Since 2008 many of the executives or Chief Data Officers that lead enterprise data programs throughout the financial services industry have been constantly adapting those programs to an unending list of new regulations. The latest that many are now studying is Single-Counterparty Credit Limits (SCCL) for Large BankingOrganizations. On the surface, it seems pretty simple and logical; let's ensure that the exposure to any single counterparty is not too great. As with all regulations though, the devil is in the details. Rather than summarize the regulation for you, I'll highlight a few key sections that emphasize the need for reliable reference data, or a master data strategy. In particular, let's take a look at the key terms related to a legal entity (one of my favorite topics).
Here's what you need to know...
There are specific definitions related to legal entities and their hierarchies that are important:
- Major counterparty: Major covered company and all of its subsidiaries, OR any foreign banking organization (and all of its subsidiaries, collectively) that meets certain conditions, OR any nonbank financial company supervised by the Board
- Major covered company: Any U.S. bank holding company identified as a global systemically important bank holding company pursuant to 12 CFR 217.402, and all of its subsidiaries
- Sovereign entity: A central national government (including the U.S. government) or an agency, department, ministry, or central bank, but not including any political governmental subdivision such as a state, province, or municipality
Financial entity means:
A depository institution;
- A bank holding company;
- A savings and loan holding company (as defined in 12 U.S.C. 1467a);
- A securities broker or dealer registered with the U.S. Securities and Exchange Commission under the Securities Exchange Act of 1934 (15 U.S.C. 78o et seq.);
- An insurance company that is subject to the supervision by a State insurance regulator;
- A foreign banking organization;
- A non-U.S.-based securities firm or a non-U.S.-based insurance company that is subject to consolidated supervision and regulation comparable to that imposed on U.S. depository institutions, securities broker-dealers, or insurance companies;
- A central counterparty; and
- A legal entity whose main business includes the management of financial assets, lending, factoring, leasing, provision of credit enhancements, securitization, investments, financial custody, proprietary trading, and other financial services.
These definitions, and further hierarchical implications come through later on when calculating exposure:
"In determining whether a U.S. intermediate holding company complies with these limits, exposures of the U.S. intermediate holding company itself and its subsidiaries would need to be taken into account.
- Exposures of a foreign banking organization’s combined U.S. operations would include exposures of any branch or agency of the foreign banking organization;
- Exposures of the U.S. subsidiaries of the foreign banking organization, including any U.S. intermediate holding company; and any subsidiaries of such subsidiaries (other than any companies held under section 2(h)(2) of the Bank Holding Company Act of 1956).
- “Subsidiary” would be defined in the same manner as under the proposed requirements for domestic covered companies: any company that a parent company directly or indirectly controls for purposes of the Bank Holding Company Act of 1956.
- For purposes of the proposed rule applicable to covered entities, the definitions of subsidiary, counterparty, and related terms and the economic interdependence, control relationship, and attribution requirements would be the same as under the portions of the proposed rule applicable to covered companies."
Additionally, we see our entities, securities, accounts, and other reference data come through in the definition of credit exposure:
"Credit exposure to a company is defined in section 165(e) of the Dodd-Frank Act to mean
- all extensions of credit to the company, including loans, deposits, and lines of credit;
- all repurchase agreements;
- reverse repurchase agreements, and securities borrowing and lending transactions with the company (to the extent that such transactions create credit exposure for the covered company);
- all guarantees, acceptances, and letters of credit (including endorsement or standby letters of credit) issued on behalf of the company;
- all purchases of, or investments in, securities issued by the company;
- counterparty credit exposure to the company in connection with derivative transactions between the covered company and the company;
- and any other similar transaction that the Board, by regulation, determines to be a credit exposure for purposes of section 165."
Throughout SCCL we see the importance of legal entity data, hierarchy data, security master, account data - the usual suspects we've been talking about for years and years. This reaffirms that reference data - specifically legal entity data - is a safe investment in 2016 and 2017. Regulations like SCCL are going to expect that reference data is governed, available for reporting, and accurate. Is yours?
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