The data management impact of Solvency II – Meeting the implementation challenge Martin Eberle

Senior Consultant, SIX Financial Information

Contents

• Introduction • Solvency II sets the Regulatory benchmark • What are the implications for firms? • The importance of managing enterprise-wide risk • Identifying the key data issues • Who does the asset data heavy lifting? • The anatomy of CIC (Complimentary Identification Code) • Identifying regulatory synergies beyond Solvency II

2

Current status The Clock is Ticking.........Finally!

3

4

Data! Data! Data! I can’t make bricks without clay! -Sir Arthur Conan Doyle

SIX Financial Information’s approach Focus on Core capabilities

5

ASSET DATA

Pillar 1 (SCR)

Fully structured database addresses key data governance criteria: • Consistency • Audit ability • Transparency • History • Evidence

Pillar 2 (ORSA)

Reference & pricing data essential for capital adequacy calculations: • Static master data for

SCR • Derived values for risk

modeling

Pillar 3 (QRTs)

High quality asset data required for compliance: • ORT Asset templates • New data items required • Covers instruments

across global asset classes

6

‘Accurate’, ‘complete’ and ‘appropriate:’ “Some firms were not always able to articulate what (it) means in practice..”

7

FSA data audit findings:

• Approach to managing data “Challenges in applying consistent interpretation of data policy”

• Implementation of the data policy “Most firms underestimated time to embed group-wide data governance into BAU”

• Understanding of the data used - Consistent interpretation and application of materiality

“Firms had not effectively considered…static & reference data and stress test data” “Data directory vs data dictionary”

• Controls over data quality “Sole reliance of third party controls without independent validation”

• IT environment, technology & tools “Use of spread sheets, often uncontrolled- was pervasive”

Impact of Solvency II on data Which data types are impacted?

8

Securities reference Entity reference Pricing data Look-through

Derived Analytics

Securities Master Data (Equities)

Asset to issuer links Market prices Line-by-line Fund composition

Earnings per share

Yields and yield curves

Terms & conditions (Debt/structured/OTC Derivatives)

Parent group-subsidiary links

Evaluations (Debt/structured/ OTC Derivatives)

Line-by-line Fund weighting

PE Ratio Effective Durations

Cross reference identifiers Unique identification (Legal Entity Identifier ISO 17442?)

Forex rates Cash Flows Issuer curves

Asset level credit ratings Issuer credit ratings Interest rates

(CIC) Complementary Identification Code

Industrial classifications (NACE)

Importance of data connectivity Adopting an enterprise risk approach – the macro view

9

Entity Linkages

Risk Management • Market risk (Issuer risk) • Credit risk • Concentration risk • Systemic risk

Current and Future Regulation • Basel II/III (CRDIV), MiFID(2), UCITS (IV),

FATCA, Solvency II,EMIR, AIFMD

Pre-trade compliance (investment driven) • Investment research • Quantitative analysis

Collateral Management • Repo/securities lending

Counterparties Issuers, Guarantors & Securities master

Institutional clients

Complex data distribution process Many Actors = Many different sources

10

Source: BNP Paribas securities services & Intedelta analysis

External Fund Manager A

External Fund Manager B

External Fund Manager C

External Fund Manager D

Asset Servicing Provider

Asset Servicing Provider

Asset Servicing Provider

Asset Servicing Provider

Affiliate Fund Manager

Data Warehouse

Pillar I SCR Calculation

Pillar II ORSA/ Governance

Pillar III Disclosure

Insurance Firm D

ata

Vend

ors

Data Vendors

Impact of Solvency II on market participants What are the implications?

11

Asset Data requirements • High quality asset data for reporting, will impact the data management process • Higher data volumes and the merging of market and reference data sets • Analytics capability to stress asset values • Availability of new data attributes such as Complementary Identification Code

(CIC, NACE classifications & Legal Entity Identifier (LEI)

Data Governance impact • Insurers are expected to demonstrate that data used to support the SCR process is

‘accurate’, ‘complete’ and ‘appropriate’

Accuracy in calculating capital adequacy • Consequences of inaccurate SCR calculations

More granular and frequent reporting • Pillar 3 Solvency II Quantitative Reporting Templates (QRTs) • More frequent reporting and a move from half-yearly to quarterly returns (T+5)

Focus on New Data requirements for Solvency II Drilling down to specifics

12

Type New Data Description Data Management Challenges In

stru

-m

ent FLT • Each instrument held to be treated as if

directly owned by the investor in the fund • Line by line constituents & weights

• Data availability • Ensuring CIC consistency - Different providers • Constituent Identifiers

Cla

ssifi

catio

n CIC • Complimentary Identification Code • Asset classification: specific to Solvency II • Defined by EIOPA

• Not an official standard • Maintaining cross asset-class consistency • Instrument level & Listing level for Groups

NACE • European standard Industrial classification • Version management • Public sources classify EU entities only

Entit

y /

Cou

nter

part

y

LEI/ pre-LEI

• ISO standard 17422 • Identify issuers, Counterparties & Parents

• Sourcing from multiple LOU’s • Mapping to reference data master

− Additional Regulatory mandates

Parent Entity • Group parent entity linked to assets • Concentration risk

• Data consistency − Vendor differences − ‘Change triggers’ e.g. Corporate actions

Who does the heavy lifting?

13

CIC LEI: ISO 17442 Classifications & ratings

• Complimentary Identification Code • Instrument classifications

(Solvency II specific)

• Institutions (GK) mapped 1-to-1 to Pre-LEI/LEI

• Entity hierarchy linked to instrument reference data

• NACE

• SIC • NAICS • ICB • GICS

• S&P • Moody’s • Fitch

Evaluated Pricing Pricing & reference data 3rd Party Content

Fixed Income & OTC Derivatives: • Fair value • Duration • Convexity • Key Rates and history

• Equities • Debt • Funds • Futures • Options • Structured Products

• MorningStar • Avox • D&B • Bloomberg symbology

Anatomy of Complimentary Identification Code (CIC) Defining Positions 1&2

14

Risk-based classification scheme:

• ISO3166-1-alpha-2 country code

• Two digits reflecting the asset type & primary risk

• Example for an unlisted corporate convertible bond: XL 22

First two positions

ISO 3166-1-alpha 2 country code

XL (not listed) and for non-regulated markets as defined

for MiFID 004/39/EC XT (for not exchange tradable) OR OR

1 2 3 4 5 Government bonds

Corporate bonds

Equity Investment funds

Structured notes

1 1 1 1 1

Central Government bonds

Common bonds

Common equity

Equity funds Equity risk

2 2 2 2 2

Supra-national bonds

Convertible bonds

Equity of real estate related corporation

Debt funds Interest rate risk

3 3 3 3 3

Regional government bonds

Commercial paper

Equity rights Money market funds

Currency risk

Anatomy of Complimentary Identification Code (CIC) Defining Positions 3&4 Step-through concept for hybrid and structured products • The host contract itself • The relevance of events for interest

payment or repayment of principals • The embedded option

(i.e. description of the triggering event) • The underlying securities

Host Contract (hybrid / structured product)

Relevance: - Interest

- principal

Event (e.g. barrier hit)

Repayment Cash Flow

Underlying Security

15

Example: EFG Intl Fin. 9% p.a. Barrier Reverse Convertible 2012-11.05.15 (Exp.30.04.15) on Equities

16

ISIN: CH0182601861 is assigned CIC: CH51

• SIX (Swiss Exch.) = Switzerland

• Asset class: Structured notes;

• Primary risk: Equity risk

Underlying constituents: CIC: DE31 Germany, Equity: Common

Type New Data Description Data Management Challenges In

stru

-m

ent FLT • Each instrument held to be treated as if

directly owned by the investor in the fund • Line by line constituents & weights

• Data availability • Ensuring CIC consistency - Different providers • Constituent Identifiers

Cla

ssifi

catio

n CIC • Complimentary Identification Code • Asset classification: specific to Solvency II • Defined by EIOPA

• Not an official standard • Maintaining cross asset-class consistency • Instrument level & Listing level for Groups

NACE • European standard Industrial classification • Version management • Public sources classify EU entities only

Entit

y /

Cou

nter

part

y

LEI/ pre-LEI

• ISO standard 17422 • Identify issuers, Counterparties & Parents

• Sourcing from multiple LOU’s • Mapping to reference data master

− Additional Regulatory mandates

Parent Entity • Group parent entity linked to assets • Concentration risk

• Data consistency − Vendor differences − ‘Change triggers’ e.g. Corporate actions

OTHERS Beyond Solvency II Regulatory Synergies

Dodd-Frank

AIFMD

FATCA

MiFID II

UCITS IV/V

FATCA

FATCA

Dodd-Frank

AIFMD

AIFMD

EMIR

EMIR

17

The Solution: Scalable data service offering to meet Solvency II compliance needs

18

1. Solvency II core data: • CIC, LEI & NACE classifications

2. Solvency II Standard data: • Expanded 120+ data items for QRT asset

templates & SCR • Optional 3rd party content

3. Custom solutions:

• Derived items, specific output format

Taking care of the Asset data fundamentals

Quality Granularity Consistency Cross-reference

Historical values Audit ability

3rd Party content

provision

20

Entity / Counterparty Identification

Entity / Counterparty Classification

21

Instrument / Listing Classification

22

Thank you for your attention. For questions contact: Darren Marsh Senior Product Manager, SIX Financial Information darren.marsh@six-group.com

Martin Eberle Senior Consultant, SIX Financial Information martin.eberle@six-group.com