The European Commission, the European Central Bank, the European Securities and Markets Authority and the Belgian Financial Services and Markets Authority have announced that a new working group will be established which will be tasked with identifying and recommending alternatives to the benchmark rates currently used in the EU – the EURIBOR and EONIA. The working group, in consultation with market participants, will recommend an alternative risk-free reference rate and develop plans to transition from the existing benchmarks to the new RFR.

The European Central Bank also announced that it will start providing an overnight unsecured index before 2020 to provide further options for the choice of alternative rates for the euro area.

View the joint press release.

View the ECB’s press release.

The International Swaps and Derivatives Association has published a paper outlining recommendations for a CCP Recovery and Resolution Framework.
 

The ISDA's paper focuses on CCPs that clear derivatives, although many of its recommendations will be relevant to clearing houses that clear other instruments. It is intended to build on the guidance from CPMI-IOSCO and the FSB. The paper sets out certain key points for CCPs, their supervisors, resolution authorities and other policy makers to consider when implementing CCP recovery and resolution mechanisms.
 

In brief, the ISDA's recommendations cover: (i) the level of transparency that should be afforded to clearing participants about the expected recovery and resolution strategies for a CCP, so that participants can manage and control their potential exposure; (ii) the timing of the resolution regime and the necessary flexibility that should be incorporated into the regime to allow for further recovery measures; (iii) the allocation of losses after a clearing member default, including by making cash calls and the application of variation margin gains haircutting (initial margin haircutting is not supported by the paper however); (iv) tools to rebalance a CCP's book, including the use of partial tear-ups as a last resort, but excluding forced allocation of positions to non-defaulting clearing members; (v) claims for clearing participants that suffer losses beyond a certain point in CCP recovery or resolution; (vi) the allocation of non-default losses; and (vii) ensuring adequate liquidity from central banks on standard market terms.
 

View the Paper.

The European Commission has published a Report to the European Parliament and the Council recommending that Exchange-Traded Derivatives (ETDs) do not need to be excluded from the scope of the provisions of the Markets in Financial Instruments Regulation that provide for open and non-discriminatory access to CCPs and to trading venues.

Read more.

The European Securities and Markets Authority has published proposed amendments to its Regulatory Technical Standards under the European Markets Infrastructure Regulation, following a public consultation between December 2016 and February 2017. ESMA provided final draft RTS to the European Commission in 2012 specifying the frequency and the details of the information to be made available by Trade Repositories to the relevant authorities and the information to be published by TRs. The RTS also specified the operational standards required to aggregate and compare data across TRs and for the relevant authorities to have access to information as necessary.

Read more.

The European Securities Markets Authority has published a consultation on proposed guidelines to ensure common, uniform and consistent application of the provisions of the Central Securities Depositaries Regulation that apply to internalized settlement reporting and to the exchange of information between ESMA and national regulators.

Read more.

The European Commission has published legislative proposals to amend the European Market Infrastructure Regulation and the Regulation establishing the European Securities and Markets Authority. The proposals are on the supervision of CCPs, both EU CCPs and third country CCPs, and include the controversial new proposals for a formal EU "location policy" for CCPs.

Read more.

The European Securities and Markets Authority has published an Opinion addressed to EU national regulators on the portfolio margining requirements for CCPs under the European Market Infrastructure Regulation. The Regulatory Technical Standards on portfolio margining that supplement the European Market Infrastructure Regulation provide that a CCP can offset or reduce the required margin across instruments, which it clears if the price risk of one instrument is significantly and reliably correlated to the price risk of other financial instruments. In those cases, a CCP may apply portfolio margining. European legislation provides certainty over the requirements only to a limited degree because there is no indication as to which instrument or product can be considered the same or which elements are needed for an instrument or product to be considered the same. ESMA's Opinion aims to provide clarification as to when two contracts can or cannot be considered the same instrument for the purpose of portfolio-margining, referencing all asset classes. In addition, ESMA confirms that CCPs have to limit the reduction in margin requirement when conducting portfolio-margining across different instruments.

View ESMA's Opinion.

The European Securities and Markets Authority has issued an Opinion on the European Commission's proposed EU Regulation on CCP Recovery and Resolution. The proposal gives CCPs' national regulators under the European Market Infrastructure regulation powers of supervision and early intervention with regards to CCP recovery. It further asks Member States to designate National Resolution Authorities to develop CCP resolution plans and ensure the resolvability of CCPs established in their Member State and for the establishment of a resolution college. ESMA is tasked with taking on a mediator role. In its Opinion, ESMA states that it broadly supports the regulatory approach taken by the Commission. However, ESMA considers that the EU legislators should consider the budgetary implications of the role assigned to ESMA and include a provision in the final CCP Recovery and Resolution Regulation for ESMA to draft a report on the issue, as was the case for EMIR. While it supports the introduction of binding mediation, ESMA raises some concerns over the proposed mediation mechanism. ESMA also states that further detailed requirements on the content of recovery plans, such as what recovery tools could be used to allocate default losses or to cover non-default losses, would be useful.

View the ESMA Opinion.

The European Securities and Markets Authority has published its final Report containing draft regulatory and implementing technical standards under the Benchmarks Regulation. The Benchmark Regulation sets out the authorization and registration requirements for benchmark administrators, including third-country entities, and the requirements for governance and control of administrators. It provides for different categories of benchmarks depending on the risks involved, imposes additional requirements on benchmarks considered to be "critical" and gives powers to national regulators to mandate, under certain conditions, contributions to or the administration of critical benchmarks.

Read more.

Regulatory Technical Standards supplementing the Central Securities Depositories Regulation setting out the prudential regime for central securities depositories was published in the Official Journal of the European Union. A distinction is made in CSDR between CSDs that offer banking-type ancillary services and are also authorized as credit institutions (i.e. banks) and CSDs that are not permitted to offer ancillary banking services. The RTS cover: (i) the capital requirements applicable to all CSDs; (ii) the additional risk-based capital surcharge which takes into account the risks, including intra-day credit and liquidity risks that arise from the ancillary banking services of CSDs; and (iii) the framework and tools for monitoring, measuring, managing, reporting and disclosing the intra-day credit and liquidity risks. CSDs that carry out ancillary banking services will also need to comply with the Capital Requirements Regulation and the RTS impose stricter requirements than those in CRR in some respects.

Read more.
 

A Commission Delegated Regulation on the content of the reports on internalised settlements was published in the Official Journal of the European Union. The Delegated Regulation will supplement the Central Securities Depositories Regulation. The CSDR requires settlement internalisers to report on settlements that they internalise. The Delegated Regulation specifies the content of such reporting, stating that reports should provide for detailed information on the aggregated volume and value of settlement instructions settled by settlement internalisers outside of securities settlement systems. The reports must specify, among other things, the asset class, type of securities transactions, type of clients and issuer CSD.

In addition, Implementing Technical Standards on templates and procedures for the reporting and transmission of information on internalised settlements was published in the Official Journal of the European Union on March 10, 2017. The ITS provide the templates and forms that CSDs must use when reporting the required information to their national regulator.

Read more.
 

Regulatory Technical Standards supplementing the Central Securities Depositories Regulation on the authorization, supervisory and operational requirements for CSDs was published in the Official Journal of the European Union. The RTS cover, among other things: (i) the authorization and identification requirements for applicant CSDs; (ii) recognition of a third-country CSD; (iii) risk monitoring tools and governance arrangements that a CSD must establish; (iv) record keeping systems, policies and procedures that a CSD must establish; and (v) rules for CSDs to participate in other entities.

In addition, Implementing Technical Standards on the standard forms, templates and procedures for authorization were published in the Official Journal of the European Union on the same day. The ITS cover the forms, templates and procedures for authorization, review and evaluation of CSDs, for the cooperation between home and host national regulators, for the consultation of authorities involved in the authorization to provide banking-type ancillary services, for access involving CSDs, and the format of the records to be maintained by CSDs.

Read more.
 

A Commission Delegated Regulation on the parameters for the calculation of cash penalties for settlement fails and the operations of CSDs in host Member States was published in the Official Journal of the European Union. The Delegated Regulation will supplement the Central Securities Depositories Regulation. The CSDR requires CSDs to impose cash penalties on participants to their securities settlement systems that cause settlement fails. The Delegated Regulation sets out the methodology, penalty rates and reference prices that CSDs should use to calculate those penalties.

Read more.

The Committee on Payments and Market Infrastructures published a report on distributed ledger technology in payment, clearing and settlement. In the context of payment, clearing and settlement, DLT enables entities to carry out transactions without relying on a central entity to maintain a single ledger. Financial market infrastructures are entrusted by their participants with maintaining a central ledger and, in some cases, managing certain risks on behalf of participants. It has therefore been commented that DLT could reduce the reliance on a central ledger managed by a FMI.

The objective of the report is to provide central banks and authorities with an analytical framework for assessing DLT arrangements, focusing on those that involve restricted ledgers where access is limited to approved users only.

Read more.

The Bank of England published a supplementary consultation paper on its revised proposed averaging methodology to be used for the Sterling Overnight Index Average Interest Rate Benchmark, known as SONIA. The BoE took over as administrator of SONIA on April 25, 2016. SONIA is currently based on a market for brokered deposits which has limited transaction volumes. In October 2016, the BoE consulted on its proposals to reform SONIA in four areas, including the SONIA calculation methodology. The Bank proposed to switch the current calculation to measuring the average rate using a volume-weighted median, rather than a volume-weighted mean. Following feedback to that proposal, the BoE is now proposing that SONIA be calculated as the volume-weighted trimmed mean rate of eligible transactions. This is calculated by removing transactions at outlying rates and calculating the mean of the remaining transactions.

Responses to the consultation are due by March 16, 2017. By the end of March 2017, the BoE intends to publish its final approach to the design of SONIA and the transition and publication arrangements in a summary and response to feedback document which will cover both this consultation and the October 2016 consultation. The BoE had intended to transition from the current benchmark to the proposed reformed SONIA between October and December of 2017. However, the BoE now expects that the transition will take place in March or April 2018.

View the consultation paper.

The Financial Stability Board published proposed Guidance on central counterparty resolution and resolution planning. The aim of the proposed Guidance is to assist national authorities and FSB member jurisdictions in implementing effective resolution regimes, credit resolution strategies and plans for CCPs that are consistent with the FSB Key Attributes of Effective Resolution Regimes for Financial Institutions and the financial market infrastructure guidance annexed to the Key Attributes. The FSB published a Discussion Note on August 16, 2016 which sought feedback on aspects of CCP resolution that are key to the design of effective resolution strategies. The FSB's proposed Guidance is based on responses to that Discussion Note as well as further consultations with FSB member authorities. The FSB is seeking feedback on, amongst other things, the powers that resolution authorities should have to maintain the continuity of critical CCP functions, return the CCP to a matched book and address default and non-default losses, the treatment of equity of existing CCP owners in a CCP resolution and cross-border enforcement of resolution actions. Among others, it is proposed that resolution authorities should have power to write down initial margin as well as variation margin.  The assessment for the "no creditor worse off" test is proposed to be based upon what would happen following exercise of all CCP post-default powers. Responses to the consultation are requested by March 13, 2017.

View the consultation paper. 

View the FSB's summary of responses to the discussion paper. 

View the discussion paper.

The European Securities and Markets Authority announced details of the 2017 EU-wide CCP stress test exercise. The European Market Infrastructure Regulation requires ESMA to conduct the exercise at least once per year to assess the resilience and safety of the EU’s CCPs from a systemic risk viewpoint. The exercise covers 17 EU CCPs and includes all products currently cleared by the CCPs. ESMA may issue recommendations to address any issues that are highlighted by the exercise. The results of the exercise are expected to be published in Q4 2017.

View ESMA's announcement and framework methodology. 

The European Securities and Markets Authority launched a consultation on proposed Guidelines on the transfer of data between trade repositories. The European Market Infrastructure Regulation requires counterparties and CCPs to report trades to a trade repository while ensuring that details of their derivatives contracts are reported without duplication. EMIR also requires trade repositories to maintain reported information for a period of ten years following the termination of the derivative. 

The European Securities and Markets Authority published the results of a peer review it has conducted into how national regulators ensure and assess compliance by CCPs with the margin and collateral requirements under the European Market Infrastructure Regulation. Under EMIR, ESMA has a coordination role between national regulators to build a common supervisory culture and consistent supervisory practices. ESMA is required to conduct a peer review of the supervisory activities of the national regulators of CCPs at least annually. ESMA's report on the peer review provides an overview of the approaches of national regulators and sets out ESMA's assessment of the degree of convergence between those approaches. ESMA found inconsistencies in the frequency and depth of the supervision of CCPs (even for CCPs of a similar size or complexity). ESMA highlights various areas for improvement to enhance supervisory convergence, including identification of new services which require an extension of a CCP's authorization, determining significant changes to a CCP's risk model and the ongoing review of CCP collateral policies. The report sets out some examples of good practice that ESMA observed during the review, such as having direct access to the data of a supervised CCP. ESMA intends to follow up on the findings from the peer review by, amongst other things, identifying appropriate tools to enhance supervisory convergence. 

View ESMA's peer review report.

Ten decisions on the equivalence of third country regulatory regimes under the European Market Infrastructure Regulation were published in the Official Journal of the European Union. 

CCPs established in third countries whose supervisory and legal regimes have been deemed to be equivalent to the EU regime may provide clearing services to clearing members or trading venues established in the Union. Such a CCP must be recognized by the European Securities and Markets Authority in accordance with the processes outlined in EMIR. The regulatory and legal regimes of India, New Zealand, Japan, Brazil, Dubai International Financial Centre and the UAE have been granted equivalence in relation to CCPs. 

Read more.

The Payment Systems Regulator published proposals for remedying the lack of competition in the provision of UK payments central infrastructure for Bacs, FPS and LINK which means that the incumbent provider, VocaLink, faces limited competitive pressure and minimal incentives to provide more efficient and innovative services. 
The PSR published its final report on its market review into the ownership and payment infrastructure competitiveness in the UK on July 28, 2016. The final report identified the competition issues and outlined potential remedies, including undertaking competitive procurement exercises, such as issuing guidance and requiring operators of payment service providers to follow a prescribed set of processes and implementing enhanced interoperability, including a common international messaging standard, for Bacs and FPS, and divestment by the four largest shareholders in VocaLink. Following feedback to those initial proposals, the PSR is now consulting on mandating competitive procurement exercises for Bacs, FPS and LINK when the operators of these systems purchase central infrastructure services and introducing the ISO 20022 messaging standard in future procurements for Bacs and FPS. 

Read more.

The European Commission published a legislative proposal for a Regulation on the recovery and resolution of CCPs. The aim of the proposed Regulation is to set up a framework for the orderly recovery of a CCP through implementation of recovery plans. Under the proposal, a CCP's recovery plan will need to be agreed between the CCP and its clearing members. If the recovery measures do not restore the CCP’s viability, the CCP's resolution authority will have the power to take action to ensure the continuity of the CCP's critical functions and, if needed, resolve the CCP.  This includes setting up bridge CCPs. In the event of losses arising under a resolution, these will be borne by a CCP's owners, creditors and counterparties in line with the hierarchy of claims in insolvency.  Managers of a CCP will be capable of being replaced and held accountable for wrongdoing under the applicable national laws. The CCP recovery and resolution framework would apply to all CCPs established in the EU. It is not proposed that the recovery and resolution framework would apply to the wider group of a CCP, but a resolution authority would be able to decide on a case-by-case basis whether a recovery plan should include a parent company.

Read more.

The European Securities and Markets Authority published an Opinion outlining a common supervisory approach for regulators dealing with central counterparties that seek to extend or change their existing authorization under the European Market Infrastructure Regulation or to adopt a significant change to their risk model and parameters. The purpose of the Opinion is to build a common supervisory culture by creating uniform procedures and consistent approaches throughout the EU. EMIR requires a CCP wishing to extend its business to additional products and services not covered by its initial authorization to apply to its regulator for an extension, and to obtain validation before adopting any significant changes to its risk model and parameters. EMIR does not define or specify what “additional services and activities” are, nor the notion of “significant change.” The Opinion provides indicators to assist regulators to identify when a change is significant and to seek the college’s opinion, as required by EMIR, on the extension of services and activities. 

Read more.

HM Treasury published a consultation paper on rules for a financial market infrastructure special administration regime. A form of special administration for certain financial market infrastructure companies, excluding central counterparties, was introduced by The Financial Services (Banking Reform) Act 2013, known as FMI administration. CCPs are already subject to the special resolution regime in the Banking Act 2009. The entities covered by the FMI administration regime are non-CCP operators of payment systems and central securities depositories. HM Treasury is seeking views on new rules, and modifications to existing general insolvency rules, required to facilitate the effective functioning of an FMI administration. The proposed rules outline the application procedure for an FMI administration order and specify the application of the Insolvency (England and Wales) Rules 2016 with modifications.

Read more.

The European Securities and Markets Authority published its final Technical Advice to the European Commission on certain aspects of the EU Benchmark Regulation. The Benchmark Regulation sets out the authorization and registration requirements for benchmark administrators, including third-country entities, and the requirements for governance and control of administrators. It provides for different categories of benchmarks depending on the risks involved, imposes additional requirements on benchmarks considered to be "critical" and gives powers to national regulators to mandate, under certain conditions, contributions to or the administration of critical benchmarks. The European Commission requested the Technical Advice from ESMA in February 2016. The Technical Advice covers: (i) the definition of benchmarks; (ii) measurement of the reference value of benchmarks; (iii) criteria for the identification of critical benchmarks; (iv) endorsement of a benchmark or family of benchmarks provided in a third country; and (v) transitional provisions.

The majority of the Benchmark Regulation will apply from January 1, 2018. Certain provisions, giving powers to ESMA to prepare draft technical standards and to the Commission to adopt delegated legislation, applied from June 30, 2016. ESMA intends to publish its final draft technical standards due under the Benchmark Regulation by April 1, 2017.

View the Technical Advice.

The New York Fed released a statement of its policies towards managing its open market operations counterparty relationships with private entities, which includes primary dealers in US Treasury securities. Generally, the New York Fed seeks to transact with regulated banks and broker-dealers of a sufficient scale that do not cause an undue level of credit risk exposure. The policy contains a series of expectations that the New York Fed has for counterparties, which includes following Treasury Market Practices Group or Foreign Exchange Committee best practices, providing insights and information to the New York Fed, meeting regulatory requirements and having a sound compliance program in place. The policy also discusses the behavioral expectations the New York Fed has for counterparties, which include that the firm participates competitively in operations where the firm is selected as a counterparty, maintains the required scale and continues to meet the standards of the New York Fed in terms of legal services, transaction support and resiliency and continuity. Under the revised standards for primary dealers, the amount of required regulatory net capital (as computed in accordance with the net capital rule of the SEC) for a broker-dealer has been reduced from $150 million to $50 million.

View the New York Fed's policy.

The Bank of England published a consultation paper on the Bank’s proposals to reform the Sterling Overnight Index Average Interest Rate Benchmark, known as SONIA. The Bank of England, which took over as administrator of SONIA on April 25, 2016, notes that despite being viewed as critical for the sterling financial markets, SONIA is currently based on a market for brokered deposits which has limited transaction volumes. The consultation builds on the Bank’s earlier consultation in mid-2015, where it proposed that SONIA should capture a broader range of unsecured overnight deposits by including bilaterally negotiated transactions alongside brokered transactions. The Bank is seeking feedback on its proposals in four areas: (i) the SONIA calculation methodology: the Bank is proposing to switch the current calculation to measuring the average rate using a volume-weighted median, rather than a volume weighted mean; (ii) the definition of SONIA: the Bank is proposing to amend the definition of SONIA to reflect recent EU and IOSCO benchmark regulatory reforms and to account for international best practices for benchmark administration; (iii) transition planning: the Bank is working with market participants to transition from the current benchmark to the proposed reformed SONIA between October and December of 2017; and (iv) publication policies: the Bank is proposing to publish SONIA at 9:00 a.m. on the business day following the business to which the data pertains and to charge users who receive SONIA data on a timely basis directly from the Bank. Responses to the consultation are due by December 31, 2016. The Bank is expected to publish the final methodology for and definition of SONIA, the transition arrangements, and the publication and licensing arrangements in early 2017.

View the consultation paper. 

The US Federal Reserve Board issued a notice that it had adopted the “ORSOM” rating system for its review of FMIs over which the Federal Reserve Board has jurisdiction, including financial market utilities designated as systemically important by the Financial Stability Oversight Council. The ORSOM system judges FMIs on five categories which the Federal Reserve Board noted highlight the issues FMIs face: Organization, Risk management, Settlement, Operational risk and IT, and Market support, access and transparency. The Federal Reserve Board’s notice also specifies particular regulations and guidance that would be examined under each ORSOM category. The rating scale runs from 1, strong, to 5, unsatisfactory, in each category, with the FMI receiving a 1-5 aggregate overall rating as well.

View The Federal Reserve Board’s release.

The Financial Stability Board published a progress report on its CCP workplan. The progress report provides an update on implementation of a workplan agreed on by the FSB, the Basel Committee on Banking Supervision, the Committee on Payments and Market Infrastructure and the International Organization of Securities Commissions (the Group) in April 2015. The workplan focuses on the resilience, recovery planning and resolvability of CCPs and coordinating the roles of each organization in achieving a new international framework for CCPs.

Read more.

A Commission Implementing Regulation establishing a list of critical benchmarks used in financial markets under the Benchmark Regulation was published in the Official Journal of the European Union. The Benchmark Regulation provides for different categories of benchmarks depending on the risks involved, imposing additional requirements on benchmarks considered to be critical, including the power of national regulators to mandate, under certain conditions, contributions to or the administration of a critical benchmark. The Commission Implementing Regulation stipulates that the Euro Interbank Offered Rate is a critical benchmark on the basis that it is important for credit loans and mortgages in the EU. EURIBOR is the first benchmark to be listed. The Commission Implementing Regulation entered into force on August 13, 2016. For the most part, the Benchmark Regulation will apply from January 1, 2018. Certain provisions, giving powers to the European Securities and Markets Authority to prepare draft technical standards and to the Commission to adopt delegated legislation, applied from June 30, 2016.

View the Commission Implementing Regulation.

The Payment Systems Regulator published its final report on its market review into the ownership and payment infrastructure competitiveness in the UK. The final report follows the PSR’s interim report which was published in February 2016. The PSR has concluded that there is currently no effective competition in the provision of UK payments central infrastructure services for Bacs, FPS and LINK (notwithstanding general satisfaction by operators and PSPs in terms of value for money, quality of service and innovation received from providers). This is partly because the operators have not periodically run competitive procurement processes or sufficiently tested the market when reproducing core infrastructure services. This means that the incumbent provider, VocaLink, has faced limited competitive pressure and minimal incentives to provide more efficient and innovative services. 

The European Securities and Markets Authority published a list of US designated contract markets considered equivalent to a regulated market in the European Union. The list is based on a Commission Implementing Decision published in the Official Journal of the European Union on July 2, 2016, which considered that 15 DCMs located in the United States are equivalent. The DCMs have been deemed equivalent for purposes of the definition of over-the-counter derivatives in the European Markets and Infrastructure Regulation. This means that derivative contracts traded on these DCMs would not be deemed to be OTC derivatives and therefore not be subject an obligation to clear the transactions, report on them and undertake risk mitigation steps as if they were OTC, under EMIR. To be deemed equivalent, a third country market must comply with legally binding requirements in its home state equivalent to the Markets in Financial Instruments Directive and must also be subject to effective supervision and enforcement in that third country on an on-going basis. 

View the Commission Implementing Decision.  

View ESMA’s library on post trading. 

The European Central Bank published a revised version of its Eurosystem Oversight Policy Framework, which describes the role of the Eurosystem in oversight of financial market infrastructure. Eurosystem promotes the safety and protection of FMIs and acts as the central bank of issues in EU and international cooperative arrangements for securities and derivatives clearing and settlement systems. FMI includes payment systems, and clearing and settlement systems. The revised version of the current framework, which builds on the edition published in September 2015, takes into account the significant regulatory and institutional changes and market developments that have affected Eurosystem’s oversight function since July 2011. This includes the revised and enhanced harmonized international standards and EU law such as the CPSS-IOSCO Principles for Financial Market Infrastructures. 

View the oversight policy.

The Bank for International Settlements' Committee on Payments and Market Infrastructures and the International Organization of Securities Commissions published Guidance on cyber resilience for financial market infrastructures. The Guidance supplements the CPMI-IOSCO Principles for Financial Market Infrastructures and aims to assist FMIs to improve their cyber resilience. The Guidance is not intended to impose additional standards on FMIs, but rather to provide FMIs with further detail on how they can enhance their cyber resilience capabilities and limit the increasing risks that cyber threats pose to financial stability. FMIs are expected to take a risk-based approach to implementing the Guidance and to act immediately to improve their cyber resilience, taking the Guidance into account. In particular, FMIs are expected to develop plans by June 2017 to improve their capability to meet the two-hour return to operations requirements.

View the Guidance on cyber resilience for financial market infrastructures.

The final EU Regulation on Benchmarks was published in the Official Journal of the European Union. The Benchmark Regulation has been introduced in response to the numerous instances of benchmark manipulation that have emerged in recent years. In addition, the Benchmark Regulation is intended to harmonize across the EU the rules that have implemented the International Organization of Securities Commissions Principles for Financial Benchmarks and Principles for Oil Price Reporting Agencies. 

The Benchmark Regulation sets out the authorization and registration requirements for benchmark administrators, including third country entities, requirements for governance and control of administrators, provides for different categories of benchmarks depending on the risks involved and imposes additional requirements on benchmarks considered to be critical, powers of national regulators to mandate, under certain conditions, contributions to or the administration of a critical benchmark.

Read more.

A Commission Implementing Regulation on the extension of the transitional periods related to own funds requirements for exposures to central counterparties set out in the Capital Requirements Regulation and European Markets Infrastructure Regulation was published in the Official Journal of the European Union. The authorization process for existing CCPs established in the European Union is on-going but will not be completed by the June 15, 2016 deadline. There are still two CCPs established in the Union that await authorization. The implementing Regulation extends the transitional period by an additional six months to December 15, 2016. 

The implementing Regulation entered into force on June 11, 2016.

View the Regulation. 

The Bank of England published a Financial Stability Paper on legal certainty for central counterparty default management processes. In the context of legal certainty, the paper focuses on the ability of CCPs effectively to manage a large member default. The paper provides analysis of the three key stages in the process of managing a default at a clearing house: (i) declaration of default; (ii) returning to a matched book; and (iii) managing collateral to absorb the losses caused by the default.

The paper examines the rules governing CCP default management and the extent to which they provide legal certainty. The current legal framework provides certainty around many aspects of financial markets which has been created through the interaction of contract and legislation at both UK and EU levels. Legislation such as the UK Companies Act 1989, European Market Infrastructure Regulation, Settlement Finality Regulation and the Financial Collateral Arrangements (No. 2) Regulation all provide protections but apply in different situations resulting in a patchwork of partial safe harbors. The Bank of England highlights various steps that could be taken to make this legislative framework more robust and coherent.

View the Financial Stability Paper.

The International Organization of Securities Commissions published its final report on the impact of storage infrastructures on the integrity of the price formation process of physically-delivered commodity derivatives contracts traded on regulated exchanges. The report sets out findings and conclusions following research, an industry survey and a public roundtable. IOSCO concludes that the IOSCO Principles for the Regulation and Supervision of Commodity Derivatives Markets provide an adequate framework for implementing effective oversight, governance and operational controls of storage infrastructure. IOSCO does not recommend the creation of additional principles or revision of the existing principles. However, it does consider that it is necessary to develop good practice guidelines and enhance current accepted practices.

Read more.

Executive Vice President and Head of the Wholesale Product Office at the US Federal Reserve Bank of New York, Richard Dzina, discussed the importance of improving the cyber resiliency of financial market infrastructures (FMIs) in light of escalating cyber threats with systemic consequences. Dzina cited the recent consultative report by the Committee on Payment and Market Infrastructures and the Board of the International Organization of Securities Commissions which provides guidance on cyber resilience for FMIs, including the expectation that their critical operations resume within a two-hour period following disruption. Heralding joint industry efforts as well as those taken by individual institutions, Dzina highlighted backup site (so-called "third site") capacity as a lynchpin to improving the resiliency of FMIs. Specifically, he recommended that FMIs invest in technologically diverse off-network third site solutions as a backstop to the measures they have in place to prevent against cyber-attacks. He stressed the importance of FMIs, particularly those at the epicenter of the financial system, continuously investing in improvements to resiliency and cybersecurity.

View Dzina’s speech.

The European Securities and Markets Authority published the results of its first EU-wide stress test for central counterparties, including recommendations for improving CCPs’ internal methodologies. ESMA must perform an annual stress test of all EU CCPs under the European Market Infrastructure Regulation. The exercise tested 17 European CCPs which held over €150 billion worth of default resources with more than 900 clearing members across the EU. The purpose of the stress test is to test the resilience and safety of the European CCP sector and identify any possible vulnerabilities, focusing on CCP credit risk when faced with multiple clearing member defaults and simultaneous price shocks. The results indicate that CCP resources are generally sufficient to cover losses resulting from the default of two EU-wide clearing member groups combined with historical and hypothetical market stress scenarios. However, under more severe stress scenarios, CCPs were faced with sector-wide residual uncovered losses varying from €0.1 billion to €4 billion. ESMA recommends that CCP internal methodologies can be improved by CCPs incorporating into their creditworthiness assessments of clearing members, the potential exposures their clearing members may face due to their membership in other CCPs and that regulators should ensure that CCPs revise the price shocks used in their internal stress test methodologies where the stress price shocks applied by CCPs were identified as not being as conservative as the minimum price shocks or as extreme as the most severe historical shocks. 

View the update.

View the Q&A on ESMA’s stress test. 

A Commission Delegated Regulation on central clearing for credit default swaps supplementing the European Markets Infrastructure Regulation was published in the Official Journal of the European Union. Under the Regulation, two classes of credit default over-the-counter derivatives are subject to the clearing obligation under EMIR: iTraxx Europe Main and iTraxx Europe Crossover.

Read more. 

New York Fed President William Dudley discussed the importance to the global economy of economic growth and prosperity in the United States and the European Union. He applauded progress that has been made to date towards strengthening global banking systems, including increased capital and liquidity standards for international banks. However, he noted that more needs to be done in order to solve the so-called “too big to fail” problem. Specifically, Dudley stated that impediments to an orderly cross-border resolution need to be fully identified and dismantled, and cross-border regulatory cooperation needs to be further enhanced, including through greater exchange of confidential supervisory information. Moreover, he noted the importance of establishing a level playing field across jurisdictions in respect of cross-border resolution, so that the regulatory focus would be on safety and soundness rather than “trying to protect, favor, or shield national champions.”

The European Securities and Markets Authority announced it will publish its first EU-wide stress tests for EU Central Counterparties. Under the European Markets Infrastructure Regulation ESMA is mandated to conduct stress tests for CCPs. The stress test will evaluate the resilience and safety of the European CCP sector and identify any vulnerabilities. The focus of the exercise is to test counterparty credit risk that CCPs would face in the event of multiple clearing member default combined with simultaneous market price shocks. The results of the stress test will be published on an anonymized and aggregated basis on April 29, 2016. 

View the announcement.

The Bank of England announced that effective April 25, 2016, it would become the administrator of the Sterling Overnight Index Average interest rate benchmark. SONIA provides bank and building societies’ overnight funding rates in the sterling unsecured market. It is designated as a specified benchmark under UK legislation. The Wholesale Market Brokers’ Association is currently the administrator of SONIA and is regulated by the Financial Conduct Authority. Under the new arrangements, the WMBA will be the calculation and publication agent for the SONIA benchmark, with the Bank of England assuming overall responsibility and providing governance and oversight. The Bank of England has been working to reform SONIA since March 2015 and intends to broaden the range of transactions supporting SONIA to include bilaterally negotiated and brokered transactions. The Bank of England's new money market data collection, announced in July 2015, will be used as the data source once it is properly established. The full transition is expected to be completed by Q2 2017. 

View the Bank of England's announcement. 

The European Securities and Market Authority published its final report and amending regulatory technical standards on the margin period for Central Counterparty client accounts. The amending RTS change the time horizons for the liquidation period for gross omnibus accounts and individual segregated accounts for exchange traded derivatives and securities. ESMA considers that a CCP, in a liquidation period, should be able to either transfer or liquidate the position of the defaulting clearing member and furthermore, have sufficient margin to cover exposures arising from such transfer or liquidation.

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The European Securities and Market Authority published its final report containing final draft amending regulatory technical standards regarding requirements for regulator access to Trade Repositories data and the subsequent aggregation and comparison of that data. The European Market Infrastructure Regulation requires ESMA to develop draft technical standards specifying the frequency and the details of the information to be made available to regulators by TRs. TRs are to provide regulators with access as required. ESMA has amended the RTS, first published in 2013, to provide regulators with better access to data and to improve their ability to compare and aggregate data. For the exchange of data between TRs and regulators, ESMA has proposed an XML template based on ISO 20022 methodology. ISO 20022 is a universal message scheme for the financial services industry. This methodology can be used to facilitate aggregation and comparison of data across repositories. The amended RTS also defines the minimum operational standards to allow direct and immediate access to TR data and the aggregation and comparison of data across TRs. The amended RTS sets out definitive timelines for the provision of data to regulators. ESMA expects this will enable regulators to better plan and schedule their internal processes for gathering and analysis of TR data. The RTS provides minimum standards for secure machine to machine connection and data exchange between TRs and regulators. In particular, ESMA has proposed enhanced procedures for data security, including the use of electronic signatures and data encryption protocols when providing regulators access to TR data. ESMA's proposed amendments to operation standards on data access also require TRs to validate in a timely manner requests from regulators. ESMA has submitted the additional final draft RTS to the European Commission for endorsement.

View the final report.

An equivalence Decision on the derivatives regulatory regimes for derivatives clearing organisations in the United States was published in the Official Journal of the European Union. The Decision follows the announcement by the European Commission and the Commodity Futures Trading Commission of a common approach on the supervision of CCPs operating in the US and EU. The Decision declares that the legal and supervisory arrangements of the CFTC for DCOs that have been declared systemically important derivatives clearing organisations by the Financial Stability Oversight Council or DCOs that have opted into additional standards similar to the SIDCO regime (so-called “Subpart C DCOs”) are equivalent to the EU requirements under EMIR, provided that the DCO’s internal rules and procedures meet the following requirements: (i) for derivatives contracts executed on regulated markets, a minimum liquidation period of two days for initial margin is applied to clearing members’ proprietary positions; (ii) for all derivative contracts, measures are in place to limit procyclicality which are equivalent to the options under EMIR; and (iii) the DCO has sufficient pre-funded available resources enabling it to withstand the default of at least two clearing members to which it has the largest exposures under extreme conditions. 
 

The UK Payment Systems Regulator published its interim report relating to its market review into the supply of indirect access to payment systems. The PSR considers that competition in the supply of indirect access is going in the right direction for indirect payment services providers. However, the regulator has concerns about choice, service quality and the ability of indirect payment services providers to switch providers. Responses to financial crime regulation is limiting the provision of indirect access. The PSR does not intend to take regulatory action at this stage but will monitor developments in the industry to assess whether its concerns are addressed. The PSR is seeking feedback on its interim findings and its approach and comments are due by May 5, 2016.

View the PSR's interim report.

The International Organization of Securities Commissions published its Second Review of the Implementation of IOSCO's Principles for Financial Benchmarks by Administrators of the Euro Inter-Bank Offer Rate, the London Inter-Bank Offer Rate and the Tokyo Inter-Bank Offer Rate. The IOSCO Principles were first published in 2013 to enhance the reliability of benchmark determinations. The first review on the implementation of the Principles was published in 2014 and included remedial recommendations for the administrators of EURIBOR, LIBOR and TIBOR. The Second Review reports on progress made in implementing the recommendations set out in the 2014 review report. IOSCO found that the three administrators – European Money Markets Institute, ICE Benchmark Administration and JBA TIBOR Administration – have all taken steps to implement the recommendations and that most of the recommendations have already been implemented or steps taken to implement them.

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The Payment Systems Regulator published an interim report following its market review into bank ownership and payment infrastructure competitiveness in the UK. The PSR's motivation to conduct the review stems from its statutory objective to promote competition and innovation in the market for payment systems and the services that the systems provide. The Report outlines the PSR's provisional finding that there is no effective competition in the central payment infrastructure market.

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