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Mitigating the headaches of imminent regulations

Temenos Risk & Compliance PanelTCF 2016 - Breakout Stream D1 – Thursday, 5/19 – 12:30 – 13:15 p.m.

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1. Current headaches to the industry & timeline – Lisa Hall

2. International Financial Reporting Standards (IFRS 9) – Deloitte/Phil White

3. Common Reporting Standards (CRS) & Foreign Account Tax Compliance Act (FATCA) – Phil White

4. EU Financial Transaction Tax (EU FTT), General Data Protection Act (GDPR), ISO 20022 (MX) & Payment Services Directive (PSD) – Peter Ryan

5. Markets in Financial Instruments Directive (MiFID II) – Alexis Ouzeau

6. Basel III – Shawn Doumy

Agenda

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Current Headaches

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Current Headaches

Regulatory fines and settlements

increased by almost

45x since 2009

Source: McKinsey&Company 2015-Compliance 20 emerging best practice model

UK watchdog fines BoA’s Merrill Lynch$20 million for reporting failures

Swiss bank tax evasion fines to US reach $1 bn

Breaking news: EU agrees 4% fines for breaching data protection regulations

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80% of respondents agree that new banking business models will force compliance to rethink its operating model.

67% say improving systems and adopting new technology will be the most important change in the next year.

84% say that turning to digital solutions and adopting industry-leading technology helps drive efficiencies and manage emerging risk.

Compliance at a Crossroads

Source: Accenture’s 2016 Compliance Risk Study, “Compliance at a Crossroads: One Step Forward, Two Steps Back?”

Survey results from the 2016 Accenture Compliance Risk Study shows: The improvement in aggregated

management information [since moving to Temenos Core Banking

and a shared service center model]has been a huge advantage during the subprime crisis. For example,

when we wanted to understand our exposure on the client and nostro

side to Lehman Brothers, it took us half an hour to understand that we

had no exposure. In contrast, at the time of the Barings collapse, we

spent significantly more time retrieving this information.

Pierre-Louis Favre –CFO - Schroder & Co Bank AG

““

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Regulation Timeline

2013 2014 2016 2017 2018 2019FATCA

July 2014GDPRMay 2018

ISO 200222013

(Optional)

CRSJan.2016

EU FTTJun. 2016

MIFID IIJan. 2017

PSD2 Jan.2018

Basel IIIMarch 2019

IFRS 9Jan. 2018

T2S (ISO

20022) 2018

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International Financial Reporting Standards (IFRS 9)

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Published by the IASB in July 2014, effective from January 2018

Worldwide more than 100 countries require, permit or are converging to IFRS

Will replace the earlier IAS 39

IFRS 9 Overview

Hold assets in order to collect contractual cash flows

Fair Value through Other Comprehensive Income achieved by both collecting contractual cash flows and selling financial assets

Includes the same option as IAS 39 that permits entities to elect to measure financial liabilities at fair value through profit or loss if particular criteria are met

Addresses the accounting for Financial Instruments with new rules

Principle-based vs. rule-based Prospectively-only Classification based on

business model and nature of cash flows

One Impairment Model Business model-driven

reclassification

Key Changes ObjectivesAdoption

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Temenos Strategy for IFRS 9

APR-MAY 2016 MAY-DEC 2016 DEC 2016-FEB 2017 MAR 2017 APR 2017

Requirements

Design, Coding, Model, Testing

Acceptance, Testing, Knowledge, Marketing

Rollout

Training & Handover

At the time of writing this roadmap is accurate and is regularly updated, however, for various reasons it may be subject to change

Effective DateJan 2018

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Common Reporting Standards (CRS)

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CRS Regulation Overview

Released by OECD in July 2014, effective from January 2016

98 countries have currently committed to implement the CRS

55 Jurisdictions Undertaking First Exchange of Information by 2017 and 43 by 2018

Adoption

Framework for the automatic exchange of information

FIs required to report financial account information on account holders that are tax residents in other participating jurisdictions

Automatic exchange of information from the source country to the residence country

Key Changes

Process to identify reportable accounts and obtain accurate, required information, financial institutions must follow a common standard with robust Due Diligence procedures

Reporting/Exchange of Information: Basic Information/Account Number Name of Reporting FIAccount BalancesIncome Details (Interest, Dividend, etc.)

Objectives

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Temenos CRS Strategy

Q1 2016 Q2-Q3 2016 Q4 2016 Q3 2017 Q4 2017

Phase I : Client Identification & Due Diligence Module: CD

Phase II: Reporting Module: CE Roll-out: Early Q1 2017

Jan. 2016: New Account Opening procedures to record the Tax Residence to be in place

Dec. 2016: Due Diligence to Identify; High Value Pre-existing Individual Accounts

Dec. 2017: Due Diligence to Identify; Low Value Pre-existing Individual Accounts & Pre-existing Entity Accounts

Sept 2017/2018: Low Value Pre-existing Individual Accounts & Pre-existing Entity Accounts

Sept 2017 New Accounts & High Value Pre-existing Individual Accounts

At the time of writing this roadmap is accurate and is regularly updated, however, for various reasons it may be subject to change

Effective DateJan 2016

Effective Date30 Sept 2017/2018

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Foreign Account Tax Compliance Act (FATCA)

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FATCA Regulation Overview

Effective July 2014

In order to reduce the administrative burden of complying with the US regulations, many countries have entered into Intergovernmental Agreement (IGA) with the US Government

Adoption

Financial institutions required to identify accounts held by US persons and report to IRS/local authorities

The agreement imposes significant reporting and disclosure obligations

Annual reporting on the identified US accounts to the tax authority

Key Changes

FATCA aims to prevent tax evasion by US persons using foreign accounts

Obtain and maintain necessary documentation for the determination of US accounts

Objectives

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Temenos FATCA Strategy

2014 Q1-Q2 2015 Q2 2016 Q1 2019 Q2 2019

Phase I: Client Identification Module : FA

Phase II: Withholding Module: FW Roll-out : Q1 2018

July 2014: New Account Due Diligence/Identification

Jul 2014: US Source FDAP payments to new Account Holders identified as NPFFIs/Recalcitrant and Passive NFFEs with undisclosed Subst US Owners

Jan 2019: Certain Gross Proceeds payments to non complaint accounts

Mar/May 2015: Form 8966 Reporting for 2013 and 2014 on Substantial US Owners & ODCFFI

Phase III: Reporting Module: FE Roll-out: Q1 2018

Mar/May 2016: Additional Income Reporting Custody/Depository Accounts

Mar/May 2019: Annual Form 8966 reporting

At the time of writing this roadmap is accurate and is regularly updated, however, for various reasons it may be subject to change

Effective DateJul 2014

Effective DateJan 2019

Effective DateMar/May 2019

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EU-Financial Transaction Tax (EU FTT)

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EU FTT Regulation Overview

Initial effective date 01 Jan 2014, postponed to Mid 2016

7 out of 27 Countries Opposing, 9 Neutral and 11 are Favouring the adoption of the EU FTT

Adoption

The European Union Financial Transaction Tax (EU FTT) is a proposal made by the European Commission

The Tax would impact Financial Transactions between Financial Institutions

Charging Tax:0.1% - Shares & Bonds0.01% - Derivatives

Key Changes Introduce FTT within some

of the member states of the European Union & Replace Local FTTs

Once EU FTT comes in to effect all the local FTTs will disappear and one common regulation will be in existence

Objectives

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Temenos EU FTT Strategy

EU FTT solution is available from AM R16 Release onwards as part of the ‘EF’ module

Note: Even if the EU FTT proposal is not passed by the member countries, the solution developed by Temenos will be still applicable to comply with the local FTTs.

Q1 2016 Q2 2016Q4 2015Q3 2015Q2 2015

Effective DateJan 2014

Postponed to Mid 2016

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General Data Protection Regulation (GDPR)

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GDPR Regulation Overview

Effective from 2018 in all EU member states

Replaces the existing Data Protection Act 1998

Impacts any organisation that gathers, processes and stores personal data

Adoption Personal Data should be

processed under the responsibility and liability of the Data Controller, who shall ensure and demonstrate for each processing operation compliance with the Regulation

Non-compliance with the GDPR can result in reputational damage, litigation and major fines

Key Changes Personal data are not made accessible to

an indefinite number of individuals Only those Personal Data should be

processed which are necessary for each specific purpose

Personal Data should not be retained beyond the minimum necessary both in terms of amount of data and the time of their storage.

Personal Data should be processed lawfully, fairly and in a transparent manner in relation to the data subject

Objectives

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Temenos GDPR Strategy

2015 April 2016 September 2016 October 2016 January 2017

EU Council and Parliament Adoption

Temenos Whitepapers on GDPR

Note: Early days of the regulation, currently Temenos is in the phase of preliminary analysis to see how the regulation will impact the business and the systems.

Impact Analysis Effective Date2018

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ISO 20022 (MX)

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ISO 20022 (MX) Overview

Widely adopted in Payments since 2013

Being rolled out in Securities Markets

Forex and Trade Services in the future

Nearly 400 messages defined and new messages being added

Adoption ISO 20022 are xml messages

with a consistent set of tags Producing single framework to

produce ISO20022 messages to support all modules

Staged roll-out across different modules starting with Securities

Future opportunities in data warehousing exist because of standard structure

Key Changes Enable communication interoperability

between financial institutions, their market infrastructures and their end-user communities, all using XML messages

Allow STP throughout between different institutions

Take advantages of opportunities to automate error processing

Objectives

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Temenos ISO 20022 (MX) Strategy

Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017

Begin Development for Securities Messages

New MX Messages Framework module is available

Produce Framework Specification

Document requirements for Securities

T24 Framework release (201608)Integration Framework Development

Securities Message Analysis

Produce Framework Training Materials

Complete Development of Securities Messages

Testing and release of MX Messages Framework

Adoption 2018

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Revised Payment Services Directive (PSD2)

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PSD2 Overview

All EU member states (28) plus Iceland, Liechtenstein and Norway to adopt an publish measures for PSD2 compliance by January 2018

Adoption

Revised European Union Payment Services Directive

Establishes legal basis of Third Party Payment and Account Information Service Provider

Regulatory requirement for Open API Access to Account Data – XS2A

2-factor authentication mandatory in all channels

Key Changes Introduces regulatory framework for

Third Party Payment Providers and Account Information Services

Open API Access to Account and Customer Information (XS2A)

Increase in regulations in e-payments and m-payments

Third party providers must itemise charges forwarded to payers

Objectives

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Temenos PSD2 Strategy – XS2A

Q4 2015 Q3 –Q4 2016 Q1-Q2 2017 Q3- Q4 2017 Q1 2018

End Q2 2017 Available to customers

Jan. 2018: PSD2 Go-Live

Oct. 2015: Adopted by EU ParliamentNov. 2015: Adopted by the EU CouncilDec. 2015 RTS Consultation begins (Regulatory Technical Standards)

Summer 2016: EBA Publishes RTSQ3 2016 API Functional and Technical AnalysisDec. 2016: Publish Temenos API rollout

Q2 2017 Complete Testing and Documentation

Q3 2017 Onsite testing and implementationQ3-Q4 2017 Regulatory API Compliance

Q1 2017 API Development Effective Date

Jan 2018

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Markets in Financial Instruments Directive (MiFID II)

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MIFID II Overview

Start date moves from 1st of January 2017 to 3rd of January 2018

Adoption

Increase responsibility of management body, strengthen the obligation about remuneration schema, prohibition of conflict of interest, internal governance, selection/training of personal

Record client’s order communication for 5 years. All member states allow firms to appoint tied agents Third country regime change: establishment of branch conditioned by

service and client profile Stricter obligations about product approval, client profiling, suitability/

appropriateness for services and product packages, experience, risk aversion, best execution, strategy of distribution, information to client on services/products and for transactions with eligible counterparties

Stronger restrictions about inducements and for independent advices

Key Changes

Increase investor protection

Alignment of regulation across EU & Increase power of supervisors

Increase competition across financial markets

Strengthen information relative to the services, the financial instruments, the costs and charges

Objectives

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Temenos MIFID II Strategy

WealthSuite Core BankingWealthSuite Core Banking MiFID 2scope implemented in 2017

WealthSuite Front Office

Suitability & AppropriatenessBest ExecutionClient ClassificationEligible CounterpartiesProcesses for client profiling, Investment objectives and risk aversion profilingFinancial product risk level classificationDiscretionary, Advisory, Execution Only

WealthSuite Front Office R 14.12 MiFID 2 Order PackagingSet of checks based on client profile applicable for orders, for all instruments and all type of servicesAvailable in all functions to create orders Single Order OrderSession (creation from Manual Order, Allocate Order, Rebalancing, Initiate Order) Proposal Order Generator

WealthSuite Front Office R 15.06 Questionnaire ModuleIntroduce a normalized profiling process to handle client profile and investment profilingProcesses available: Client Suitability & Appropriateness Profiling Investment Profiling Process integrated with Order Proposal

2017 2018201620152014

Effective DateJan 2018

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Basel III

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Basel III Overview

Effective date extended from March 2018 to March 2019

Adoption

New framework for RWA and CAD

New policies for portfolio leverage ratio

Liquidity Requirements Introduction of LCR and NSFR Intra-day and available liquidity

Key Changes

Improve the banking sector’s ability to absorb shocks arising from financial and economic stress

Improve Risk Management & Governance

Objectives

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Temenos Basel III Strategy

All Modules Historical Data Risk Metrics Trend Analysis and Reporting Analytics, Predictive and Decision support via Data Sampling

Market AnalyticsPerformance AllocationAdvanced Derivatives Modelling & Pricing

Regulatory Capital & Market AnalyticsCredit Valuation Adjustment (CVA) Models & Expected Default Frequency (EDF) modelling

Assets Liabilities ManagementCash flows Generation engine and Balance Sheet SimulationABS & Bonds Pricing for CRD IV Reporting on Liquidity

Introducing reporting cubes for all modules to allow more flexibility in on-demand reports and data manipulation. Current system provides no pre-built cubes.Insight Risk Front-End: New Design

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Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017

Effective DateMarch 2019

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Regulatory Compliance & Capital Allocation: FactsTemenos Customers reduce their capital

consumption by 37%:

Temenos Customers achieve higher level of

working capital:

Fast time to Market products packages:

Optimized capital allocation to more profitable business lines

MitigantsOptimization

Advanced RWA calculation models

6 weeks average implementation

Pre-packaged software for Basel II & III compliance

Pre-packaged risk analytics for EWRM (Liquidity, Market, Credit…)

Pre-packaged regulatory reports for Basel II & III, COREP/FINREP, etc.

Temenos customers can leverage their

capital to exposure by 1 to up to 75:

Understanding your customer (SCRV)

Understanding your transaction (STRV)

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Avoid regulatory fines, reputational damage and other risks by staying on top of regulatory changes.

Make regulatory risk a corporate IT investment priority.

Turning to digital solutions and adopting industry-leading technology will help drive efficiencies and manage emerging risk.

Pain Relief for Your Compliance Headaches 35

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Thank you