IRRBB IT system and data quality

The IT systems and applications used by the institution to carry out, process and record operations, to identify, measure and aggregate IRRBB exposures, and to generate reports should be capable of supporting the management of IRRBB in a timely and accurate manner. In particular, the systems should:

• (a) Capture interest rate risk data on all the institution’s material IRRBB exposures including exposures to gap, basis, and option risk. This should support the institution’s measurement system to identify, measure and aggregate the major sources of IRRBB exposures.
• (b) Be capable of fully and clearly recording all transactions made by the institution, taking into account their IRRBB characteristics.
• (c) Be tailored to the complexity and number of transactions creating IRRBB.
• (d) Offer sufficient flexibility to accommodate a reasonable range of IRRBB shock and stress scenarios and any additional scenarios.
• (e) Enable the institutions to fully measure, assess and monitor the contribution of individual transactions to their overall exposure.
• (f) Be able to compute the IRRBB measures (i.e., economic value and net interest income measures plus market value changes) as well as other measures of IRRBB prescribed by their competent authorities, based on the interest rate shock and stress scenarios set out in sections 4.3.3 and 4.3.4.
• (g) Be sufficiently flexible to incorporate supervisory- imposed constraints on institutions’ internal risk parameter assumptions.

The IT system and transaction system should be capable of recording the repricing profile, interest rate characteristics (including spread) and option characteristics of the products to enable measurement of gap risk, basis risk and option risk. In particular, the transaction system should be able to gather detailed information on the repricing date(s) of a given transaction, interest rate type or index, any options (including early repayment or redemption) and the fees relating to the exercise of these options. The systems used to measure IRRBB should be capable of capturing the IRRBB characteristics of all products. The systems should also allow the disaggregation of the impact of individual IRRBB instruments and portfolios at the risk level of the non-trading book.

For complex, structured products in particular, the transaction system should be able to gather information about the separate parts of the product and to capture their IRRBB characteristics (e.g., the characteristics of assets and liabilities grouped by certain characteristics such as repricing dates or optionality elements). The institution should ensure that the IT system is able to keep pace with the introduction of new products.

Adequate organisational controls of IT systems should be in place to prevent the corruption of data used by IRRBB computer systems and applications, and to control changes to the coding used in those applications, so as to ensure, in particular:

• (a) the reliability of data used as input, and the integrity of processing systems for IRRBB models;
• (b) that the likelihood of errors occurring in the IT system, including those occurring during data processing and aggregation, is minimised; and
• (c) that adequate measures are taken if market disruptions or slumps occur.

Risk measures should be based on reliable market and internal data. Institutions should scrutinise the quality of external sources of information used to establish the historical databases of interest rates, as well as the frequency at which databases are updated.

To ensure the high quality of data, institutions should implement appropriate processes that ensure that the data entered into the IT system is correct. Data inputs should be automated as much as possible to reduce administrative errors, and data mapping should be periodically reviewed and tested against an approved model version. In addition, there should be sufficient documentation of the major data sources used in the institution’s risk measurement process. Institutions should also establish appropriate mechanisms to verify the correctness of the aggregation process and the reliability of model results. These mechanisms should confirm the accuracy and reliability of data.

Where institutions slot cash flows into different time buckets (e.g., for gap analyses) or assign the cash flows to different vertex points to reflect the different tenors of the interest rate curve, the slotting criteria should be stable over time to allow a meaningful comparison of risk figures over different periods.

Institutions should identify potential reasons for discrepancies and irregularities that may arise at the time of data processing. Institutions should have procedures in place to handle those discrepancies and irregularities, including procedures for the mutual reconciliation of positions to enable these discrepancies and irregularities to be eliminated.

Institutions should set up appropriate processes to ensure that the data used to feed models measuring the IRRBB across the group is consistent with the data used for financial planning.