Common Reporting

Will you be ready?

Originally published in the December 2012/January 2013 issue

Common Reporting (COREP) is expected to go live from 1 July 2013. This means that Q3 figures, submitted no later than 11 November 2013, are likely to be the first filings made under this new regime. Whilst this might seem a way off, our experience is that if firms have not started looking into the requirements yet, now is the time to start to ensure that they will be compliant.

What is it?
COREP is a new filing requirement for reporting to the European Banking Authority (EBA), as part of their implementation of the Basel III capital reforms. In the UK, the Financial Services Authority (FSA) and its successor bodies, who will be collecting data on behalf of the EBA, state that “COREP will become the prudential reporting framework for credit institutions and some investment firms according to the framework established by the Capital Requirements Directive IV (CRD IV) and Capital Requirements Regulation (CRR).”

In practice, the new requirements will apply to all firms currently required to file to the FSA, estimated to be around 2,800 firms in the UK. Whilst some parts of the reporting framework will remain unchanged, other parts will be totally overhauled in the new COREP templates. The result of this will be fundamental and wholesale changes in the type, volume and granularity of data reported.

In particular, the following are some key templates that will now be reported using the new EBA templates, rather than the old FSA-style templates:

• FSA003: Capital Adequacy
• FSA004: Capital Risk
• FSA005/006: Market Risk
• FSA008: Operational Risk
• FSA008: Large Exposures
• Others: FSA045/046/058

Based on our experience, this will affect the vast majority of hedge funds, for whom capital adequacy figures make up a significant portion of their filings.

Key points for hedge funds
There are a few practical points that hedge funds specifically should consider:

• Currently, limited license and limited activity firms are only required to file every six months. The COREP mandate generally requires quarterly reporting for all firms from Q3 2013 onwards; effectively doubling the reporting requirements for current half-yearly filers. We would expect further guidance on this from the FSA once the rules are finalised.
• As already mentioned, for many hedge funds, a key part of their current filings are capital adequacy figures. The COREP templates will capture granular data on capital and credit requirements, replacing the existing FSA003 and FSA004 reports. Therefore, you should be ready to look at the EBA Capital Adequacy templates, to ensure that you are gathering the expected detail and volume of data. The templates can be found online. One difference to note at this stage isthat separate templates will be used for actual and end-point reporting.
• Moreover, the data being gathered in the COREP templates is expected to be at least as granular as the current FSA reports, if not more. It will therefore be important to review your wider filing requirements to ensure compliance.
• The rules require all filings to be made in eXtensible Business Reporting Language (XBRL).

This language has been used in the UK for the filing of Corporate Tax returns from 1 April 2011, seeing in excess of 1.75 million documents filed to HMRC in this way in 2012. The language itself is essentially a way to barcode data, giving figures a number of attributes, to allow the EBA to better analyse the figures. This itself poses the challenge of not only “what to file” but “how to file”.

Practical considerations
Whilst the rules are not final and the timeline seems long in terms of when the first COREP filings are due, it is important to consider COREP from an early stage. We see two main challenges associated with COREP:

1. Understanding the rules
For the simplest of firms, it will require a day or so of time to transpose ‘what is being done now’ into ‘what it will look like under COREP’, whilst for the more complex it will involve considerable time and effort, and likely external assistance to provide a level of advice and assurance. This effort should be done well in advance of Q3 2013, with the appropriate processes and systems in place to ensure that all data is captured and processed correctly.

2. Filing using XBRL
For many hedge fund compliance managers, this will be the first time they need to consider XBRL. Even if a firm only expects to file a dozen figures, there is still complexity in ensuring that XBRL is applied correctly to the filing. There are two approaches that can be taken:

• Enterprise-wide regulatory reporting systems, which deal with complex reporting requirements. These will ensure considerable levels of automation, but will come at a considerable cost and therefore will only be applicable to larger organisations with complex filings.
• Simple conversion solutions (such as KPMG’s K-COREP software), that are aimed at removing the need for the end user to understand XBRL at all. Essentially, the XBRL tagging would be done behind the scenes, with compliance managers simply tasked with filing in templates. The software will enable automatic filings to the FSA gateway. These solutions will be available at a fraction of the price, and will be geared towards the wider market.

There are some misconceptions around, especially among those for whom the filing process seems the simplest. They often expect to do the XBRL themselves, or that the FSA will accept the current format of filings by exception. In our view, both of these assumptions are incorrect.

Due to the regulated nature of the hedge fund marketplace, we have seen that firms are already showing significant interest in this topic. With HMRC’s XBRL mandate, which applied to a much wider range of companies, many firms left it too late to find the solution that was right for them. This resulted in uncertainty, panic and in some cases high costs to ‘get it done’ in a short timeframe to meet the deadline.

Those who plan ahead, seek to understand the rules and ultimately determine the best approach for them in advance of the first reporting period, will ensure that this compliance burden is minimised as far as possible. This fundamental change to reporting need not have to take up vast quantities of time or money for many compliance teams, but it cannot be ignored as it does involve some fundamental changes to both what and how figures are reported.

COREP will, no doubt, be one of the ‘hot topics’ throughout 2013; as the EBA finalises the rules and the FSA get to grips with using XBRL data. More than anything, we are advising our clients to act early, understand how the new rules affect them, and consider the right solution to enable compliance in advance of 1 July 2013.

Russell Gammon has been working with technology tools for over five years, and with XBRL for the past two. He is currently leading the push to market of KPMG’s ‘K-COREP’ tool. Bivek Sharma leads the Accounting and Tax Technology team in the UK, and has been working in the industry for over 15 years. Sharma’s team supply software and services to over 1,500 clients in the UK.