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Trading and Capital-Markets Activities Manual

Trading Activities: Regulatory Reporting
Source: Federal Reserve System 
(The complete Activities Manual (pdf format) can be downloaded from the Federal Reserve's web site)

The internal-control function is critical in the assessment of an institution's regulatory reporting. The examiner must gain a thorough understanding of (1) the information flows from the execution of a transaction to its inclusion in the appropriate regulatory report, (2) the design and performance of critical internal-control procedures, and (3) the adherence to regulatory reporting standards. 

Examiners, report processors, and economists who analyze regulatory reports or otherwise use the data contained in them depend on the data's accuracy. False reporting is punishable by civil monetary penalties as prescribed in the Financial Institutions Recovery, Reform, and Enhancement Act of 1989 (FIRREA).

OVERVIEW OF REPORTS 

Several types of regulatory reports contain trading data: the Report of Condition (FFIEC 031- 034), the Report of Assets and Liabilities of U.S. Branches and Agencies of Foreign Banks (FFIEC 002), and financial statements of the securities subsidiaries. 

The Federal Reserve Board (FRB) and Federal Financial Institutions Examination Council (FFIEC) require financial institutions to summarize their gross positions outstanding in traded products on the Report of Condition and Income as well as on the Report of Assets and Liabilities (collectively, the call reports). These regulatory reports vary according to the size and type of institution. For example, the reports required by the FFIEC include the 002 for U.S. branches and agencies of foreign banks and a series of reports for domestic banks, while the FRB requires the Y-series to cover bank holding companies. 

Section 20 subsidiaries show their securities revenue and capitalization in detail on the Financial and Operational Combined Uniform Single (FOCUS) report as required by the Securities and Exchange Commission (SEC). This report is filed with the appropriate self-regulatory organization (SRO), and the SEC furnishes micro-data to the Board for bank-affiliated securities dealers. The Y-20, another FRB report, summarizes the FOCUS data and segregates revenues from eligible and ineligible securities. The Y-20 report is only filed by securities subsidiaries that are still operating pursuant to section 4(c)(8) of the Bank Holding Company Act, and are therefore subject to the Board's revenue test designed to prevent violation of the former Glass-Steagall Act. Other bank holding company subsidiaries that trade eligible securities also file the FOCUS report with the SEC and the appropriate SRO. The appendix to this section describes frequently used regulatory reports. 

SOUND PRACTICES 

  Every organization should have procedures to prepare regulatory reports. When conversion from foreign accounting principles to generally accepted accounting principles (GAAP) is required, a mapping should document an audit trail. This documentation is particularly important as the degree to which reconciliation is automated declines. 
  Every institution should maintain clear and concise records with special emphasis on documenting adjustments. 
  Every organization should have a procedure to ensure that current reporting instructions are maintained and understood by control staff. 
  To ensure correct classification of new products, every organization should have a procedure whereby staff who are preparing regulatory reports are consulted if new products are introduced. 
  Every organization should have a procedure, such as contacting the appropriate statistics units within the Federal Reserve System, to resolve questions when they arise. 

Regulatory Reporting 

Examination Objectives 

The examiner's principal objective when reviewing the regulatory reporting function is to verify the accuracy and consistency of reporting requirements. The examiner's review of regulatory reporting, as it applies to trading activities of the institution, should be coordinated with overall trading-examination objectives. To assess the accuracy of regulatory reports, examiners should review appropriate supporting documents, such as work-papers, general ledgers, subsidiary ledgers, and other information used to prepare the regulatory reports. 

The reports must meet the following objectives: 

1. To confirm that the trading data are as of the report date and that they match the records of the traders and include all material post-closing adjustments to the general ledger. 

2. To check that the data conform to the requirements of the report instructions. (''Accounting requirements'' refers to how a transaction should be valued. It also prescribes when transactions should be reported (for example, the rules regarding trade-date accounting). The reports required by the Board are generally consistent with generally accepted accounting principles (GAAP). 

3. To assess the effectiveness of the system of internal controls over the regulatory reporting function. To identify, document, and test internal-control procedures that are critical to the accurate, reliable, and complete reporting of trading transactions in regulatory reports. 

4. To determine the effectiveness of the internal controls over financial reporting, which can have an impact on the extent of examination procedures that need to be applied to verify the accuracy of regulatory reports. (For example, if an examiner has determined that an organization has very effective internal controls over financial reporting, then the extent of detailed testing procedures applied to verifying the accuracy of regulatory reports will be less extensive than the procedures applied to an institution that has ineffective controls or a system of controls with potential weaknesses.) 

5. To review the Financial and Operational Combined Uniform Single (FOCUS) report to evaluate capital adequacy. (For section 20 subsidiaries, the examiner reviews the FR Y-20 report to ensure that revenue from ineligible securities does not exceed 10 percent of total revenue.) 

Regulatory Reporting 

Examination Procedures 

These procedures list processes and activities that may be reviewed during a full-scope examination. The examiner-in-charge will establish the general scope of examination and work with the examination staff to tailor specific areas for review as circumstances warrant. As part of this process, the examiner reviewing a function or product will analyze and evaluate internal-audit comments and previous examination work-papers to assist in designing the scope of examination. In addition, after a general review of a particular area to be examined, the examiner should use these procedures, to the extent they are applicable, for further guidance. Ultimately, it is the seasoned judgment of the examiner and the examiner-in-charge as to which procedures are warranted in examining any particular activity. 

1. Early in the examination, the examiner should review trading data for arithmetic mistakes, general accounting errors, and any misunderstanding of the regulatory reporting instructions. Common conceptual errors include incorrect recognition of income on traded products, incorrect valuation of trading-account securities, omission of securities not yet settled, and reporting of currency swaps as interest-rate swaps. 

2. The examiner should ensure that previously noted exceptions (either in the prior Report of Examination or by auditors) have been properly addressed. 

3. The examiner should review the work-papers of the person responsible for preparing regulatory reports in order to check the descriptions of each transaction included in the line items. These details must match the instructions for the corresponding lines. 

4. The examiner should reconcile the regulatory reports to the institution's official records, especially the general ledger, and to reports of the area in charge of trading. The reconciliation process begins with a review of the regulatory report through a spot check of the regulatory report against the preparer's sources. The examiner may be able to avoid line-by-line reconciliation if accuracy runs high in the spot check or if the examiner verifies that the institution has an approved, independently verified reconciliation process. 

5. The examiner should ensure that post-closing adjustments and all accounting and timing differences, if any, between the regulatory reporting requirements and generally accepted accounting principles (GAAP) have been effected. 

Call report data are the basis for the balance sheet, off-balance-sheet items or activities, income statement, and risk-based capital schedules of the Report of Examination. Corrections to the data made during the reconcilement of the regulatory reports must be reflected in Report of Examination schedules. In the rare instance when the dates of the regulatory reports and the examination do not coincide, data as of the examination date must be compiled in accordance with call report instructions. 

Regulatory Reporting 

Internal Control Questionnaire 

1. Before reports are submitted to the regulatory authorities, are all regulatory reports reviewed for accuracy by a person who is independent of the preparation process? 

2. Does internal audit at the institution review the process of regulatory reporting, including the accuracy of the trading data on regulatory reports? 

3. Are internal controls in place that provide reasonable assurances of the accuracy, reliability, and completeness of reported trading information? 

4. Are the internal controls documented and tested by internal audit? If not, examination personnel should document and test critical internal controls in this area to the extent appropriate to satisfy examination objectives. 

5. Does supporting documentation include sources of information and reconciliation to the general or subsidiary ledgers, and are reconciling items handled appropriately? 

6. Are procedures in place to capture exotic instruments or other transactions that require special handling? Off-balance-sheet items that are handled outside of normal processes or automated systems may be omitted if procedures and adequate communication exist between the reporting and trading functions. 

7. Do reporting personnel have an adequate understanding of trading instruments, trading transactions, and reporting requirements to ensure accurate and reliable regulatory reporting? 

8. Does the preparer or reviewer maintain the most current instructions for the reports he or she is responsible for? 

9. Does the accounting department have procedures to ensure that the preparer or reviewer investigates questions from the FRB report analysts? (Report analysts ask the accounting department over the telephone to explain arithmetic discrepancies and large variances from prior periods.) 

10. What knowledge does the signatory have regarding the report he or she is signing and the controls in place to ensure accuracy? 

Regulatory Reporting 

Appendix-Reports for Trading Instruments 

REPORTS LISTED BY TYPE OF INSTITUTION 

Listed below, according to the type of respondent, are the regulatory reports that include data on traded products. Some of the reports show detail by product type, while others only have data aggregated for selected products. Before undertaking a review of any trading instruments, examiners should become familiar with the data available to them in the reports filed by the entity under examination. 

Bank Holding Company Reports

1. FR Y-9C Consolidated financial statements for top-tier bank holding companies with consolidated assets of $150 million or more and lower-tier bank holding companies that have total consolidated assets of $1 billion or more. In addition, FR Y-9C reports are filed by all multi-bank bank holding companies with
outstanding to the general public or that are engaged in certain non-bank activities, regardless of size.
Frequency: quarterly
Each of the instruments listed below is captured on this report. See the instructions/glossary for the treatment of each instrument. See schedule for risk-based capital components.
Schedule HC-B
Securities
U.S. Treasuries
Municipal
Mortgage-backed
Asset-backed
Foreign governments
Corporations
LDC debt
Equities
Schedule HC-L
Futures and forwards
Forward rate agreements
Interest-rate swaps
Foreign exchange
Currency swaps
Options (interest-rate, currency)
Commodities
Index-linked activities
Hybrids
2. FR Y-9SP Parent-company-only financial statements for one-bank holding companies with
total consolidated assets of less than $150 million.
Frequency: semi-annually
Typically, examiners will encounter only securities (for example, U.S. Treasuries,
obligations of states and municipalities, and mortgage-backed securities)
when reviewing this report. No off-balance-sheet items are captured on this
report.
3. FR Y-9LP Parent-company-only financial statements for each bank holding company that
files the FR Y-9C. In addition, for tiered bank holding companies, parent-company-
only financial statements for each lower-tier bank holding company if
the top-tier bank holding company files the FR Y-9C.
Frequency: quarterly
Typically, examiners will encounter only securities transactions (for example,
U.S. Treasuries, municipal, and mortgage-backed) when reviewing this report.
No off-balance-sheet items are captured on this report.
4. FR Y-8 Bank Holding Company Report of Insured Depository Institutions' Section 23A
Transactions with Affiliates.
Frequency: quarterly
This report collects information on transactions between an insured depository
institution and its affiliates that are subject to section 23A of the Federal Reserve
Act (FRA). The information is used to enhance the Federal Reserve's ability to
monitor bank exposures to affiliates and to ensure compliance with section 23A
of the FRA. Section 23A is one of the most important statutes on limiting
exposures to individual institutions and protecting the federal safety net.
Reporters include all top-tier bank holding companies (BHCs), including
financial holding companies (FHCs). In addition, all foreign banking organizations
that directly own a U.S. subsidiary bank must file this report. Participation
is mandatory.
5. FR Y-20 Financial statements for a bank holding company subsidiary engaged in
ineligible securities underwriting and dealing.
Frequency: quarterly only by firms that continue to function as ''section 20
subsidiaries''
Schedules SUD and SUD-A capture securities transactions (for example, U.S.
Treasuries, municipal, foreign, and asset-backed securities) as well as transactions
involving equities, futures and forwards, and options.
6. FR Y-11Q Financial statements for each individual non-bank subsidiary of a bank holding
company with total consolidated assets of $150 million or more in which the
non-bank subsidiary has total assets of 5 percent or more of the top-tier bank
holding company's consolidated tier 1 capital, or in which the non-bank
subsidiary's total operating revenue equals 5 percent or more of the top-tier
bank holding company's consolidated total operating revenue.
Frequency: quarterly
Each of the instruments listed below is captured on this report.
Balance-Sheet Items
Securities
Off-Balance-Sheet Items
Futures and forwards
Forward rate contracts
Interest-rate swaps
Foreign exchange
Currency swaps
Option contracts
7. FR Y-11I Financial statements for each individual non-bank subsidiary that is owned or
controlled by a bank holding company with total consolidated assets of less than
$150 million or with total consolidated assets of $150 million or more if (1) the
total assets of the non-bank subsidiary are less than 5 percent of the top-tier bank
holding company's consolidated tier 1 capital and (2) the total operating revenue
is less than 5 percent of the top-tier bank holding company's consolidated total
operating revenue.
Frequency: annually
Each of the instruments listed below is captured on this report.
Balance-Sheet Items
Securities
Off-Balance-Sheet Items
Futures and forwards
Forward rate contracts
Interest-rate swaps
Foreign exchange
Currency swaps
Option contracts
8. FFIEC 009 Country Exposure Report filed by U.S. commercial banks and/or bank holding
companies that meet the reporting criteria specified in the instructions to this
report.
Frequency: quarterly
8a. FFIEC 009a Country Exposure Information Report supplements the FFIEC 009 and is
intended to detail significant exposures as defined in the instructions to this
report.
Frequency: quarterly
These reports show country distribution of foreign claims held by U.S. banks
and bank holding companies. They also include foreign securities in the
aggregate assets of the countries shown.
These reports may also be filed by U.S.-chartered insured commercial banks,
Edge Act and agreement corporations, and other banking organizations.
9. X-17A-5 FOCUS Report.
Frequency: quarterly
This report collects data on securities and spot commodities owned by
broker-dealers. In addition, it reflects the haircuts the broker-dealers are required
to take, when applicable, pursuant to SEC rule 15c3-1(f).

Bank Reports

1. FFIEC 031 Consolidated reports of condition and income for a bank with domestic and
foreign offices.
Frequency: quarterly
Each of the instruments listed below is captured on this report. See the report
instructions for the treatment of each instrument. See schedule RC-R for
risk-based capital computation.
Schedules RC-B and RC-D
Securities
U.S. Treasury
Municipal
Mortgage-backed
Asset-backed
Foreign government
Equity
All others
Schedule RC-L
Futures and forwards
Forward rate agreements
Interest-rate swaps
Foreign exchange
Currency swaps
Options (interest-rate, currency)
Commodities
Index-linked activities
Hybrids
Credit derivatives
The FFIEC 032, 033, and 034 reports of condition and income capture
information on the same instruments as the FFIEC 031.
2. FFIEC 030 Report of condition for foreign branch of U.S. bank.
Frequency: annually for all overseas branch offices of insured U.S. commercial
banks
quarterly for significant branches with either total assets of at least
$2 billion or commitments to purchase foreign currencies and U.S.
dollar exchange of at least $5 billion
This is a two-page report that captures information on balance-sheet data as well
as selected off-balance-sheet data (options, foreign exchange, interest-rate
swaps, and futures and forward contracts).

Reports for U.S. Branches and Agencies of Foreign Banks

1. FFIEC 002 Report of assets and liabilities of U.S. branches and agencies of foreign banks.
Frequency: quarterly
This report captures information pertaining to balance-sheet and off-balance-heet
transactions reported by all branches and agencies.
Schedule RAL
Securities
U.S. Treasuries
Government agencies
All others
Schedules L and M-part 5
Futures and forwards
Forward rate agreements
Interest-rate swaps
Foreign exchange
Currency swaps
Options (interest-rate, currency)
2. FR 2069 Weekly report of assets and liabilities for large U.S. branches and agencies of
foreign banks.
Frequency: as of the close of business every Wednesday
Securities are included in this abbreviated report of assets and liabilities, which
resembles schedule RAL on FFIEC 002.
3. FFIEC 019 Country exposure for U.S. branches and agencies of foreign banks.
Frequency: quarterly
This report shows country distribution of foreign claims held by branches and
agencies. It includes foreign securities in the aggregate assets of the countries
shown.
The FFIEC 009 (filed by banks, bank holding companies, and Edge Act and
agreement corporations) is similar to this form.

Other Reports

1. FR 2314a Report of condition for foreign subsidiaries of U.S. banking organizations (to be
filed by companies with total assets exceeding U.S. $100 million as of the report
date).
Frequency: annually
quarterly for significant subsidiaries with either total assets greater
than $2 billion or $5 billion in commitments to purchase and sell
foreign currencies
1a. FR 2314b Report of condition for foreign subsidiaries of U.S. banking organizations (to be
filed by companies with total assets between U.S. $50-100 million as of the
report date).
Frequency: annually
1b. FR 2314c Report of Condition for Foreign Subsidiaries of U.S. Banking Organizations (to
be filed by companies with total assets less than U.S. $50 million as of the report
date).
Frequency: annually
These three schedules are intended to capture financial information on the
overseas subsidiaries of U.S. banking organizations (that is, bank holding
companies, banks, and Edge Act corporations). The level of detail reported will
depend on the asset size of the reporting entity. The FR 2314a and FR 2314b
capture information on balance-sheet and off-balance-sheet transactions. The FR
2314c report cannot be used to track individual categories as the other two
reports can.
2. FR 2886b Report of condition for Edge Act and agreement corporations.
Frequency: quarterly
This report reflects the consolidation of all Edge and agreement operations,
except for those majority-owned Edge or agreement subsidiaries. The latter are
accounted for within a single line item, claims on affiliates. Asset instruments
(securities and LDC debt) are reflected in the securities and loan lines,
respectively, of this report. Off-balance-sheet items are grouped except for
foreign-exchange and options contracts.

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