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PUR1601/04
Request for Proposal
-----------------------------------------------------------PROJECT DEFINITION: INTERNATIONAL FINANCIAL
REPORTING STANDARD 9
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PUR1411/26
1.0
INTRODUCTION
The European Bank for Reconstruction and Development (the “Bank” or "EBRD") is
an international financial institution. The EBRD was established by treaty in 1990 to
foster the transition towards open market oriented economies and to promote private
and entrepreneurial initiatives in Central and Eastern Europe, the Baltic States and the
Commonwealth of Independent States that are committed to and applying the principles
of multiparty democracy, pluralism and market economics. The EBRD has 63 members
(61 countries, the European Community and the European Investment Bank). Further
information about the EBRD's roles and activities can be found on the EBRD's website:
www.ebrd.com.
1.1
Definitions:



The term ”RFP” shall mean this Request for Proposal.
The term “Supplier(s)” shall mean a party that submits a proposal in
accordance with this RFP.
The term ”Proposal” shall mean a combination of the documents
defined in section 4.4 of this RFP. Specifically the Technical Proposal
and the completed Quotation File.
2.0
Objective of this RFP
The Bank seeks to appoint a Supplier to work in partnership with it provide advice on
the definition of a project to implement new impairment and hedge accounting rules to
comply with International Financial Reporting Standard 9 (IFRS 9). The selected
Supplier will be required to perform the services as defined in Annex A.
The Bank reserves the right to engage the Supplier / Suppliers of its choice or to award
no contract for the implementation of the implementation phase of the project.
3.0
EBRD CONTACT DETAILS
Your sole contact for the purposes of this RFP is:
Tom Husband – Associate Director
Corporate Procurement Unit
EBRD
One Exchange Square
London
EC2A 2JN
Telephone: 020 7338 6173
Email: husband@ebrd.com
4.0
DESCRIPTION OF THIS RFP
4.1
Overview
Suppliers wishing to participate in this process will be required to make the following
submissions in accordance with the timetable outlined in section 4.2:


a technical proposal (the ‘Technical Proposal’);
a completed quotation file (the ‘Quotation File’).
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4.2
Timetable
23th February 2016
29th February 2016
3rd March 2016
7th March 2016
w/c 14th March 2016
Pre-qualification Notice and RFP published.
Deadline for requests for clarification
EBRD response to requests for clarification
Deadline to submit Proposals
Presentations by Suppliers
The EBRD reserves the right to amend or change these dates at any time.
4.3
Clarifications
The process for reception and resolution of queries shall be as follows:





Suppliers will send queries by e-mail to the following address:
husbandt@ebrd.com;
there will be one round of queries;
the deadline for queries is shown in the timetable set out in section 4.2 of this
RFP;
the EBRD will circulate the responses to all queries to all participating Suppliers
in accordance with the timetable set out in section 4.2 of this RFP; and
the clarification document will make no reference to which Supplier made any
particular query.
4.4
Technical Proposal
The Technical Proposal shall be prepared with reference to Annex A – Scope of
Requirements.
The Technical Proposal must be submitted by E-mail to the sole source of contact
provided in section 3.0 in line with the timetable provided in section 4.2.
4.4.1 Technical Proposal submission
Technical Proposals shall be submitted to the sole source of contact provided in section
3.0 on a CD or a USB drive and in an original hard copy by courier in a sealed envelope
clearly identified as “PUR1601/04 – PROJECT DEFINITION: INTERNATIONAL
FINANCIAL REPORTING STANDARD 9 - Technical Proposal” in accordance
with the timetable set out in section 4.2 of this RFP.
4.5
Quotation File
All Suppliers are required to complete the Quotation File attached as Annex B of this
RFP. Prices are to be quoted in GBP net of VAT. All of the cells in the Excel
spreadsheet shaded in yellow must be completed by Suppliers.
4.5.1 Quotation File submission
The Excel file must be submitted to the sole source of contact provided in section 3.0 on
a CD or a USB drive and in an original hard copy by courier in a sealed envelope
clearly identified as “PUR1601/04 – PROJECT DEFINITION: INTERNATIONAL
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FINANCIAL REPORTING STANDARD 9 - Quotation File” in accordance with the
timetable set out in section 4.2 of this RFP.
4.5.2 Quotation File validity
Quotes submitted shall be valid for ninety (90) days following date of receipt.
5.0
EVALUATION METHODOLOGY
Maximum points
available
Element of the Evaluation
Technical Evaluation of Written Proposal
and Presentation
Financial Evaluation
Total
80
20
100
5.1
Technical evaluation
Technical Proposals will be evaluated by a nominated Tender Evaluation Panel (TEP)
of Bank staff selected from operational departments which are directly involved with
the services to be provided.
Only those Suppliers that achieve a score of at least 80% of the maximum points
available following evaluation of the written technical proposals and the presentation
stage (i.e. 64 points out of a maximum of 80) will have their Quotation Files opened and
evaluated.
5.2
Financial evaluation
Following the review of the Technical Proposals, the Quotation Files of those Suppliers
who have passed the technical qualification threshold will be opened.
The Bank will calculate a total bid price for each Supplier based on the costing
provided. The Supplier proposing the lowest total bid price will be given the maximum
financial score available (20 points). Other Suppliers’ (higher) prices will be divided
into the lowest price and the result multiplied by the maximum score given.
FSa = LP EPa x Maximum Financial Score
FSa
LP
EPa
= financial score for proposal a
= the lowest evaluated financial proposal
= the financial proposal of a.
5.3
Financial errors
Mathematical errors detected by the Bank in the submitted Quotation Files will be
corrected in the following manner:


if there are errors in the mathematical extension of unit price items, the unit
prices prevail and the mathematical extension is adjusted accordingly; and
if there are errors in the additional of lump sum prices or unit price
extensions, the bid is not rejected but the total is corrected and the correct
amount reflected in the total bid price.
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5.4
Preferred Supplier
The Supplier achieving the highest combined score following the technical and financial
evaluations shall be nominated as the preferred Supplier (the “Preferred Supplier”).
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5.5
Checking of references
The Bank may contact the three references provided by the Preferred Supplier. The
Bank reserves the right to speak to any company which has dealt with the Preferred
Supplier, whether provided as a reference or not, without prior notification to the
Supplier.
In the event that the Preferred Supplier’s references prove unsatisfactory, the Bank will
consider the next highest scoring Supplier to be the Preferred Supplier and will repeat
the procedure described above.
5.6
Negotiations
Upon satisfactory conclusion of the reference checking, the Bank will move to negotiate
a contract with the Preferred Supplier. In the event that a satisfactory conclusion to the
contract negotiations cannot be agreed the Bank may consider the next highest scoring
Supplier to be the Preferred Supplier and will commence the procedure described
above.
5.7
Right to reject
The Bank reserves the right to accept or reject any RFP response, or part thereof, and to
annul the RFP process and reject all RFP responses at any time prior to award of
contract without incurring any liability to the affected parties.
6.0
CONTRACT
6.1
Term
It is anticipated that any Contract issued as a result of this RFP process will run for an
initial term of three months.
6.2
Status of the EBRD
The EBRD is an international organisation established by international treaty. As such,
the EBRD possesses a special status under public international law which has been
confirmed under English law through statute (Statutory Instrument 1991, No. 757, The
European Bank for Reconstruction and Development (Immunities and Privileges) Order
1991), available at:
http://www.legislation.gov.uk/uksi/1991/757/contents/made.
Please also refer to the aforementioned establishment treaty of the Bank ("articles of
incorporation") which lays out the immunities as found in Chapter VIII. These can be
found at:
http://www.ebrd.com/pages/research/publications/institutional/basicdocs.shtml
The special status of the EBRD requires it to seek specific provisions relating to such
status in all contracts with external suppliers and service providers. EBRD is unable to
agree to terms that expressly contradict its special status and internal policies as an
international organisation.
6.3
Contract negotiation
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The Bank’s standard terms for the provision of services shall form the basis of any
contract that may ensue. EBRD reserves the right to subject each proposal to final
negotiations.
7.0
GENERAL TERMS AND CONDITIONS OF THIS RFP
7.1
Amendment
EBRD reserves the right to negotiate any or all terms and conditions, and to cancel,
amend or resubmit this RFP in part or entirely at any time. None of the terms and
conditions of this RFP can be revoked or amended in any way by Suppliers without the
prior written agreement of EBRD.
7.2
Supplier costs
EBRD is not responsible for any Supplier costs associated with this RFP, Supplier
responses or any contract discussions or negotiations. Nor is EBRD responsible for any
indirectly related costs. No statement by EBRD should be viewed as a request by
EBRD or justification for Suppliers to increase or change inventory, staff, facilities,
business relationships with its suppliers, or internal business processes. All actions by
Suppliers in response to this RFP or subsequent discussions or negotiations should be
taken with the clear understanding that neither this RFP nor subsequent actions or
omissions by EBRD obligate or commit EBRD to pay or reimburse Suppliers for any
costs or expenses they incur. This RFP is not an offer to enter into a contract.
7.3
Professional competence
Suppliers shall absolutely rely on their own professional competence in evaluating and
verifying the information contained in this RFP. Suppliers must take every opportunity
to inspect and verify the information contained or referred to in this document or
subsequent to it, subject to the confidentiality restrictions as detailed in section 7.6 of
this RFP.
7.4
Intellectual property
The information contained in this RFP will remain EBRD’s intellectual property.
Suppliers are granted a limited, revocable license to use the same for the purpose of
responding to the RFP. By submitting a response to the RFP Suppliers grant EBRD a
royalty free, irrevocable license to use the intellectual property in the proposal for its
internal business purposes in relation to the procurement of the services required.
7.5
Sole response
Submission of a response as part of this process shall be deemed to be the Suppliers’
only offer(s).
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7.6
Confidentiality
Suppliers shall treat the RFP and EBRD's process of evaluating Suppliers as strictly
private and confidential. The contents of this RFP, including specification, designs,
drawings or other related documents shall be considered confidential and shall not be
disclosed by the Supplier, the Supplier’s servants or agents to any persons, firm or
corporation without the prior written consent of EBRD. Any such specifications,
designs, drawings or other documents shall remain the property of EBRD and shall be
returnable to EBRD within five (5) days of the Supplier receiving either, notification
that it has been unsuccessful, or on written request from EBRD.
7.7
EBRD logo protection
Please be advised that EBRD logo is a registered service mark and as such should not
be reproduced without the express written permission of the Bank.
7.8
General
Incomplete or inadequate responses, lack of response to an item or items, or
misrepresentation in responding to this documentation may result in rejection of a
Supplier’s Proposal.
After receipt of the RFP and until the award of any contract, neither information relating
to the examination, clarification, evaluation and comparison of the submissions nor
recommendations concerning the award of a contract shall be disclosed to the Supplier,
or to any other outside parties, until the RFP process has been concluded and a contract
awarded.
Any effort by a Supplier to influence EBRD in the process of examination, evaluation
and comparison of the RFP, or in decisions regarding the award of a contract, shall
result in the rejection of the Supplier’s Proposal.
Ownership of documentation or other information submitted in the RFP will become the
property of EBRD unless otherwise requested at the time of submission. Any materials
submitted in response to the RFP, which are considered to be confidential, should be
clearly marked as such by the Supplier.
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Annex A- Specification
1.
Introduction
The EBRD (the ‘Bank’) must implement new impairment and hedge accounting rules to
comply with International Financial Reporting Standard 9 (IFRS 9) by Q1 2018 (the
‘Project’). In addition, the EBRD also wishes to fully implement the Effective Interest Rate
(EIR) amortisation approach for Banking products required by IFRS 9.
The EBRD requires a consultant to undertake a project definition exercise to determine details
of the outline scope, cost and timescales for the implementation of the Project (the
‘Assignment’). The primary output of this Assignment will be the Consultant’s
recommendations in relation to the scope, cost and timescales for the implementation of the
Project (‘Project Definition Document’). The contract for the Assignment may be extended to
cover the consultancy services required for the implementation phase of the Project (‘Project
Implementation’).
2.
Background
2.1
IFRS 9
IFRS 9 is the replacement standard for IAS 39, the standard which governs the accounting for
financial instruments and therefore the single most important IFRS for the Bank.
The new standard was introduced in a number of separate tranches as follows:

Financial assets:- classification and measurement, Nov 2009;

Financial liabilities:- classification and measurement, Oct 2010;

Hedge accounting: Nov 2013;

Impairment, July 2014
The Bank adopted the financial assets tranche in 2010 because the new classification and
measurement rules were better aligned with how the Bank wished to report its investments.
The remainder of IFRS 9 has to be implemented by the Bank for Q1 2018.
2.2
Hedge Accounting
The purpose of the new hedge accounting rules is to allow more hedges to qualify for hedge
accounting treatment through placing greater emphasis on the risk management purpose of
hedging activities rather than a strict, numerically based “yes/no” decision based on
accounting measurement. Consequently the Bank will see less volatility in its PL as it is
envisaged that all its one-to-one hedges should qualify under the new rules. Maximising use
of the options in the new rules to dampen PL volatility will require complex adjustments to
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the Bank’s existing hedge accounting system ‘AFI’ (see description below) a module of SAP.
At the same time as implementing the required hedge accounting changes, the opportunity
will be taken to automate tenor curves and OIS discounting adjustments which are currently
performed manually at a portfolio level rather than as part of individual hedge assessment. As
the Bank has decided to implement the new hedge accounting rules (as opposed to fair
valuing its own issued debt), there are no changes required to its accounting for financial
liabilities.
2.3
Impairment
The new impairment rules require the provisioning models of financial institutions to move
from an “incurred loss” model (i.e. a loss event must have occurred in order to provision) to a
forward looking “expected loss” model (i.e. provisions should be taken in anticipation of
future loss events). Current provisioning rules essentially allow for two stages – a general
provision for unidentified losses and a specific provision when it is decided that an asset is
individually impaired and will not be able to meet its repayment obligations. The new rules
will introduce an interim stage which, in effect, will require the full expected loss on an asset
to be recognised sooner in the credit cycle because its credit risk has “significantly increased”,
even if it has not reached the stage of being identifiably impaired.
At the same time as implementing the new impairment rules, the Bank will seek to implement
recognition of interest income on its Banking loans on an “effective rate” basis as opposed to
a “straight line” basis. This requires the “amortising” of certain related costs and fees into the
interest rate of the loan so that the effective rate on the loan is a constant yield over its life.
Accommodating both the new impairment rules and the automation of effective interest rate
recognition will likely require considerable changes to the Bank’s provisioning model and its’
IT systems, in particular Summit (see below) which is used to process loans.
3.
Current processes and approach
3.1
Hedge accounting process
The Bank’s hedge accounting (“HA”) is currently performed within a module of SAP – ‘AFI”
(see below). The instruments involved in HA are currently bonds and swaps with the latter
covering both interest rate and currency types. A substantial number of these relationships
are complex products where the component instruments can have highly structured interest
profiles, embedded options and dual-currency cash-flows.
The instruments are booked in either the Bank’s ‘Summit’ system or, for the more complex,
structured products, booked in ‘NumeriX’ (see below). The former is a “fully fledged” front
and back office system generating accounting postings and cash settlement entries to the
general ledger in SAP. The latter is a separate financial modelling system.
The cash-flows associated with the instruments are extracted into a centralised ‘Financial
Data Repository’ – (FDR – see below under the BW description) where, as required, they
may undergo certain calculation routines before being interfaced to AFI. The value of an
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embedded option in the instrument is transferred as a “current day” cash-flow. AFI derives its
own yield curve from market data sent from Summit. Its construction is therefore not
identical to how yield curves are calculated in Summit or NumeriX. In particular, the AFI
yield curve does not currently cater for multi-tenor curves or OIS discounting.
There are also no “XVA” pricing components currently applied to the derivatives portfolio.
The Bank’s hedge accounting is overwhelmingly focused on relationships where the fixed or
structured coupon attaching to a bond is swapped into a Libor-based floating rate return. AFI
derives a “hedge spread” for the bond by calculating the spread-to-Libor required to discount
the instrument’s cash-flows back to its acquisition cost. This hedge spread is thus a constant
applied to the underlying Libor rates and used to derive the hedge value of the bond
throughout the hedge relationship. The associated swap is marked-to-market. AFI then
generates the appropriate accounting entries into the SAP general ledger (see below).
Due to developments in how derivatives are now priced in the market, certain pricing
components only apply to the measurement of derivatives and not to cash instruments. This
means that identically offsetting cash-flows between a bond and a swap will produce different
values and hence hedge ineffectiveness. This has caused a large number of the Bank’s “onefor-one” hedge relationships to fail the bright-line correlation requirements (within a range of
80 - 125percent) of IAS 39.
However, IFRS 9 no longer requires a correlation test and so the Bank anticipates that all its
hedged relations will qualify for HA under IFRS 9. While IFRS 9 promotes the use of Risk
systems to demonstrate that instruments are in economically effective hedge relationships, the
Bank’s Risk systems are not currently in a position to evidence this. This may change as a
result of the system developments currently pursued by Risk Management, including
envisaged expansion of trade data analysed as part of market risk calculations. Equally,
reliance on other evidence may be required and should be considered as part of this
assignment. This could be based, for example, on “critical term matching” or offsetting cashflow reports.
3.2
Impairment process
The Bank’s loan portfolio
The Bank has around 1,650 debt counterparties (borrowers and guarantors) with assigned PD
(probability of default) ratings. At the end of 2015, the overall debt Portfolio totalled €33.7
billion, of which €22.5 billion was disbursed. The average PD rating of the debt portfolio was
equivalent to B+ on a standard rating agency scale. Only €4.1 billion of debt Portfolio assets
had investment grade rating, while €8.8 billion were rated CCC+ equivalent or below. €8.7
billion of Portfolio exposure was direct sovereign or sovereign guaranteed, directly
benefitting from the Bank’s preferred creditor status.
Taking account of risk transfers based on full and irrevocable guarantees, the portfolio is
diversified across 37 countries of operations and 27 developed markets. The Bank lends to
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counterparties across a wide range of sectors, including financial intermediaries, equity funds,
utilities, consumer staples, materials, transport, energy and others.
Assignment of PD Ratings
All counterparties in the Bank’s Debt Portfolio are reviewed at least annually. In the course
of the review, Risk Management confirms or changes PD ratings based on information
received from the client and external sources, research prepared by the Banking Department,
and its own analysis. With the exception of Financial Institutions, where a PD Scorecard is
currently piloted, the Bank does not at present apply scoring models.
In assigning and validating PD ratings, Risk Officers are guided by country sovereign
ceilings, external agency ratings (where available), internal country risk ratings, peer analysis
and own professional judgement. Risk Management is of the view that the resulting PD
ratings are “Point in Time” rather than “Through the Cycle”, especially as economic cycles in
the Bank’s countries of operations are obscured by frequent systemic economic and political
changes.
PD ratings were introduced in December 2010, when they replaced Facility Risk Ratings
(FRR). FRR combined elements currently assigned through both PD and LGD (loss given
default) elements ratings. The history of PD ratings and FRR for each counterparty and
transaction is stored in the Bank’s Data Warehouse, allowing for historical rating migration
analysis and automatic (subject to minor IT enhancement) identification of counterparties and
transactions for which PD ratings deteriorated beyond pre-agreed threshold.
PD and LGD rate models
The PD rates assigned to individual PD ratings are governed by the Bank’s Provisioning
Policy and are reviewed annually. They are set uniformly for the entire portfolio (including
sovereign exposures), based on internal default experience since the inception of the Bank and
external emerging market default data published by S&P (cumulative average default data by
rating). The Bank has an established table of cumulative PD rates by rating over time (one
year time horizon and beyond) based on the methodology in the Provisioning Policy. The
scarcity of available data has so far prevented the Bank from disaggregated modelling of any
of its sub-portfolios.
LGD rates are governed by the Provisioning Policy and reviewed annually and are set
uniformly for the entire portfolio based on seniority of the loan (senior / subordinated). Given
the scarcity of usable internal data and limited relevant external emerging market
comparators, they are set based on regulatory guidance issued in the context of capital
adequacy and capital measurement rules.
Risk transfers
The Bank assesses the credit quality of individual transactions taking into account risk
transfers. Only full and irrevocable guarantees covering the entire loan amounts are currently
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recognised in the Bank’s system. Risk transfer only takes place if PD rating of the guarantor
is better than PD rating of the borrower.
General provisioning process
The Bank’s current calculation of its general portfolio provisions (impairment incurred but
not yet identified) under IAS 39 is based on a one year loss emergence period; i.e. a
calculation of one year expected loss. The calculation is a function of the PD and LGD being
used to derive a provision percentage applied to Exposure at Default (EAD). EAD is
calculated by adding disbursed loans and half of the committed but undisbursed amounts.
The Bank’s calculation of general portfolio provisions on its loan book is derived by an inhouse Excel-based model. The key inputs to the model and the source systems from which
these inputs are extracted via Data Warehouse are as follows:
 Details of the loan – both drawn and undrawn commitments – Summit;
 The PD rating of the borrower and/or guarantor – DTM (see below);
 The LGD of the facility – DTM and/or guarantee - SAP.
The model produces a figure for each currency in which loans are held and recorded in the
SAP general ledger by manual journal that is created as an output to the model.
The model also provides a high level portfolio estimate of the expected loss over the full life
of every loan, used by the Bank to “ring-fence” an additional amount in its reserves as ‘undistributable’.
Ongoing enhancements
For the purpose of liquidity risk management and compliance the Bank, using an Excel-based
model constructs disbursement profiles based on characteristics of individual transactions.
This methodology is currently undergoing refinements and automation, with the view of
injecting modelled cash flow profiles automatically to Nominal Exposure Review Application
(NERA). NERA (see below) is the Bank’s system that combines details of the loan from
Summit with disbursement projections manually input by the Banking department to create
transaction specific cash flow projections. The Bank’s transaction level cash flows are highly
irregular, especially for infrastructure and construction projects, where delays often result in
disbursement and repayments occurring at the same time.
While currently not utilised in the general provision process, transaction specific cash flow
projections from NERA feed into the Banking Potential Future Exposure (PFE) calculation.
They can be used to establish expected EAD for each transaction and any given point of time.
This system could also potentially be developed to also calculate an interest rate that would
allow discounting all future exposures back to the committed loan amount.
NERA cash flows are currently used by a Risk Management’s model calibrating Economic
Capital utilisation by the Bank. Overall, Risk Management operates a suite of quantitative
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models supplied by third parties (QuiC – see below) and developed internally (mainly in R1
and Matlab) and has in-house capability to develop new and enhance existing quantitative
tools. These models are fully integrated with the IT infrastructure of the Bank, including
automation, scheduling and reliability support.
The Bank does not currently hold general provisions for its Treasury assets. Under IFRS 9,
Treasury assets are classified as either debt securities at fair value or debt securities at
amortised cost. Debt securities at amortised cost are subject to both specific and general
(incurred but not yet identified) impairment. In general, the nature of the Treasury assets are
such that the probability of impairment is very low compared to Banking assets and often the
deterioration occurs relatively rapidly once a certain threshold is obtained. Furthermore, due
to the significant variety of asset classes and different characteristics among the lower rated
Treasury assets, specific provisioning will be the main focus in determining the appropriate
level of provisioning for those portfolios.
A regular review is undertaken to assess the materiality of potential losses not yet identified
on unimpaired Treasury exposures classified as debt securities at amortised cost (for risk
ratings 3.7-7.3). Based on a review as at 30 June 2015 a potential Expected Loss of under €1
million was estimated based on a three month loss horizon. This was deemed to be immaterial
by Management.
Given that specific provisions are raised for identified impairment, the Management
concluded that a General Portfolio Provision for Treasury assets classified as debt securities at
amortised cost is not necessary. However, the materiality of the potential level of impairment
not yet identified on Treasury assets classified as debt securities at amortised cost will
continue to be regularly evaluated to ensure that the policy does not result in a misstatement
of the Bank’s accounts.
3.3
Calculation of effective interest rate for amortised cost loans
For financial assets and liabilities accounted for at amortised cost, IFRS requires interest
recognition to be measured using the EIR method.
EIR is a method of calculating the amortised cost of a financial asset or a financial liability
and of allocating the interest income or interest expense over the relevant period. EIR is the
rate that exactly discounts estimated future cash payments or receipts through the expected
life of the financial instrument to the net carrying amount of the financial asset or financial
liability. When calculating the EIR, an entity shall estimate cash flows considering all
contractual terms of the financial instrument (for example, prepayment, call and similar
options) but shall not consider future credit losses. The calculation includes all fees and
points paid or received between parties to the contract that are an integral part of the effective
interest rate (see IAS 18 Revenue), transaction costs, and all other premiums or discounts.
1
R is a language and environment for statistical computing. R provides a wide variety of statistical models
(linear and nonlinear modelling, classical statistical tests, time-series analysis, classification, clustering).
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The Bank currently performs EIR for relevant Treasury assets and liabilities (essentially
bonds acquired as investments or bonds issued for borrowing purposes) within the SAP
module “AFI”.
It does not have a system for performing EIR on its loan book and currently performs a highlevel portfolio estimate using excel spreadsheets and simplified assumptions. Loans and their
associated fees are recorded in the Bank’s ‘Summit’ system. Loan commitments are made
with a last availability date by which the full loan is intended to be drawn. The repayment
profile of the loan – with full drawdown assumed – is available at the outset and recorded at
the commitment (facility) level. No forecast of drawdowns is made in Summit – only the
actual drawdowns as they occur (drawdown forecasts are available through NERA, subject to
ongoing enhancements set out above). The income on fixed rate loans is booked out to
maturity but floating rate loans are only booked for the current interest period (the full
repayment schedule for such loans is available in the Bank’s system). Interest derived from
the loan’s stated rate is accrued on a straight line basis while the fees are deferred to the
balance sheet and then unwound manually using excel spreadsheets.
4.
IT Systems
It is expected that the following Bank IT systems will be impacted and reviewed as part of the
Project Definition phase.

SAP Accounting for Financial Instruments (AFI)

SAP Limits Management

SAP BW

Summit (in particular Summit Commercial Lending)

NumeriX

Payment Tracker

NERA

Interim Exposure Measurement Solution (IEM)

QuiC

Data Warehouse

DTM
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SAP Accounting for Financial Instruments (AFI)
SAP Bank Analyser 5.0 (AFI) is the engine for IFRS 39 reporting: it calculates key figure
values for the Bank’s Financial Instruments (Fair Value, Amortised Cost, Hedge Fair Value
and Hedge Amortised Cost) and performs micro fair value hedge management and hedge
effectiveness testing. AFI receives master data, static data and market data from Summit (the
front office trading system) plus cashflow feeds from NumeriX (the Bank’s pricing tool used
for exotic trades), generating and sending accounting entries to the SAP GL using the subledger scenario. The Bank’s General Ledger is run on SAP ECC6.06 (the SAP “new” GL has
not been implemented to date)
SAP Limits Management
SAP Bank Analyser 5.0 is also the application for monitoring Treasury counterparty credit
exposure by storing and actively monitoring the Banks’ credit limits, based on credit exposure
data generated overnight from the Bank’s risk engine, QuiC. This system is referred to as
SAP Limits Management and is made up of SAP Business Partner functionality, running in
conjunction with Bank Analyser 5.0 (Limit Manager).
SAP Business Warehouse (BW)
Two separate BW instances are used to stage, transform and interface data between the source
systems and the two Bank Analyzer systems.
The ‘Financial Data Repository (FDR)’ BW system feeds the Bank Analyzer AFI system and
BW for risk system feeds SAP Limits Manager. The Bank runs BW 7.31
Summit (including Summit Commercial Lending)
The Summit Front Office trading and Back Office settlements system from vendor Misys
supports transaction processing (front to back office) for all Treasury and Banking deals except equity which is recorded in the Framework (AFL) system from vendor 3i Infotech.
The Summit Commercial Lending module is used to book guarantee products (TFP) and a
wide variety of loans products including details such as start and end dates, limits and fees.
The Bank currently runs Summit v5.4 and is aiming to upgrade to v6.0 by end 2016.
NumeriX
The NumeriX Cross Asset Valuation Engine is used to value the Bank’s highly structured
trades (i.e. the exotic trades that cannot be readily valued in Summit). The Bank currently
runs the spreadsheet version of NumeriX 12.1.0.
Payment Tracker
The Payment Tracker system is used by the Cash Management Team to monitor payments
from Banking Clients. The system records the expected cash flows and in cases where the
expected cash flows do not mirror the actual cash flows, as generated by the trades which
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have been entered in Summit, then a late payment is alert is sent to senior management and to
the Banking clients.
The system is built on technologies like - Java Swing, EJB's, Internal Database Access
Objects, Email Object
NERA
NERA is a user-interface which is used by bankers and credit reviewers on a periodic basis to
capture information on expected future cash flows (particularly disbursements and
prepayments) at a facility level. The inputs are currently based on expert judgement (work is
ongoing to supplement or replace expert judgement by cash flow modelling based on historic
disbursement/prepayment patterns).
The system is built on technologies like - Java Swing, EJB's, Internal Database Access
Objects
IEM
The system loads the expected cash flows from FDR system every night as a batch run and
then uses a business rules engine to calculate a measurement of the Bank’s interim exposure
for each of the banking products. This is based on operating assets and portfolio viewed from
the current date, as well as future profiles using generated cash flows. Following the
calculation of the interim exposure for each of the banking products, the system provides an
extract to be loaded into the Data Warehouse to include all new and enhanced data for risk
reporting at the required aggregation levels.
The system is built on technologies like - Java, EJB's, JMS, Internal Database Access Objects,
Email Object and Rules Engine
QuiC
Credit risk, market risk and economic capital are calculated using the QuiC (Markit
Analytics) package from vendor Markit. The Bank currently runs QuiC QSF 11.24 Platform
3.14 and is aiming to upgrade to QSF 12.27 Platform 4.18 (RIAN delivery process) for credit
risk and market risk by mid 2016.
Data Warehouse
The Bank runs a Cognos Data Warehouse (DW) that generates reports that form part of the
current process for reporting on IFRS 9 compliance. This DW runs on an Oracle database
platform and currently utilises Informatica as its extraction, transformation and loading tool.
The Bank has recently implemented TIBCO as its Enterprise Service Bus and it is expected
that this tool will start to replace the use of Informatica within the DW environment.
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DTM
Used to track and monitor the Bank’s projects from pipeline through signing to completion.
Technology is a combination of Powerbuilder and JAVA
5.
Objectives
The objectives of the Assignment are to provide:

A detailed outline of an IFRS 9 compliant impairment business process and supporting
systems, highlighting the key components and requirements, including data, systems,
models etc.

The means by which to achieve the automation of interest recognition on an “effective
interest rate” basis for banking loans, highlighting the key components and
requirements, including data, systems, models etc.

A detailed outline of an IFRS 9 compliant hedge accounting process, highlighting the
key components and requirements, including data, systems, models etc.

A fully-fledged plan for the implementation phase of the Project covering systems
implementation approach, resources, timescales and costs.

Options and recommendations where choices are available around third party systems
(i.e. alternatives to current systems).
In pursuing the above objectives, the Bank wishes to comply with IFRS 9 in a manner which
will ensure cost efficiency and avoid unnecessary complexity. The Bank also wants the
solutions put in place to be adaptable, so that they can be adjusted as interpretation of
accounting standards and the Bank’s own business practices evolve over time. To the extent
possible the Bank seeks to exploit synergies between necessary enhancements in the
calculation of impairment and effective interest rates.
6.
Tasks
In pursuing the above objectives, the Consultant will (as a minimum) address the following
issues.
In the area of hedge accounting, the Consultant is required to:

Consider whether the current process is the best way of continuing HA under IFRS 9 or
whether there are there better alternatives.

Propose a solution that looks to fair value derivatives in line with best market practice to
avoid the necessity to make manual adjustments from a “hedge valuation” to a “fair
value” valuation required for IFRS reporting.
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
Propose a solution that provides the Bank with the ability to remove the volatility associated with currency basis spreads in currency swaps - from PL as IFRS 9 allows
this to be separated for reporting in OCI (other comprehensive income).

Ensure that hedge relationships associated with the Bank’s loan book which are not
currently automated through AFI (these are relatively few and are not necessarily
“back-to-back” matched hedges, which are monitored manually in excel spreadsheets)
are brought into the automated solution.
In the area of impairment calculation, the Consultant is required to:

Review in detail the current impairment business process and supporting systems as
outlined above.

Review existing plans for modification of the Bank’s impairment process and identify
any enhancements and/or refinements needed to ensure IFRS-9 compliance. This
analysis should outline the technical solutions necessary to implement the
enhancements and/or refinements and any external data that may need to be procured.

Provide Bank Management with the necessary accounting advice to refine the plans for
modification to the Bank’s impairment process, reflecting emerging best practice and
the Bank’s business context.

Clearly identify aspects of the plans for modification of the Bank’s impairment process
which are absolutely necessary for IFRS 9 compliance and those where further
discussion with the Bank’s external auditor is required to establish the necessary degree
of complexity. Provide advice to the Bank’s Management for their discussions with the
external auditor.

As part of the assignment, the Consultant should advise what, if any, refinements are
required to the General Portfolio Provision for Treasury assets approach to make it fully
compliant with IFRS 9 requirements
In the area of effective interest rate calculation, the Consultant is required to:

Review the adequacy of the Bank’s existing process for gathering the information
required to perform EIR on its loan book.

Recommend an automated solution for performing EIR.

Propose a solution to enable the calculation of EIR on impaired assets.
7.
Implementation Arrangements.
The Consultant shall report to and receive instructions from Nigel Kerby, Managing Director,
Controller (the Controller). The Bank has convened a steering committee to oversee the
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delivery of the Project (the Steering Committee). The Controller is the Chair of the Steering
Committee and may instruct the Consultant to report to and accept instructions from other
members of the Steering Committee.
The Consultant is required to provide monthly reporting to the Steering Committee on
progress made against the implementation plan proposed by the Consultant and accepted by
the Bank at contract signature. In addition, the Consultant shall meet on a weekly basis with
the Controller and the Steering Committee members representing the IT Department.
8.
Deliverables
The Consultant shall deliver the following outputs to the Steering Committee:

A Draft Report containing a summary of the Consultant’s findings and recommendations
following its execution of the tasks listed in section 6 (Tasks) and more specifically:
o The Consultant’s advice to the Bank in respect of existing arrangements and
potential approaches to achieve IFRS 9 compliance in the areas covered by the
Assignment.
o A Project Definition Document (as defined in section1 above) covering, interalia, the recommended systems implementation approach, resourcing proposals for
both Bank staff members and third party providers, timescales and costs including
an approximate cost benefit analysis for the key options.
o The Project Definition Document shall include the Consultant’s assessment of the
options available to the Bank and its recommendations regarding third party
systems (i.e. alternatives to current systems).
 A Final Report containing the elements of the Draft Report updated / responding to
all comments and corrections made by the Steering Committee (and any other Bank
staff members identified by the Controller).
9.
Timetable
The Consultant’s deliverables (as defined in section 8) shall be submitted in accordance with
the following schedule:
Deliverable
Submission Date
Draft Report (including the Project Definition Document)
Within 2.5 months of
contract start date
Within 3 months of
contract start date
Final Report
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Annex B – Quotation File
PUR1601/04 - Project Definition: IFRS 9.
Suppliers are required to fill in all cells shaded yellow
Suppliers shall provide all pricing in GBP exclusive of VAT
Supplier name:
Fees
Name of Expert
Category / Job Title of
Expert
Daily Fee
0
0
0
0
0
0
0
0
Total
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