Publication Date: 2023-12-11 | Regulator: Bank of England (BOE)
Title: CP19/24 – Closing liquidity reporting gaps and streamlining Standard Formula reporting
Main Objective and Summary
The main purpose of the regulatory document, specifically the consultation paper CP19/24 titled “Closing liquidity reporting gaps and streamlining Standard Formula reporting,” is to enhance the PRA’s framework for monitoring and supervising liquidity risk at large insurance firms. The document outlines proposed changes aimed at improving the quality and consistency of liquidity reporting, thereby ensuring that the PRA has access to crucial data necessary for effective supervision.
Summary of the Document:
- Context and Background: The document addresses the increasing liquidity risks faced by large life insurers, particularly due to the significant growth in derivatives usage. It highlights the limitations of current regulatory returns in providing detailed and timely information on cash flows and liquidity risks.
- Proposed Changes: The PRA proposes to require firms to report on committed credit and liquidity facilities exceeding £10 million annually. This includes detailed information on lenders, payment dates, collateral requirements, and total amounts available. The aim is to ensure that the PRA has a comprehensive understanding of firms’ liquidity positions.
- Removal of SF.01 Reporting Expectation: The PRA plans to remove the annual SF.01 reporting expectation for internal model (IM) life insurance firms. This change is intended to reduce the reporting burden on these firms while maintaining adequate supervision and oversight.
- Regulatory Principles: The proposals are developed in line with the PRA’s regulatory principles, including proportionality, efficient use of resources, and transparency. The PRA aims to ensure that the reporting requirements are proportionate to the risks faced by different firms.
- Objectives: The primary objectives of the proposals are to enhance the safety and soundness of firms, protect policyholders, and facilitate effective competition within the insurance sector. By improving liquidity reporting, the PRA seeks to address vulnerabilities and promote confidence in the UK insurance market.
- Consultation Process: The document invites feedback from stakeholders on the proposed changes, with a deadline for responses set for March 31, 2025. The PRA will consider these responses in finalizing its approach to liquidity reporting.
Questions we asked our AI RIG (Regulatory Insights Generator)
What are the key requirements outlined for liquidity reporting and Solvency II reforms?
The key requirements outlined for liquidity reporting and Solvency II reforms in the PRA’s consultation paper CP19/24 include the following:
Liquidity Reporting Requirements:
- New Reporting Templates: The PRA proposes the introduction of four new reporting templates and instruction files to standardize the collection of liquidity data from large UK insurers. These templates will facilitate consistent and comparable reporting across firms.
- Frequency of Reporting: Firms will be required to report on their liquidity positions on a quarterly basis, with specific provisions for daily reporting during periods of elevated risk or market stress. This aims to provide the PRA with timely and relevant information to assess liquidity risks.
- Thresholds for Reporting: The new liquidity reporting requirements will apply only to solo UK Solvency II firms that exceed certain asset thresholds:
- Firms with average assets exceeding £20 billion over the previous three quarterly reporting periods.
- Firms with gross notional value of derivatives contracts exceeding £10 billion.
- Firms with total value of on and off-balance sheet securities involved in lending or repurchase agreements exceeding £1 billion.
- Key Information to be Reported: The reporting will include details on:
- Sensitivity of unencumbered asset values and collateral flows to changes in market variables (e.g., interest rates, exchange rates, inflation).
- Committed credit and liquidity facilities exceeding £10 million, including information on lenders, payment dates, collateral requirements, and total amounts available.
- Focus on Liquidity Risk Management: The proposals emphasize the importance of effective liquidity risk management, aligning with the PRA’s expectations set out in Supervisory Statement (SS) 5/19. Firms are expected to have robust frameworks in place to manage liquidity risks effectively.
Solvency II Reforms:
- Streamlining Reporting: The PRA aims to streamline the reporting framework under Solvency II by removing certain templates and simplifying the reporting process. This is intended to reduce the reporting burden on firms while ensuring that the PRA retains the necessary oversight capabilities.
- Changes to SF.01 Reporting Expectations: The PRA proposes to remove the expectation for internal model (IM) life insurance firms to report the Standard Formula Solvency Capital Requirement (SF SCR) annually via the SF.01 template. This change is designed to lower reporting costs for these firms without compromising the PRA’s supervisory objectives.
- Proportionality in Reporting: The reforms are designed to ensure that the reporting requirements are proportionate to the size and complexity of the firms involved. The PRA recognizes that larger firms may face greater liquidity demands and therefore requires more detailed reporting from them.
- Consultation and Feedback: The PRA is engaging with stakeholders through a consultation process to gather feedback on the proposed liquidity reporting requirements and Solvency II reforms. This feedback will be considered in finalizing the regulatory framework.
These key requirements reflect the PRA’s commitment to enhancing the regulatory framework for liquidity risk management and ensuring that firms are adequately prepared to handle potential market stresses. By implementing these changes, the PRA aims to improve the overall stability and resilience of the UK insurance sector.
What are the new liquidity reporting templates introduced by PRA?
The PRA has proposed the introduction of four new liquidity reporting templates aimed at enhancing the liquidity reporting framework for large insurance firms. These templates are designed to standardize the collection of liquidity data and improve the PRA’s ability to monitor and assess liquidity risks. The key details of these new templates are as follows:
- Cash Flow Mismatch Template
- Purpose: This template is intended to provide a comprehensive view of expected and contractual cash inflows and outflows, unencumbered assets, and certain contingent liquidity demands.
- Content: It will collect information on cash flows resulting from insurance and reinsurance contracts, debts, and other financial contracts. The template will also capture counterbalancing capacity provided by investments and outflows contingent on external events, such as downgrades or market shocks.
- Frequency: Firms will be required to report using this template on a regular basis, allowing the PRA to assess liquidity adequacy in both normal and stressed conditions.
- Liquidity Management Reporting Template (L-MRS)
- Purpose: This template is designed to provide insights into firms’ liquidity management practices and their exposure to liquidity risks.
- Content: It will include information on the liquidity position, including the sensitivity of unencumbered asset values and collateral flows to changes in market variables, as well as details on committed credit and liquidity facilities.
- Frequency: Reporting will be required on a quarterly basis, with additional requirements during periods of heightened risk.
- Derivative Exposure Reporting Template
- Purpose: This template aims to enhance the understanding of firms’ derivative exposures and their impact on liquidity risk.
- Content: It will capture position-by-position details about derivative exposures, including margin and collateral flows, and the sensitivity of these positions to changes in market conditions.
- Frequency: Firms will be required to report this information quarterly, with a focus on providing timely data to the PRA.
- Committed Facilities Template
- Purpose: This template is focused on capturing information about committed credit and liquidity facilities that firms have in place.
- Content: It will require firms to report details on lenders, payment dates, collateral requirements, and total amounts available under these facilities.
- Frequency: Reporting will be required annually, with minimal costs expected for firms that do not have committed facilities.
Overall Objectives of the New Templates:
- Standardization: The introduction of these templates aims to standardize liquidity reporting across firms, enabling the PRA to make effective comparisons and assessments of liquidity risk.
- Timeliness: By requiring more frequent and detailed reporting, the PRA seeks to enhance its ability to monitor liquidity positions in real-time, particularly during periods of market stress.
- Risk Management: The templates are designed to support firms in better managing their liquidity risks by providing them with a clearer understanding of their cash flows and liquidity positions.
These new liquidity reporting templates represent a significant step towards improving the PRA’s oversight of liquidity risks in the insurance sector, ensuring that firms are better equipped to handle potential liquidity challenges.
How does the PRA plan to assess the sensitivity of firms' liquidity positions to market changes?
The PRA plans to assess the sensitivity of firms’ liquidity positions to market changes through the implementation of a Liquidity Market Risk Sensitivities (L-MRS) template. This template is designed to collect specific information that will enable the PRA to evaluate how fluctuations in various market variables impact firms’ liquidity positions. The key components of this approach include:
- Quarterly Reporting: Firms will be required to submit the L-MRS template on a quarterly basis, with a remittance period of 30 business days (T+30). This frequency is intended to ensure that the PRA receives timely updates on liquidity sensitivities, which are expected to change more rapidly than solvency sensitivities.
- Focus on Key Market Variables: The L-MRS template will specifically assess the sensitivity of firms’ liquidity positions to changes in critical market variables, including:
- Interest rates
- Sterling exchange rates
- Inflation
- Government bond spreads
- Credit spreads
By focusing on these variables, the PRA aims to isolate potential risk drivers that could lead to liquidity strains.
- Sensitivity Analysis: Firms will be required to report on how the values of unencumbered assets and collateral flows are affected by changes in the specified market conditions. This analysis will include variations in the mark-to-market value of derivatives and the value of collateral held in respect of derivatives, securities financing transactions, or reinsurance contracts.
- Granular Data Collection: The L-MRS template will allow the PRA to gather granular data on the cash flows that expose firms to short-term liquidity needs. This detailed information will facilitate a more nuanced understanding of how market changes can impact liquidity positions.
- Complementing Existing Frameworks: The information collected through the L-MRS template will complement the PRA’s existing market risk sensitivities (MRS) used for monitoring potential vulnerabilities in firms’ solvency positions. This integrated approach will enhance the PRA’s overall ability to assess both liquidity and solvency risks.
- Proactive Risk Management: By requiring firms to regularly update their liquidity sensitivities, the PRA aims to foster proactive risk management practices within firms. This will enable firms to better anticipate and respond to market fluctuations that could affect their liquidity positions.
What information will the PRA require from firms regarding committed credit and liquidity facilities?
The PRA will require firms to report comprehensive information regarding committed credit and liquidity facilities that exceed £10 million. This reporting will be conducted annually and will include the following key details:
- Total Committed Amount: Firms must disclose the total committed amount of each facility. This figure represents the maximum amount that can be drawn upon by the firm under the terms of the facility.
- Total Amount Drawn and Available: Firms are required to report on the total amount that has been drawn from the facility as well as the total amount still available for future drawdown. This information is crucial for assessing the liquidity resources accessible to the firm.
- Lender Information: The report must include details about the lender providing the facility. This may encompass the name of the lending institution and any relevant identifiers that clarify the relationship between the firm and the lender.
- Contractual Payment and Maturity Dates: Firms will need to specify the contractual payment dates associated with the facilities, as well as the maturity dates. This information is essential for understanding the timing of repayment obligations and the duration of the liquidity support.
- Collateral Requirements: The report must outline any collateral requirements tied to the committed facilities. This includes details on whether collateral is needed to secure the facility and, if so, the nature and value of the collateral.
- Nature of the Facility: Firms may also be required to provide information on the type of facility (e.g., revolving credit facility, term loan, etc.) to give context to the liquidity support being reported.
- Additional Terms and Conditions: Any significant terms and conditions associated with the facilities that could impact the firm’s ability to utilize the liquidity support may also need to be reported.
The PRA’s requirement for this detailed reporting aims to enhance its understanding of the liquidity resources available to firms, particularly in stress scenarios. By collecting this information, the PRA can better assess the adequacy of firms’ liquidity positions and their ability to respond to potential liquidity demands during periods of financial strain. This comprehensive data collection will also facilitate the PRA’s evaluation of firms’ recovery plans and actions in the event of liquidity stress.
What measures are in place to protect personal data submitted in response to the PRA's consultation?
The PRA has implemented several measures to protect personal data submitted in response to its consultation, ensuring compliance with data protection regulations while balancing transparency and accountability. The key measures include:
- Redaction of Personal Data: The PRA commits to redacting all personal data from the responses it receives within five years of receipt. This ensures that any identifiable information is removed from the public domain, thereby protecting the privacy of individuals who participate in the consultation.
- Data Processing in Accordance with Law: The PRA processes personal data in compliance with applicable data protection laws, including the General Data Protection Regulation (GDPR) and the Data Protection Act 2018. This legal framework governs how personal data is collected, stored, and used.
- Confidentiality Considerations: Respondents are given the opportunity to indicate whether they consider all or part of the information provided as confidential. The PRA takes these indications into account when handling responses and may consider confidentiality requests when disclosing information.
- Disclosure in Accordance with Access to Information Regimes: While the PRA may disclose information in accordance with access to information regimes, such as the Freedom of Information Act 2000, it will assess each request for disclosure carefully. The PRA will consider the implications of such disclosures on personal data and confidentiality.
- Retention and Deletion Policies: The PRA retains responses for a period relevant to supporting ongoing regulatory policy developments and reviews. However, personal data will be redacted within five years, ensuring that it does not remain in the PRA’s records longer than necessary.
- Transparency in Data Use: The PRA provides clear information in its privacy statement regarding how personal data will be processed, the rights of individuals regarding their data, and the procedures for withdrawing or amending consent for data use.
- Contact Information for Data Queries: The PRA offers contact details for individuals who may have questions or concerns regarding the handling of their personal data, ensuring that respondents have a channel for addressing any data protection issues.
These measures collectively aim to safeguard personal data submitted in response to the PRA’s consultation while maintaining the integrity of the consultation process and the PRA’s regulatory responsibilities. By balancing the need for transparency with the protection of individual privacy, the PRA seeks to foster trust and encourage participation in its consultations.
What is the scope, attributes and submission timeline for Cash Flow Mismatch Template?
The Cash Flow Mismatch Template is a vital tool for the PRA to assess liquidity adequacy and monitor potential mismatches between inflows and outflows. By establishing clear requirements regarding its scope, attributes, and submission timeline, the PRA aims to enhance the overall liquidity risk management framework within the UK insurance sector. Below are the details regarding its scope, attributes, and submission timeline:
Scope
- Applicability: The Cash Flow Mismatch Template applies to UK Solvency II firms, including solo entities that may have multiple ring-fenced funds (RFFs) or matching adjustment portfolios (MAPs).
- Coverage: The template is designed to capture a comprehensive view of expected and contractual cash inflows and outflows, unencumbered assets, and certain contingent liquidity demands. It aims to provide insights into the liquidity position of firms under both normal and stressed market conditions.
Attributes
- Key Information: The Cash Flow Mismatch Template will require firms to report on:
- Expected and contractual cash inflows and outflows from various sources, including insurance business, financial transactions, and other relevant activities.
- Unencumbered assets categorized by type and maturity.
- Securities flows and the impact of specified market changes on contingent inflows and outflows.
- Memorandum items that provide additional context or relevant information.
- Granularity: The template will require firms to provide both backward-looking data (to identify deviations from expectations) and forward-looking data (to act as early warning indicators for potential liquidity stress).
- Frequency of Reporting: Firms will be required to submit the Cash Flow Mismatch Template on a monthly basis, with the possibility of daily reporting during periods of heightened liquidity risk or stress.
Submission Timeline
- Monthly Submission: The PRA proposes that firms must submit the Cash Flow Mismatch Template monthly, with a remittance period of T+10 (10 business days after the reporting date).
- Accelerated Reporting: In the event of a firm-specific liquidity stress or a general market liquidity stress event, the PRA may require firms to submit the Cash Flow Mismatch Template on a daily basis. This would ensure that the PRA has timely access to critical liquidity information to effectively carry out its supervisory functions.
- Preparation for Accelerated Reporting: Firms are expected to be prepared for the potential of accelerated daily reporting, ensuring that they have the necessary systems and processes in place to gather and report the required data promptly.
What is the scope, attributes and submission timeline for Liquidity Management Reporting Template (L-MRS)?
The Liquidity Management Reporting Template (L-MRS) is a crucial tool for the PRA to assess and monitor liquidity risks within large insurance firms. By establishing clear requirements regarding its scope, attributes, and submission timeline, the PRA aims to enhance the overall understanding of liquidity management practices and potential vulnerabilities in the insurance sector. Below are the details regarding its scope, attributes, and submission timeline:
Scope
- Applicability: The L-MRS applies to solo UK Solvency II firms that meet specific asset thresholds. Firms must have assets exceeding £20 billion on average over the previous three quarterly reporting periods to be subject to these reporting requirements.
- Coverage: The L-MRS is intended to provide insights into firms’ liquidity management practices and their exposure to liquidity risks. It focuses on the sensitivity of liquidity positions to changes in market variables.
Attributes
- Key Information: The L-MRS will require firms to report on:
- The sensitivity of unencumbered asset values and collateral flows to changes in various market variables, including interest rates, sterling exchange rates, inflation, government bond spreads, and credit spreads.
- Details on committed credit and liquidity facilities available to the firm.
- Information on the liquidity position, including the availability of liquid assets and potential liquidity demands.
- Sensitivity Analysis: The template will facilitate the assessment of how changes in market conditions could impact the firm’s liquidity position, enabling the PRA to identify potential vulnerabilities.
- Granularity: The L-MRS will focus on solo entities, allowing for a more detailed understanding of liquidity risks at the individual firm level, complementing the broader insights provided by other templates.
Submission Timeline
- Quarterly Submission: Firms will be required to submit the L-MRS on a quarterly basis, with a remittance period of T+30 (30 business days after the reporting date).
- Timeliness: The PRA emphasizes the importance of timely reporting, as liquidity sensitivities are expected to change more rapidly than solvency sensitivities. Therefore, regular updates will be necessary to ensure effective monitoring of liquidity risk.
- Additional Reporting During Stress: In periods of heightened liquidity risk, the PRA may require firms to provide additional information or more frequent updates to ensure that supervisors have access to the most current data regarding liquidity positions.
What is the scope, attributes and submission timeline for Committed Facilities Template?
The Committed Facilities Template is a vital component of the PRA’s liquidity reporting framework, aimed at enhancing the understanding of firms’ access to liquidity in times of stress. By establishing clear requirements regarding its scope, attributes, and submission timeline, the PRA seeks to ensure that firms are adequately prepared to manage liquidity risks and respond effectively to potential liquidity crises. Below are the details regarding its scope, attributes, and submission timeline:
Scope
- Applicability: The Committed Facilities Template applies to both solo firms and groups within the UK insurance sector. It is relevant for firms that have access to committed credit and liquidity facilities from third parties.
- Coverage: The template focuses on capturing information about significant contingent sources of liquidity that may be available to firms during periods of liquidity stress. Specifically, it targets facilities with a total committed amount greater than £10 million (or the foreign currency equivalent).
Attributes
- Key Information: The Committed Facilities Template will require firms to report on:
- Total committed amount of each facility.
- Total amount drawn and available under each facility.
- Details regarding the lender, including the contractual payment and maturity dates.
- Any requirements for collateral associated with the facilities.
- Information on the total amount still available through each facility.
- Purpose: The information collected through this template will enable the PRA to assess the extent to which firms can draw down significant additional liquidity in times of stress, thereby enhancing the PRA’s understanding of firms’ liquidity positions and recovery plans.
Submission Timeline
- Annual Submission: Firms will be required to submit the Committed Facilities Template annually, with a remittance period of T+70 (70 business days after the reporting date).
- Rationale for Annual Reporting: The PRA considers that annual reporting is sufficient because it does not generally expect significant variation throughout the year in the number or composition of facilities with total committed amounts greater than £10 million.
- Timeliness of Information: While the template is submitted annually, firms are expected to maintain accurate and up-to-date records of their committed facilities to ensure that they can provide timely information when required.
What is the scope, attributes and submission timeline for Derivatives and Securities Template?
The Derivatives and Securities Template is a critical tool for the PRA to monitor and assess liquidity risks associated with derivatives and securities held by insurance firms. By establishing clear requirements regarding its scope, attributes, and submission timeline, the PRA aims to enhance the overall understanding of firms’ liquidity management practices and the potential impact of market conditions on their liquidity positions. Below are the details regarding its scope, attributes, and submission timeline:
Scope
- Applicability: The Derivatives and Securities Template applies to solo UK Solvency II firms that have significant exposure to derivatives or securities involved in lending or repurchase agreements.
- Coverage: The template is designed to capture detailed information about the firm’s derivative positions and securities, particularly those that may impact liquidity management and risk assessment.
Attributes
- Key Information: The Derivatives and Securities Template will require firms to report on:
- Position-by-position details about derivative exposures, including the gross notional value of derivatives contracts.
- Information on the types of derivatives held, their associated risks, and the potential impact on liquidity.
- Details regarding securities involved in lending or repurchase agreements, including their total value and any relevant collateral requirements.
- Sensitivities of derivative positions to changes in market conditions, which may include interest rates, credit spreads, and other relevant market variables.
- Purpose: The information collected through this template will enable the PRA to assess the liquidity risks associated with derivatives and securities, allowing for better monitoring of potential vulnerabilities in firms’ liquidity positions.
Submission Timeline
- Quarterly Submission: Firms will be required to submit the Derivatives and Securities Template on a quarterly basis, with a remittance period of T+30 (30 business days after the reporting date).
- Timeliness of Information: The PRA emphasizes the importance of timely reporting, as liquidity stresses can develop quickly, particularly in relation to derivatives and securities. Regular updates will ensure that supervisors have access to the most current data regarding firms’ exposures and liquidity risks.
What are the key implementation dates and transitional periods?
The document outlines several key implementation dates and transitional periods related to the proposed changes in liquidity reporting requirements. These key implementation dates and transitional periods are designed to facilitate a smooth transition to the new liquidity reporting framework while allowing firms sufficient time to adapt to the changes. The PRA aims to ensure that firms are well-prepared to meet the new requirements and that the regulatory framework remains robust and effective in monitoring liquidity risks. Below are the details:
Key Implementation Dates
- Implementation Date for Changes: The PRA proposes that the implementation date for any changes resulting from the consultation paper (CP19/24) will be 31 December 2025. This date marks when the new liquidity reporting requirements are expected to come into effect.
- Temporary Extension for SF.01 Submission: As a temporary measure, the PRA has decided that the deadline for Internal Model (IM) life insurance firms to submit the SF.01 template for the year-end 2024 has been extended to 15 September 2025. This extension allows time for the PRA to consider consultation responses and determine whether to implement the proposed policy.
Transitional Periods
- Consultation Period: The consultation on the proposals outlined in the document will close on 31 March 2025. During this period, stakeholders are invited to provide feedback on the proposed changes.
- Temporary Measures: The PRA has indicated that no policy decision regarding the removal of the expectation for IM life insurance firms to submit the SF.01 figures annually will be made until the end of the consultation and the completion of the PRA’s policy-making processes. This transitional period is crucial for ensuring that firms have adequate time to prepare for any changes.
What are the reporting thresholds mentioned in the document?
The reporting thresholds mentioned in the document are critical for determining which firms are subject to the PRA’s proposed liquidity reporting requirements. The specific thresholds are as follows:
Reporting Thresholds
- Asset Threshold:
- Firms must have more than £20 billion in assets on average over the last three quarterly reporting periods. This threshold is designed to capture firms with significant size in the insurance sector, as those with more than £20 billion in assets account for approximately 70% of the total asset base of the UK insurance sector.
- Derivatives Exposure Threshold:
- Firms must have a gross notional value of derivatives contracts exceeding £10 billion. This threshold is intended to identify firms with substantial exposure to derivatives, which can lead to significant liquidity demands.
- Securities Financing Transactions (SFTs) Threshold:
- Firms must have a total value of on and off-balance sheet securities involved in lending or repurchase agreements exceeding £1 billion. This threshold aims to capture firms that may face material liquidity demands due to their involvement in SFTs.
Additional Considerations
- The PRA proposes that firms meeting these thresholds would be required to submit the proposed returns for three years before they can fall out of scope, ensuring stability in the reporting requirements.
- The thresholds are designed to apply retrospectively, meaning that firms would be subject to the requirements if they meet the thresholds at the proposed implementation date of 31 December 2025, based on their balance sheet over the three quarterly reporting periods prior to implementation.
These thresholds are crucial for identifying firms that have a potentially material exposure to liquidity risk and ensuring that the PRA can effectively supervise and monitor liquidity risk within the insurance sector.
What are actions the document is asking firms to take?
The document outlines several actions that firms are expected to undertake in response to the proposed changes in liquidity reporting requirements. Below are the key actions that firms are being asked to take:
Actions for Firms
- Monthly Returns Submission:
- Firms are required to produce monthly returns that contain granular information on:
- Assets
- Insurance cash flows
- Derivative cash flows
- Other financial contract cash flows
- For faster-moving exposures, firms must provide data in frequent, sometimes daily time steps, showing how positions have changed in the past month and how they are expected to change in the next three months.
- Firms are required to produce monthly returns that contain granular information on:
- Implementation of Reporting Templates:
- Firms must implement the proposed reporting templates, including the cash flow mismatch templates and the L-MRS (Liquidity Market Risk Sensitivity) template.
- The L-MRS template will require firms to report on the sensitivity of the value of unencumbered assets and derivatives to changes in market conditions.
- Data Collection and Management:
- Firms need to enhance their data collection processes to ensure they can provide timely, consistent, and comparable data on liquidity risk.
- This includes ensuring that they have access to the necessary granular information about their liquidity positions and the quality of unencumbered assets.
- Regular Updates on Cash Flow Positions:
- Firms are expected to regularly update their information on how assets and cash flow positions could change in response to specific market variables.
- Cost Management:
- Firms should prepare for the additional ongoing costs associated with the regular provision of the proposed reporting to the PRA, as well as one-off costs to implement the necessary systems and processes for producing the required data.
- Engagement with the PRA:
- Firms are encouraged to engage with the PRA during the consultation period to provide feedback on the proposals and to seek clarification on any aspects of the new reporting requirements.
- Compliance with International Standards:
- Firms should align their liquidity reporting practices with international standards, particularly those set forth by the International Association of Insurance Supervisors (IAIS), to enhance the UK’s competitiveness in insurance regulation.
Any additional information firms should pay attention to?
Firms should pay attention to several additional considerations as they prepare for the implementation of the new liquidity reporting requirements proposed by the PRA. Below are key points of additional information that firms should be aware of:
Additional Considerations for Firms
- Understanding Reporting Thresholds:
- Firms must be aware of the specific thresholds that determine whether they fall under the new reporting requirements. The PRA proposes that these requirements apply to solo UK Solvency II firms with assets exceeding £20 billion on average over the previous three quarterly reporting periods, as well as those with significant derivative exposures or securities involved in lending or repurchase agreements.
- Impact of Market Conditions:
- Firms should consider how varying market conditions may affect their liquidity positions and the reporting of cash flows. The PRA emphasizes the importance of understanding potential liquidity demands during stress scenarios, such as margin calls on derivatives.
- Data Quality and Consistency:
- Firms need to ensure that the data they provide is of high quality and consistent across different reporting periods. This includes maintaining accurate records of unencumbered assets and cash flows to facilitate effective monitoring by the PRA.
- Cost-Benefit Analysis:
- Firms should conduct a cost-benefit analysis of the proposed changes to assess the financial implications of implementing new reporting systems and processes. Understanding the potential costs involved, including one-off implementation costs and ongoing reporting expenses, will be crucial for financial planning.
- Training and Capacity Building:
- Firms may need to invest in training and capacity building for their staff to ensure they are equipped to handle the new reporting requirements effectively. This includes understanding the new templates and the data collection processes.
- Engagement with Stakeholders:
- Firms are encouraged to engage with stakeholders, including senior management and boards, to ensure that there is a clear understanding of the implications of the new requirements and the importance of liquidity risk management.
- Monitoring Regulatory Developments:
- Firms should stay informed about any further developments or clarifications from the PRA regarding the implementation of the new requirements. This includes monitoring the outcomes of the consultation process and any subsequent guidance issued by the PRA.
- Alignment with International Standards:
- Firms should focus on aligning their liquidity reporting practices with international standards, particularly those recommended by the IAIS, to enhance their competitiveness and compliance with global regulatory expectations.
- Contingency Planning:
- Firms should develop contingency plans to address potential liquidity stress scenarios, ensuring they have strategies in place to manage liquidity demands effectively during periods of market volatility.
Based on the requirements suggest a control framework for a firm to comply with this regulation?
To ensure compliance with the PRA’s proposed liquidity reporting requirements, a firm should establish a comprehensive control framework that addresses the key aspects of liquidity risk management and reporting. Below is a suggested control framework structured around the requirements outlined in the documents:
Control Framework for Liquidity Reporting Compliance
- Governance and Oversight
- Establish a Liquidity Risk Management Committee: Form a dedicated committee responsible for overseeing liquidity risk management and compliance with reporting requirements. This committee should include representatives from finance, risk management, compliance, and operations.
- Define Roles and Responsibilities: Clearly outline the roles and responsibilities of all stakeholders involved in liquidity risk management and reporting, including senior management and the board of directors.
- Data Management and Quality Control
- Data Collection Processes: Implement robust data collection processes to ensure accurate and timely gathering of information related to unencumbered assets, cash flows, and derivatives.
- Data Validation and Reconciliation: Establish controls for data validation and reconciliation to ensure the accuracy and consistency of reported data. This includes cross-checking data against multiple sources and conducting regular audits.
- Data Governance Framework: Develop a data governance framework that defines data ownership, data quality standards, and procedures for data management.
- Reporting Controls
- Template Implementation: Ensure that the L-MRS template and other reporting templates are correctly implemented within the firm’s reporting systems.
- Automated Reporting Systems: Utilize automated reporting systems to streamline the generation of liquidity reports, reducing the risk of human error and ensuring timely submissions.
- Review and Approval Process: Establish a review and approval process for liquidity reports before submission to the PRA. This should include multiple levels of review to ensure accuracy and completeness.
- Risk Assessment and Monitoring
- Liquidity Risk Assessment Framework: Develop a framework for assessing liquidity risk that includes stress testing and scenario analysis to evaluate the impact of adverse market conditions on liquidity positions.
- Regular Monitoring of Liquidity Positions: Implement continuous monitoring of liquidity positions and key risk indicators (KRIs) to identify potential liquidity strains early.
- Sensitivity Analysis: Conduct regular sensitivity analyses to assess the impact of changes in market conditions (e.g., interest rates, exchange rates) on liquidity positions.
- Training and Awareness
- Staff Training Programs: Develop training programs for staff involved in liquidity risk management and reporting to ensure they understand the new requirements and the importance of compliance.
- Awareness Campaigns: Conduct awareness campaigns to educate all employees about the significance of liquidity risk and the firm’s compliance obligations.
- Documentation and Record-Keeping
- Maintain Comprehensive Documentation: Ensure that all processes, controls, and reporting methodologies are well-documented and easily accessible for audit purposes.
- Audit Trail: Implement an audit trail for all data inputs and reporting outputs to facilitate transparency and accountability.
- Engagement with Regulators
- Regular Communication with the PRA: Establish a communication plan for regular engagement with the PRA to discuss compliance progress, seek clarification on requirements, and provide updates on any challenges faced.
- Feedback Mechanism: Create a feedback mechanism to capture insights from regulatory interactions and incorporate them into the firm’s compliance practices.
- Contingency Planning
- Liquidity Contingency Plans: Develop and maintain contingency plans to address potential liquidity crises, including strategies for accessing additional funding sources and managing collateral requirements.
In conclusion, the PRA’s proposed changes to liquidity reporting and standard formula reporting highlight the evolving regulatory landscape for large insurers. Firms must act now to assess their readiness, enhance their reporting capabilities, and align their practices with the new requirements.
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