What is it?

“Large Exposures” is a concept defined in the Second Pillar of the Basel II accord. Its objective is to prevent the collapse of a financial institution due to the failure of a market participant. As a result, the large exposures regime requires financial services firms to identify, monitor, control but also report their large exposures.

Moreover, specific rules place limits on the exposure an institution may take. The aim is to prohibit excessive concentration of risks in any individual counterparty or group of counterparties.

The details and application of large exposure standards differ across jurisdictions. The levels of large exposures that need to be reported as well as the limits imposed can vary significantly (typically between a 10% to 40% range).

 

The Challenge

The main challenge resides in the identification of counterparties. If you want to build an accurate picture of the risk to which a firm is subject, you cannot measure exposure only on an entity-by-entity basis. For example, different legal entities that are members of the same groups or are cross-guaranteed need to be aggregated and represented correctly.

This is why the large exposures regime requires that exposures be measured not simply on an entity-by-entity basis, but also across groups or similarly interrelated counterparties. This is achieved by applying the rules to each of counterparties, connected counterparties and groups of connected clients.

  • A counterparty is usually the counterparty to a transaction with respect to an exposure (for example, for a bank it can be the borrower of a loan).
  • It can also be an entity to which a bank may be indirectly exposed to and because of whom it may face a loss if that entity fails to meet its obligations (for example an issuer of a security which underlies a derivative held by the bank).
  • When a counterparty is protected by a guarantee from a third party, the bank may treat the exposure as being to the third party and not to the counterparty.
  • The exposures to connected counterparties are to be treated effectively as a single exposure. For example, a connected counterparty can be a member of the bank’s group but also any person under the control or significant influence of the persons who ultimately significantly influence the bank.
  • In the same way, exposures to groups of connected clients are also to be treated effectively as a single exposure.

 

There is hope…

You cannot achieve compliance without effective policies, systems and controls. You also need the right data management tools. This is where we come in.

Joss Technology provides its clients with the ability to build a 360 degree view of the counterparty, connected counterparties and connected clients. First, we make sure that the data you already have is aggregated and cleansed of all duplication and manual errors. Then our powerful yet intuitive tools and dashboards enable your analysts to uncover connections between entities. From there, they create a clear and comprehensive “picture” that can be used to accurately report to regulators and remain within the exposure limits they have set.

With our EDMS platform, you can rest assured that the information is kept up-to-date on an ongoing basis. We proactively monitor changes to the entities and update the information that is centralized. The integrated information is dynamically shared (real-time or batch based on your requirements) with all your downstream systems that need it. Our configurable corporate hierarchy views and our flexible data model will provide you with the agility to quickly adapt to any regulatory change.