New IED compliance tool from Ricardo-AEA and EEA

10 July 2015 Consultancy.uk

The Industrial Emissions Directive is a nationally enforced EU Directive that requires industrial process players to implement best practice in waste management. There are, however, exceptions to the directive. England’s Environmental Agency (EEA) has been charged with providing derogation in particular cases. To assist in this process, the EEA contracted Ricardo-AEA to develop a tool that would allow companies to identify whether they stand a chance of being granted an exemption.

Industrial Emissions Directive
Greenhouse gas emissions as well as dangerous acidifying substances, wastewater emissions and waste, pose a threat to the wellbeing of the ecosystem and its human inhabitants in Europe. In a bid to reduce the damage industrial processes do to the environment in which they are permitted to operate, the EU adopted the Industrial Emissions Directive (IED) on industrial emissions. The Directive obligates certain industries to introduce Best Available Techniques (BAT) into their industrial process with reference to pollution creation. As a consequence of the continued update and deployment of best practice, the net positive effect on human life for the regulation of large combustion plants alone is already in the order of €7-28 billion per year. This includes the reduction of premature deaths and years of life lost by 13,000 and 125,000 respectively.

New IED compliance tool from Ricardo-AEA and EEA

Not every industry need be bound by the Directive as it provides elements of flexibility to prohibit BAT being too onerous on companies, and generating disproportionately higher costs compared to the environmental benefits. The EEA is charged with determining if an industrial player is required to deploy BAT in their industrial process, or whether they can be exempted based on eligibility criteria supported by the Directive.

To reduce the burden on the Agency with identifying whether a company can apply for derogation, Ricardo-AEA was hired to develop a set of tools that allow companies to easily assess whether they need to comply fully with BAT or whether they are exempt due to their specific environmental or process context. The tool was developed with facilities in mind whose geographical, technical or environmental conditions would mean that their implementation of the BAT would cause them disproportionately higher costs than their competition. The results generated from the inputs to the tool, can be used to apply to the EEA for derogation, thereby reducing the demand on the EEA to check up on frivolous cases.

Commenting on the tool, Ben Grebot Technical Business Manager at Ricardo-AEA, says: “This tool will make the IED derogations process more transparent, helping businesses understand whether they have a case to make for exemptions. It will also reduce the English Environment Agency’s regulatory workload, while enabling more consistent decisions and providing the evidence needed to justify derogations to the European Commission. The training we have provided the Agency on how to use the tool has been well received and we are now looking forward to providing similar support to industry.”

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An 8-step framework for banks to prepare for FRTB changes

02 April 2019 Consultancy.uk

With FRTB expected to come into force in 2022, it is critical that banks implementing necessary changes remain on track for their compliance timelines. Whether a company is aiming for the mandatory Standardised Approach (SA) or the voluntary Internal Models Approach (IMA), the programs often represent a significant investment, requiring process, systems and cultural change. 

Drawing from its experience in helping banks meet the milestone set in their compliance timelines, Capco – a management and technology consultancy for the financial services industry – has developed an eight-point prioritisation framework for FRTB preparation and implementation. Natasha Leigh Giles, a Managing Principal at the consultancy, outlines the main dimensions of the framework: 

Prioritisation framework for FRTB

1. Front office operating model

For those who have already implemented the Volcker rule, the desks are well defined with monitoring and governance frameworks. However, for companies that have not been required to adhere to the U.S. regulation, there may be additional work involved in implementing desk-level controls as required under FRTB. The trading desk structure is especially important for banks planning to implement IMA, as this regime is applied at the desk level and requires that the full flow of the selected desk is able to pass the IMA requirements (including the modelability test for the risk factors). Key business decisions may be required if a desk trades complex products that are more aligned for SA treatment. 

2. Product scope

In order to reach the IMA status, products are required to be supported with additional data sets including historical market and reference data as well as risk factor pricing evidence. The opportunity for 2019 lies in refining the assessment on the feasibility of each product type to ensure a clear scope is agreed for the IMA environment. If the challenges are too complex or costly to overcome, such as access to historical market data, availability of price verification for the risk factors or significant enhancements to support computational capacities, then these products should be scoped out of the IMA program as soon as possible in order to save time and effort on continuing analysis. 

3. Client & trading activities

There is no need to wait until the FRTB implementation timeframe to undertake a holistic review of client and trading profitability – including the capital impacts. For example, running training and awareness campaigns within the front office can help the traders to understand the impacts of their activities and encourage changes in the way that they trade. By considering this holistically as a business and operational change, it can help keep the focus and resources on the primary (profitable) business in preparation for the compliance deadline. 

4. Internal controls

Methodology, reporting, auditability, and process governance for internal controls also need to be monitored in detail. We recommend having clearly defined processes accompanied by effective training across front-to-back office. For some banks, it will be beneficial to audit existing capital adequacy processes to ensure that findings are highlighted in advance of the implementation timeline and the appropriate focus is achieved within senior management.

5. Data & metrics

Financial institutions need to consider their overarching governance and ongoing management for the data (including ownership, quality control, golden source storage solutions, etc.) and the ongoing control framework for ensuring the data remains accurate and relevant for capital adequacy modeling. If there has not been a data lineage exercise already applied, this is a great opportunity to deliver business benefit, even in 2019. By creating agreed definitions, preferred sources, ownership and workflows for managing data quality, the benefits of more accurate data can already be applied to existing capital calculation models. 

Framework for FRTB

6. Model management & validation framework

In preparation for the FRTB regime, an opportunity for 2019 is to understand if there are gaps or control concerns to manage immediately. Model enhancements across SA and IMA will need to be productionized for output accuracy and refinement, however, these need to be maintained alongside existing Basel 2.5 BAU models and other concurrent changes e.g. LIBOR Transition. Business process optimization, testing environments and automation tools, documentation and model validation can all be reviewed for immediate benefits and prepare the process for a smooth implementation of the future FRTB models. 

7. Technology platform & testing environments

With regards to technology planning, the opportunity in 2019 is focusing on gaining agreement of the front-to-back FRTB future state architecture including the use of vendors as applicable. By ensuring a disciplined focus upon design and solution definition across all requirements, it provides a clear baseline for implementation planning and scheduling. Establishing a technology architecture which allows for FRTB data feeds, model enhancements, control definitions and accurate capital calculation outputs will provide the program with essential data and metrics needed for decision making. 

8. Leverging synergies

Once a baseline plan has been established, it is possible to identify synergies across other programs – such as the SA-CCR (Standardized Approach for Counterparty Credit Risk) or the IMM (Internal Models Methodology) – that could deliver overlapping benefits at reduced effort. Understanding requirements, defining the future state architecture, and implementing the change in a complex environment requires a mix of strategic principles and program management. Therefore, we consider it an opportunity for 2019 to take a centralized approach for data lineage and requirements gathering as this would be beneficial for optimizing capital costs across both the market and credit risk environment.

Conclusion

By considering each topic strategically in 2019, benefits such as data quality enhancements, strengthened internal controls and flexible test environments will not only bring immediate business value, but also set a solid foundation for a comprehensive FRTB implementation in the years to come. 

For more information on Capco’s model and the its approach in helping banks plan for FRTB, download the full whitepaper on the firm’s website.