Documenting the accounting and prudential treatment of complex transactions

Avantage Reply assisted a well-known Private Bank in the Eurozone to document the non-standard accounting and prudential treatment of structured finance transactions. The tailor- made structured finance solutions, e.g. asset-backed finance transactions, operating leases and export leases, do require special consideration regarding regulatory reporting and risk management.

CUSTOMER GOALS

The key objective of the project was to provide a comprehensive and complete documentation to reinforce the understanding of complex financial structures across support functions and to allow operational teams to better apprehend reporting obligations, e.g. correct allocation of exposures, guarantees received and impact in multiple regulatory reports. The secondary objective was to draw a parallel between the theoretical and operational treatments in both, accounting and prudential terms, to remediate imperfections in the reporting system.

THE CHALLENGE

Complex deals do not follow a standard operational treatment and engage multiple teams at each stage of the transaction lifecycle, i.e. the view on booking, follow-up and reporting is fractured across departments and limited to the responsibilities of each actor. Hence, collecting accurate and complete information was a primary challenge of the project. Additionally, the large number of manual corrections and adjustments made by various contributors at different levels of the reporting process was not formalized to fully assess the impact of these changes in the final reports.

APPROACH AND SOLUTION

• Collection of key elements and understanding of deal structure: For each of the transactions, dedicated workshops were organized with operational teams including Business, Risk, Finance and ALM departments to collect information about the operational treatments as well as any pain points identified at different levels of the reporting process. A series of one-to-one interviews with key stakeholders and contributors followed to clarify on specificities of each structure.
• Documentation of accounting schemes and prudential treatments: Based on the Workshops and interviews, each complex transaction was documented including any references to the CRR to align the 'as is' processing with the regulatory requirements and formalized adjustments. The final documents were reviewed and approved by all contributors before sharing with operational and reporting teams. As a result, each actor involved in the reporting process or operational follow-up of these transactions has a clear view and centralized source of information to better understand these complex structures.
• Remediation of reporting process gaps: As the last stage of the project, in collaboration with members of the project team, several process analyses were conducted to identify divergences between the current operational process and the theoretical treatment to apply to complex transactions. Each of the gaps could be remediated by defining clear operational actions, to be implemented and documented in due course, e.g. amendment of allocation rules. As a positive outcome from this stage, the client noted a significant decrease in the number of adjustments to be performed within the quarterly reporting process.