a) product pricing; (b) performance measurement and incentives; and (c) the approval process
for new products [12.3.4AG].
• A firm should ensure that liquidity costs, benefits and risks are clearly and transparently attributed to business lines and are
understood by business line management.
[Prudential sourcebook for Banks, Building Societies and Investment Firms (“BIPRU”), Chapter 12]
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3

23. Internal Mechanisms for Managing New Liquidity Requirements
• Ideal basic solution for smaller BFIs that are limited in size or distribution, or have a narrow
range of products in their portfolios or balance sheets, and have already achieved 100% (or
more) compliance with LCR and NSFR ratios. Automated solutions are able to adjust existing
financial reporting software or systems.
23
(1) Manual/Automated LCR/NSFR Reporting
• An installed and integrated LCR forecasting and reporting software solution, but without NSFR
capabilities. This may reflect the situation in many banks and financial situations which are
awaiting finalisation of the Basel III NSFR rules.
(2) LCR Software (Reporting/Steering)
• An fully installed and integrated LCR and NSFR forecasting and reporting software solution. This
will allow banks and financial institutions to start adjusting LTSF strategies now, and allowing
them to ‘fine tune’ settings with the finalised Basel III NSFR rules.
(3) LCR/NSFR Software (Reporting/Steering)
• Many banks and financial institutions may have developed pooled or MM FTP systems, but have
not yet integrated LCR and/or NSFR reporting and steering functions. These functions may be
currently undertaken separately, either manually or automatically.
(4) Separate FTP and LCR/NSFR Reporting/Steering
• This solution has managed to integrate FTP and LTP systems, but is still utilising separate LCR
and/or NSFR reporting and/or steering functions, which may be undertaking manually or
automatically.
(5) FTP/LTP and LCR/NSFR Reporting/Steering
• This solution has managed to fully integrate LTP systems into FTP systems in a centralised way,
and has also fully integrated LCR and NSFR reporting and steering functions, allowing banks to
undertake LCR/NSFR optimisation strategies whilst considering comparative transfer prices.
(6) Fully Integrated FTP/LTP/LCR/NSFR Solution
3

24. Manual/Automated Basel III (LCR/NSFR) Reporting
• Discuss Basel III Monitoring Reporting Template (Version 2.6.1) (Bank of
Luxembourg) – separate Microsoft Excel sheet.
24
2

25. A Select Review of Existing Software Applications
No. Software Application(s) Abbrev. Provider Abbrev.
25
1 Financial Services Funds Transfer Pricing
Financial Services Liquidity Risk Management
FSFTP
FSLRM
Oracle Financial Services Oracle
2 ABACUS/LiMa ABACUS/LiMa Bearing Point Software Solutions BESS
3 EPM Funds Transfer Pricing EPMFTP Axiom EPM® Axiom
4 Transfer Price Manager
Liquidity Manager
MORS TPM
MORS LM
MORS Software MORS
5 RiskConfidence™
Liquidity Risk Management and Compliance
RC
LRMC
Moody’s Analytics Moody’s
1

26. Oracle FSFTP, FSLRM: Company Offering
Oracle FSFTP
• Uses Matched Maturity (“MM”) FTP to enable accurate assessment of profitability along
product, channel, and business lines.
• Centralises IRR, and calculates option costs, e.g. prepayments, impact of rate caps and floors,
early redemption on deposits.
• Fully integrated with Oracle’s Financial Services Analytical Applications (shares common
customer account level data model) allowing accurate central control of pricing and
profitability.
• Provides 9 stochastic techniques:
• (1) Monte Carlo (pseudo-random numbers); (2) Monte Carlo (low discrepancy sequences); (3) Ho and Lee (TS); (4)
Merton (TS); (5) Vasicek (TS); (6) Extended Vasicek (TS); (7) Straight Line; (8) Cubic Spline; and (9) Quartic Spline.
• Provides 12 transfer pricing methods:
• (1) Cash Flow Weighted Term; (2) Cash Flow Zero Discount factor; (3) Cash Flow Duration; (4) Cash Flow Average
Life; (5) Caterpillar; (6) Moving Average; (7) Spread fromInterest Rate Code; (8) Spread from Note Rate; (9) Straight
Term; (10) Redemption Curve; (11)Weighted Average; (12) Unpriced Account.
26
1

27. Oracle FSFTP, FSLRM: Company Offering
Oracle FSLRM
• Can estimate a bank’s liquidity under normal and stressed business conditions; can identify and
manage liquidity threats by comparing liquidity gaps (under baseline assumptions and stress
conditions); and can focus on countering liquidity hotspots.
• Can define business assumptions based on multiple dimensions allowing banks to specify
business-as-usual (“BAU”) conditions (e.g. rollovers, run-offs, prepayments, asset value changes
or book growth, recoveries from delinquent accounts) at any required level of granularity
(contractual cash flows affected by absolute values or percentages).
• Can estimate LCR and NSFR ratios based on Basel III guidelines based on pre-specified
parameters such as liquidity horizon, liquidity haircuts, and funding factors.
• Can be used to specify and assign liquidity haircuts, available and required funding factors, and
can estimate the LCR and funding concentrations for each significant currency, product, and
counterparty.
27
1

28. Oracle FSFTP, FSLRM: Company Offering
28
LCR and NSFR and components are reported in line with Basel III requirements.
1/3

29. Oracle FSFTP, FSLRM: Company Offering
29
Detailed Bucket-Wise Gap report providing a multi-dimensional view of liquidity gaps including
currency, product, line of business, customer type, etc.
1/3

30. Oracle FSFTP, FSLRM: Company Offering
Detailed liquidity Gap Report after applying counterbalancing strategies to bridge liquidity gaps.
30
1/3

31. Advantages
• Oracle FSFTP and FSLRM seamlessly integrate data,
analytics, business rules, hierarchies, and reporting, to
allow superior risk, performance and strategic
management, customer insight, and compliance.
• Oracle FSFTP and FSLRM can be integrated at a very
core level owing to the common/shared data model
(including shared dimension attributes).
• Oracle FSFTP’s core strengths are scalability, ability to
accept data from any source, trustworthy results,
multidimensional reporting, and sophisticated analysis
capabilities.
• Oracle FSLRM is also designed to work with Asset
Liability Management systems already used by leading
global institutions (including Oracle Financial Services
Asset LiabilityManagement).
• Oracle FSLRM provides clarity on liquidity positions, and
allows BFIs to develop contingency funding plans that are
tailor-made to manage liquidity hotspots.
Disadvantages
• Oracle FSFTP is sophisticated, advanced, and
complex, and with a huge variety of transfer
pricing methods, add-on rates, and stochastic
methods for calculating option costs such as
Monte Carlo, Merton, and Cubic Spline, extensive
training and support may initially be required in
both pre-installation and post-installation phases.
• Oracle FSFTP and FSLRM are some of the most
advanced systems on the market, so they are
priced accordingly at the higher end of relevant
FTP and liquidity management software solutions
currently available.
• Oracle systems are often found in larger Tier 1
banking frameworks, and therefore design and
installation time frames for these types of systems
are typically much longer.
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Oracle FSFTP, FSLRM: Evaluation
1

32. BESS Abacus LiMa: Company Offering
Background, Functionalities and Key Benefits
• BESS are a very well established company, which holds over 65% of the German market (i.e. banks
and financial institutions) for legal reporting software, and are expanding to other international
markets (i.e. Luxembourg, Romania, Sweden, and the United Kingdom).
• BESS have significant market operational experience, and prime examples of LCR/LiMa working
partnerships include ‘Commerzbank AG’ and the National Bank of Romania (LCR/NSFR data
gathering).
• BESS Abacus LiMa users can interconnect regulatory and business requirements, and can take
profit and loss effects (plus effects on RWA) into account.
• BESS Abacus LiMa offers a centralised data repository for legal reporting and economic steering
based on the same interface.
• Data is presented via a cockpit in a management-oriented form. The system enables the regulatory
as well as the economic examination of the liquidity risk on the basis of a standardised and
consistent database.
• Optimization of LCR (including different regulatory caps/limits) possible, as well as simulation of
cash flows and single positions such as high liquid assets.
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1.5

33. BESS Abacus LiMa: Company Offering
33
Online Simulation - Overview
1/3

34. BESS Abacus LiMa: Company Offering
34
LCR Forecast
1/3

35. BESS Abacus LiMa: Company Offering
35
User Interface
LCR 20-Days Forecast Simulation
1/3

36. Advantages
• ABACUS/DaVinci product can be used to provide
high quality data for international and national
reporting (e.g. CoRep, FinRep, Large Exposures,
Statistical Reporting, Leverage Ratio, LCR, NSFR).
• ABACUS/LiMa product can currently be used for
LCR forecasting and steering purposes, e.g. with
graphical charts produced for Single Deal and
Portfolio Simulation (single transactions or
aggregated data).
• ABACUS/LiMa product enhancements planned
for 2015 (Collateral Swap Simulation, Reporting
Engine, GUI Manager, and Backtesting Tools).
• ABACUS/LiMa used in conjunction with
ABACUS/Da Vinci is an ideal software solution
platform for banks and financial institutions that
do not believe implementing a full FTP system
would be cost-effective, but wish to have a near-comprehensive
Basel III and LCR reporting,
forecasting, and steering solution.
Disadvantages
• BESS do not currently offer a completely
integrated FTP and liquidity management
solution, BESS only focus on liquidity
management and reporting, not FTP.
• ABACUS/LiMa product does not currently offer
NSFR simulation capabilities. BESS are waiting
for the Basel III NSFR requirements to be finalised,
and they also note that German financial
institutions currently prefer to deal with the NSFR
through business modelling, rather than NSFR
scenario analysis.
• ABACUS/LiMa product does not currently offer
cash flow simulation with deterministic or
stochastic flows, but these developments are
listed as future development opportunities.
• Software operating literature is not
comprehensively offered in English language
translations yet.
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BESS Abacus LiMa: Evaluation
1.5

37. Axiom EMPFTP: Company Offering
• Axiom’s EPMFTP calculates accurate FTP rates to view the value created by funds users, funds providers and
interest rate risk managers, with detailed and granular analysis, and the ability to apply external cost factors.
• Axiom’s EPMFTP utilises projected MM cash flows (at origination) to produce highly accurate FTP rates at the
customer level; the system calculates time and balance-weighted transfer funding rates for each cash flow strip.
• Axiom’s EPMFTP can:
• price the balance sheet;
• produce a range of analytical reports and processes (accessed via a finance-friendly Microsoft Excel® interface);
• drill down and analyse information by organisation, product, or officer;
• undertake incremental analysis which facilitates segmentation analysis at the product portfolio levels and by origination
month; and
• produce rate volume reports (i.e. detail spread income into days, spread, volume) and funding centre reports (net profit
and loss for all assets and crediting all liabilities).
• Axiom’s EPMFTP aims to provide analytical richness through the incorporating more detailed analysis of
margin results (e.g. credit score, risk rating, officer code, zip code, collateral code), and other analysis options
(e.g. segmentation, ranking, charting, drill through and derived calculations such as weighted averages).
37
1

38. Axiom EMPFTP: Company Offering
End-to-end integrated tools to
facilitate balance sheet monitoring
and planning, and align incentives with
planning.
Axiom’s EPMFTP multilayered dashboards provide banks and
financial institutions with a rich data repository from which to
draw financial, operational, or risk information.
38
0.5

39. Axiom EMPFTP: Company Offering
39
Historical Performance (PP1-x)
Analysis of a banking officer’s historical
pricing trends by product for any
designated year, can be compared to the
overall bank’s FTP spread for the same
product.
Prospective Performance (FP1-x)
Analysis of the principal runoff of the current portfolio
for any product and any officer, which can assist in the
budgeting process, i.e. determining new volumes and
rates needed to meet targets.
Current Performance (T0)
Facilitates analysis of pricing decision by
ranking of loan officers by volume
origination over x period, and by average
FTP Spread and net income effect (balance x
spread) booked for volumes.
0.5

40. Axiom EMPFTP: Company Offering
40
• Axiom EMPFTP offers mobile
dashboards which crucially make
critical performance information
available anywhere at any time.
• Axiom EMPFTP mobile dashboards
are available on all major operating
platforms, including tablets (e.g.
Apple iPad) and smartphones (e.g.
Apple iPhone and Android
BlackBerry).
• Axiom notes that end users can
interact with dashboards, spot trends,
conduct ad hoc analysis and make
timely, informed decisions regardless
of location, based on rich and highly
customizable performance data.
0.5

41. Advantages
• Axiom EPM offers an integrated financial
planning and decision support platform for banks
and financial institutions, providing them with
sophisticated planning, report and strategic
decision making tools and functions.
• Axiom EPMFTP offers both precision in
calculating FTP rates and deep and insightful
analytical reporting options, which leads to better
pricing decision overall.
• Axiom EPMFTP offers three time perspectives
(i.e. historical performance, current performance,
prospective performance) for a more holistic view,
facilitating analysis of pricing consistency over
time, as well as helping understand the impact of
maturing spreads on portfolio performance.
• Axiom financial software solutions offer rich and
robust enterprise dashboards from which banks
and financial institutions can visualise and manage
data and components.
Disadvantages
• Axiom EMP does not currently offer
comprehensively integrated LTP and
LCR/NSFR calculation, forecasting, and
reporting solutions.
• Integrating Axiom EPMFTP software
solutions with other LCR/NSFR software
solutions may require significant planning
and customisation.
• The comprehensive nature of Axiom
EMPFTP’s FTP analysis means that the
software packages will require significant
and comprehensive training in order to be
able to get the most out of FTP analytics,
e.g. including and calculating the impact of
the time dimension.
41
Axiom EPMFTP: Evaluation
1.5

42. 42
MORS TPM and LM: Company Offering
• MORS TPM and MORS LM can be used in conjunction with each other and with other software
offerings, such as MORS ‘Balance Sheet Manager’, for 3600 strategic management evaluation of e
current and future FTP and liquidity situation.
• MORS TPM is transparent, agile, and informative, and can cover all cost layers (i.e. CLC, term
liquidity/funding premium, basis/hedging costs, base rate).
• MORS TPM pricing is based on an infinite amount of user-defined curves; with CLC included (e.g.
Liquidity buffer cost); complete drill-down and monitoring of FTP transactional effects; and
dynamic alteration of FTP levels for any product, business line, client segment.
• MORS LM combines internal liquidity metrics and scenarios with Basel III LCR regulatory
requirements, which allows identification of funding gap, funding mismatch, concentration risk,
and stress testing for monitoring, forecasting, and steering purposes.
• MORS LM allows for liquidity buffer management (unencumbered, encumbered), OBS contingent
exposure follow-up and cash flow monitoring (net, gross) by counterparty (intra-day liquidity).
1

43. MORS TPM and LM: Evaluation (cont)
MORS is Different
It offers multi-dimensional, real-time,
drill down capabilities, in
order to facilitate balance sheet
forecasting, steering and
optimisation – the result is
customer profitability.
Example of MORS Transfer Pricing Calculator
43
0.5

44. 44
MORS TPM and LM: Company Offering
Example of
MORS LCR
Breakdown
0.5

45. 45
MORS TPM and LM: Company Offering
Example of
MORS LCR
Liquidity
Scenario
Cashflow
Details
0.5

46. 46
MORS TPM and LM: Company Offering
Example of MORS NSFR Balance Sheet Scenario Set-up
0.5

47. 47
MORS TPM and LM: Company Offering
Example of MORS NSFR Balance Sheet Scenario Totals/Ratio
0.5

48. 48
MORS TPM and LM: Company Offering
MORS Scenario Analysis Tools
0.5

49. MORS TPM and LM: Evaluation
Advantages
• MORS has decades of experience in developing and
refining market leading middle office and front office
integrated software functions.
• MORS offers a comprehensive range of fully integrated
treasury and risk management solutions, i.e. TPM, LM,
Trading Book, Balance Sheet Manager, Treasury Front &
Middle, and Multi Site Manager.
• MORS TPM and LM offer real-time FTP and liquidity
monitoring capabilities which can be dynamically
interfaced with the majority of financial data providers
such as Reuters and Bloomberg.
• MORS TPM liquidity costs can be determined based on
maturity , rate bases, currency, business unit,
counterparty type, product or any other classification
criteria in order to provide an efficient steering tool.
• MORS LM allow LCR forecasting, steering, and
optimisation with Basel III metrics, or other RWA settings
or haircuts available through the application of different
rule mapping profiles.
Disadavantages
• MORS software has a very high dominance in the Nordic
banking markets (e.g. Stockholm, Copenhagen, Oslo,
Helsinki) and has extended across Europe (e.g. Warsaw),
but has yet to reach high market shares in global markets
(e.g. New York, Moscow, Singapore, Hong Kong,
Shanghai).
• MORS software solutions have been primarily installed
across a large number of Tier 2 banks, soMORS has yet to
compete on a global level for installation within Tier 1
banks.
• MORS software solutions are generally installed in a
short-time frame as they traditionally rely on interfacing
existing data connections. Therefore building completely
new FTP, liquidity and risk management systems may
require longer installation and post-installation
timeframes.
• MORS software solutions have been designed to work
most efficiently as a comprehensive set of treasury and
risk management solutions, so may possibly not work as
effectively when integrated with other custom-built
software applications.
49
1

50. Moody’s LRMC and RC: Company Offering
Moody’s LRMC and RC
• Moody’s LRMC enables the quantification of liquidity risk and management of stress-testing
capabilities, e.g. quantification of sources and uses of funds, developing cashflow-based
liquidity metrics, and centralising liquidity inputs such as capital market and origination data.
• Moody’s LRMC assesses daily cash flows; examines liquidity risk exposures; and monitors
liquidity risk via dynamic dashboard which offers key customised management reports, i.e.
LCR/NSFR, RWA, forecast income statement and balance sheet.
• Moody’s RC has multi-currency capacity; parameter deal mapping; balance sheet strategy
capabilities; stress testing (e.g. scenario simulation, funding stress testing); and custom asset
liability/FTP/liquidity management, e.g. funding and behavioural models, and contingent
liquidity and buffers.
• Moody’s offers comprehensive enterprise risk management via its ‘Liquidity Risk Solution
Family’, which includes RiskConfidence ™(IRR, FTP), RiskAuthority™(regulatory capital),
Scenario Analyzer (stress testing models), and Regulatory Reporting Module (regulatory
reports), RiskFoundation™ (optimized platform).
50
1

51. Moody’s LRMC and RC: Company Offering
Ability to define transfer price settings at the account or
Parameter Deal Mapping levels. MM FTP calculations
performed at instrument level (including deal level
adjustments to base transfer pricing curve).
51
1

52. Advantages
• Moody’s LRMC facilitates the calculation of LCR
and NSFR and all the relevant risk indicators need
for populating Basel III Pillar 1 and 3 risk reports.
• Moody’s LRMC allows banks to manage multi-jurisdictional
liquidity regulatory requirements for
over 50 jurisdictional supervisors.
• Moody’s LRMC facilitates centralised liquidity risk
management; advanced cash flow deposit
modelling (non-maturing deposits); high
performance grid computing; and comprehensive
advisory services.
• Moody’s RC manages liquidity risk (LCR, NSFR,
and liquidity gaps and buffers); allows liquidity
modelling; computes net interest income and
economic value of equity; defines multi-factor
behaviour models; and integrates and managers
maturity-matched FTP capabilities.
Disadvantages
• Moody’s LRMC and RC offer top-of-the-line
operating software so will be priced at the top-end
of the relevant software vendor purchase and
installation costs.
• Moody’s LRMC and RC offer a wide array of
complex computational and analysis tools which
may require a lot of initial training and installation
and post-installation support.
• Moody’s LRMC and RC architecture may need
significant IT and change management planning,
so may have prolonged installation and testing
phases.
• Moody’s Liquidity Risk Solution Family has been
specifically designed to function as a
comprehensive and modular solution, so may not
work as seamlessly integrated with other IT
architecture.
52
Moody’s LRMC and RC: Evaluation
2

53. 53

54. Appendix: Basel III and Liquidity Guiding Principles
• Basel Committee on Banking Supervision, Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools,
54
(January, 2013) Bank for International Settlements.
• Basel Committee on Banking Supervision, Consultative Document Basel III: The Net Stable Funding Ratio, (February,
2014) Bank for International Settlements.
• Basel Committee on Banking Supervision, Instructions for Basel III Monitoring, (25 March, 2014) Bank for
International Settlements.
• Basel Committee on Banking Supervision, Principles for Sound Liquidity Risk Management and Supervision,
(September, 2008) Bank for International Settlements.
• Committee of European Banking Supervisors (CEBS), Guidelines on Liquidity Cost Benefit Allocation, (27 October,
2010).
• Financial Services Authority, Strengthening liquidity standards, Policy Statement 09/16, (October, 2009).
• Financial Stability Institute, Liquidity transfer pricing: a guide to better practice, (Occasional Paper No 10).
(December 2011). Financial Stability institute, Bank for International Settlements, by JoelGrant (Australian Prudential
Regulation Authority).
• Moody's Analytics, Eleven Best Practice Principles for Implementing High-Value FTP Systems, (September, 2011).

55. 55
References: (1)
• Accenture (2011). Basel III and Its Consequences: Confronting a New Regulatory Environment. Accenture Management Consulting, by Michael Auer,
(Executive Principal, Accenture Risk Management, Munich), Georg von Pfoestl (Manager, Accenture Risk Management, Vienna), and Jacek
Kochanowicz (Manager, Accenture Risk Management, Frankfurt).
• AxiomEPM (2012). Extracting More Value from FundsTransfer Pricing. (April).White Paper.
• BCBS (2010). Results of the comprehensive quantitative impact study. (December). Basel Committee on Banking Supervision, Bank for International
Settlements.
• BCBS (2013). Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools. (January). Basel Committee on Banking Supervision, Bank for
International Settlements.
• BCBS (2014). Basel III: The Net Stable Funding Ratio. (January). Basel Committee on Banking Supervision, Bank for International Settlements.
• Becker, L. (2014). Repo desks up in arms about NSFR. (7 April), Riskmagazine.
• CEBS (2010). Results of the comprehensive quantitative impact study. (16 December). Committee of European Banking Supervisors.
• Devasabai, K. (2014). Hedge funds face higher prime broker charges under Basel III. (18 June). Risk Magazine.
• Farooqui, S. (2011). Development of Simulation based Model to quantify the degree of Bank’s Liquidity Risk. 2011 ERM Symposium (14-16 March),
Swissôtel Chicago, Chicago, IL.

56. 56
References: (2)
• Felder, R. and Mahlknecht, M. (2013). Basel III: Solving the Liquidity Business Challenge. (April). Capco Journal 37: Cass-Capco Institute Paper Series
on Risk, pp.76-94.
• FSI (2011). Liquidity transfer pricing: a guide to better practice (Occasional Paper No 10). (December). Financial Stability institute, Bank for
International Settlements, by JoelGrant (Australian Prudential Regulation Authority).
• IMF (2013). Changes in Bank Funding Patterns and Financial Stability Risks, In Global Financial Stability Report: Transition Challenges to Stability,
pp.105-148. (October), International Monetary Fund.
• IMF (2014). The Net Stable Funding Ratio: Impact and Issues for Consideration. IMF Working Paper, (WP/14/106) by Jeanne Gobat, Mamoru Yanase,
and Joseph Maloney (ThisWorking Paper should not be reported as representing the views of the IMF).
• King,M.R. (2013). The Basel III Net Stable Funding Ratio and bank net interest margins. Journal of Banking & Finance, 37, pp.4144-4156.
• Kratky, A. (2012). Incorporating Liquidity Risk into Funds Transfer Pricing: Progress and Challenges. Commerzbank (Group Treasury – Liquidity
Analytics), presentation for the Professional Risk Managers’ International Association.
• Leon, C. (2012). Estimating the intraday liquidity risk of financial institutions: a Monte Carlo simulation approach. (27 September 2012), Journal of
FinancialMarket Infrastructures.
• Linklaters (2011). Basel III and project finance. (July), Briefing by MatthewWorth and Edward Chan, as published in Project Finance International, 29
June 2011, Issue 460.

57. 57
References: (3)
• Matz, L. (2011). Liquidity RiskMeasurement andManagement. Xlibris Corporation.
• McKinsey (2010). Basel III and European banking: Its impact, how banks might respond, and the challenges of implementation. (November),
McKinsey Working Papers on Risk, Number 26, McKinsey & Company, by Philipp Härle, Erik Lüders, Theo Pepanides, Sonja Pfetsch, Thomas
Poppensieker, andUwe Stegemann.
• Moody’s Analytics (2011). Implementing High Value Funds Transfer Pricing Systems. (September)ModelingMethodology by Robert J.Wyle, CFA and
YaakovTsaig, Ph.D.
• Moody’s Analytics (2013). Liquidity Risk Management is a Game Changer. (December) Research /Whitepaper by Cayetano Gea-Carrasco (Stress
Testing, Balance Sheet Management, and Liquidity Practice Leader) and David Little (Managing Director, Head of the US Enterprise Risk Solutions and
SalesTeam).
• Oracle Financial Services (2011).Oracle Financial Services Liquidity Risk Management. Oracle Data Sheet.
• Pokutta, S. and Schmaltz, C. (2012). Optimal Bank Planning Under Basel III Regulations. Capco Journal of Financial Transformation, Journal 34,
pp.165-174.
• PwC (2014). Stretched to the limit: Dealing with the implications of the NSFR (Basel III breakfast briefing series). PricewaterhouseCoopers LLP.
• SSG (2009). Risk Management Lessons fromthe Global Banking Crisis of 2008. (21October). Senior SupervisorsGroup.
• Taylor, S. (2011). Unlocking Liquidity Premiums. (April) Novantas Review, pp.1-4.
• Watt,M. (2012). Basel III blamed for aircraft financing drought. (9 May), Riskmagazine.

58. Presentation Information
DECLARATION OFCONFLICTING INTERESTS
The author declares that to the best of his knowledge he has no potential conflicts of interest with respect to the research or
authorship of this presentation.
ABOUTTHE PRESENTER
Rodrigo Zepeda is an independent consultant who specialises in derivatives and financial services law, regulation, and
compliance. He holds a LLM Masters degree in International and Comparative Business Law, has been an Associate of the
Chartered Institute for Securities and Investment since 2004, and has passed the New York Bar Examination. He has also
published widely in leading industry journals such as the Capco Institute’s Journal of Financial Transformation, the Journal of
International Banking Law and Regulation, as well as e-books on derivatives law. Noted publications include “Optimizing Risk
Allocation for CCPs under the European Market Infrastructure Regulation”; “The ISDA Master Agreement 2012: A Missed
Opportunity”; “The ISDA Master Agreement: The Derivatives Risk Management Tool of the 21st Century?”; and “To EU, or not to
EU: that is the AIFMD question”.
58
CONTACT DETAILS
Email: rodrigo@zepeda.co.uk
LinkedIn: http://www.linkedin.com/in/rodrigozepeda
Mobile: UK + (0)7592457373

59. 4th Annual
Practical Funds Transfer Pricing and Balance Sheet Management Forum
17th September 2014, London, UK
NSFR LIQUIDITY FRAMEWORK:
Practical Implementation
Requirements
IMPLEMENTATION REQUIREMENTS TO ADAPT
TO NEW NSFR LIQUIDITY PARAMETERS
WORKSHOP
Rodrigo Zepeda
Independent Consultant