APRA and Technology, what’s next?
This RegCentric whitepaper briefly outlines data management, cyber security and technology developments in the Australian financial system from a regulatory lens.
The management of non-financial risks – in particularly cyber security – by domestic organisations is under increasing regulatory scrutiny, alerting consumers and the public alike to the need for more robust data management processes and resilient cyber security practices. Managing data risks and the associated mitigating practices is becoming more complicated too, as consumer preferences move towards technology-enabled financial services. This has led to open banking policy reform in Australia, which tasks banks with the colossal challenge to safely and securely share customers’ personal information across organisations.
We take a deeper dive into threats and opportunities, disruptions to existing business models and explore many more considerations by examining this evolving landscape.
Extinction of LIBOR
Is the Australian Financial industry ready for the “big switch”?
In this paper, we dive deeper into the underlying reasons that provoked the need for alternate benchmarks as well as the cause and effects of LIBOR replacement on the Australian Financial Industry and how the replacement can be best carried out with minimal impact on business continuity & sustainability.
In July 2017 FCA announced that starting 2022, it would no longer monitor or seek submission of LIBOR rates from the panel banks and therefore, market participants must prepare for alternate reference rates for the purpose thereof.
Back home in Australia, the Australian Securities and Investments Commission (ASIC) recently sought inputs from the financial market players to take stock of their readiness in incorporating replacement benchmark of LIBOR (London Interbank Offered Rate).
It is estimated that LIBOR as global interest rate benchmarks are still embedded in contracts worldwide to the tune of hundreds of trillions of US Dollars. Major players that rely upon LIBOR are Banks, Asset Managers, Insurers as well as corporates around the world. The financial instruments that underpin it as underlying reference are mortgages, bonds, corporate loans and derivatives.
While volume is just one aspect, the complexity in steering away from LIBOR also lies in the fact that the benchmark, being only an underlying reference rate, makes it harder to assess with certainty the aggregated sums to which a firm is exposed to it. Although transitions from LIBOR to transaction-based alternative reference rates have already started picking up pace in recent years, experts have expressed concerns about complete preparedness of the market, when the sun sets on the usage of the benchmark rate with the end of 2021.
Read on to find out what makes LIBOR the most important reference rate in the world, the reasons behind FCA's decision to pull the plug on it and how the affected nations including Australia should work towards addressing the switch over to alternative rates.
In December 2017, the Basel Committee on Banking Supervision (BCBS) completed its journey of finalizing Basel III post-crisis regulatory reforms. The reforms, originally introduced in 2010 in the aftermath of the GFC, underwent multiple phases of discussions and negotiations, before finally rolled out for implementation with deadlines leading up to the 3rd decade of the century.
Following-up on the major changes and updates introduced in Basel III, the Basel Committee also took a phased approach in revising the Pillar III disclosure requirements to better align with newly introduced as well as revised approaches.
Since the introduction of Pillar III disclosure requirements in Basel II in 2004, BCBS largely brought in changes in 3 phases commonly referred as:
Phase 1 - January 2015 Standards
The first phase mainly focused on ensuring comparability and consistency in disclosures by banks across the board. It achieved so by introducing a hierarchical disclosure regime where the quantitative reporting forms surrounding capital adequacy were fixed to ensure consistency and comparability across banks, whereas for disclosures important for markets were kept flexible. This approach also allowed room to accommodate management commentary on bank’s particular circumstances and risk profile.
Phase 2 - March 2017 Standards
Phase 2 of Pillar III brought consolidation of all the newly introduced risk measures in Basel III (and beyond) namely; disclosures surrounding composition of capital, the leverage ratio, the liquidity ratios, the indicators for determining globally systemically important banks, the counter-cyclical capital buffer, interest rate risk in the banking book as well as disclosures pertaining to remunerations. This phase also incorporated the revised market risk framework alongside the introduction of dashboard type disclosure templates to capture summary of banks’ key prudential metrics depicting its prudential position and key RWA break-ups across asset classes and adopted computational approaches.
Phase 3 - December 2018 Standards
After the finalization of Basel III norms in December 2017, the committee revised Pillar 3 disclosure requirements to reflect the underlying updates. Barring the minimum changes expected due to RWA computation approaches across asset classes and revisions to other risk measures; the newly revised Pillar 3 disclosure requirements also showcased the following glaring inclusions:
disclosure of bank’s encumbered and unencumbered assets
introduction of capital distribution constraints to portray clearer picture of bank’s capital position.